QUESTION: Dear Martin, If the Fed KNOWS that raising rates will cause a problem (to say the least) for 1) Bond Market 2) rates on reserves 3) Debt interest 4) sluggish US economy with numbers turning down now then why should they raise rates just because capital flows are coming here and pushing up stocks? Why does that really matter this time around, as isn’t this what the Fed wants…is for asset prices to rise? People will cheer in the US as assets continue, with the next wave of thinking focused on when companies will restart capital spending…keeping the hope alive.
It is the last good story they can tell to keep things propped up. Right? This is why I have trouble with your argument. Clearly “they” are pumping buy European stocks as the DAX is up 17% in 2 months. They are trying to steer capital to Europe to save Europe and usurp your comments. So what happens if they do NOT raise rates, as isn’t your Bond Bubble scenario based on this?
Best, T
ANSWER: Everything you have articulated makes perfect sense. The problem is you have crossed the road into seeing the world from a more global view. The 99% do not see the world this way and they will look at the Fed and blame it for an asset bubble. Even Milton Friedman’s review of the Great Depression was that the Fed was too restrictive during the Great Depression and the lowering of the rates in 1927 to try to help Europe was seen as the cause of the bubble into 1929. Keep in mind I am EXPLAINING what happened from their perspective. This is NOT my argument. The lowering of rates in 1927 backfired for no reason of the Fed actions. It was simply that capital smelled a rat.
Neither the Fed nor the ECB wanted to see a blast to the upside in the DAX. This is in itself internal capital flows betting AGAINST the survival of the ECB and Brussels. This is capital shifting within Europe not for P&E ratios, profits, expectation of a future boom economy or anything of the sort. This is capital within EUROS betting that the EURO will fail so buy assets in Germany and you will in the end get Deutschemarks. This is not bailing out Europe in the least.
The blame that was piled on the Fed for that 1927 attempted manipulation was huge. Prior to 1935, each branch of the Federal Reserve operated independently to manipulate the internal capital flows within the USA. The Banking Act of 1935 forever changed the structure of the Fed changing powers, and functions of the Federal Reserve System as a whole. This issue was the focus of the portion of the act known as Title II, Amendments to the Federal Reserve Act. This portion expanded the powers of the Federal Reserve; shifted power from the regional reserve banks to the Board based in Washington, DC; clarified and codified the relationship between the Federal Reserve and the executive and legislative branches of the federal government; and reorganized the Federal Reserve’s leadership structure.
In other words, the 1927 manipulation was carried out unilaterally by the New York Fed alone. The criticism heap up that act for creating the 1929 Bubble was WRONG, but that does not matter, The Fed would NOT dare to act wisely on a global perspective to help Europe. If they dared to do that ignoring the domestic economy their head would be served on a platter to Congress.
Whenever you hear the rich get richer, what the Democrats talk about is the stock market. They argue it is not fair that the rich get richer and the rest (who do not invest) fail to keep pace. So the top 1% keeps making more and more. This is not wages. This is based upon asset appreciation. This is by no means a goal of the Fed. They will raise rate if the US share market breaks out to the upside as is taking place in the DAX.
Likewise, let the stock market fall and then I get questions from Capitol Hill – “Do you think the Fed should be intervening?” Why? Because that is the ONLY thing that directly impacts those on the Hill – they all have investments and are part of that 1% they pretend to hate so much. HOUSEHOLD income of $400,000 places you in that 1%. It is not the Billionaire’s Club. That income is investment income not wages. It is what Obama wants to tax more – capital gains he touts as the loophole for the rich.
So it may be nice to contemplate that the Fed will not raise rates and be worldly about this entire mess. At the end of the day, Congress and the US media will have their heads if they do not raise rates in the face of a blast up in the US share market values. So yes, the Fed KNOWS what I am talking about. Trust me, central banks read this blog and have attended our conferences. I have sat in the rooms of central banks and saw the red phones that connected them on hot-lines. I have had two on the phone at the same time during a meltdown.
All I am doing is explaining HOW this works. It is not my ARGUMENT for how things should work, it is just a statement of how they DO WORK. I am not guessing here. I have been there. I have even been the keynote speaker at such gatherings in Paris and sat at the head table with only central bankers. Sometimes 50% of my job is hand-holding in the middle of a crisis for at the end of the day, everyone needs someone to talk to in such moments. So what I write is by no means what I THINK is going on, I have been there and done it first hand – no guessing. During the 1987 Crash, the CFTC asked me to testify on their behalf because the SEC was blaming the futures. It is always a dof eat dog world in Washington.
