Should They Keep ZIRPing Along?

GUALFIN, Argentina – Poor Janet Yellen.

Usually, we reserve our pity for the poor, the downtrodden, and the hopeless. But today, we spare a thought for the clueless… and feel Yellen’s pain.

Markets are tense. Investors seem to be holding their breath.

Everyone is waiting to see what the Fed will do.

There must be hundreds of thousands – if not millions – of well-educated adults sitting on the edges of their seats… eager to hear what this rather ordinary functionary will say.

No Return to Sanity

And here I’ve got Bill Dudley at the New York Fed, Goldman Sachs, and Larry Summers all telling me that natural market forces are already tightening credit conditions… without waiting for the Fed. And that if we raise rates now, we’ll just be making a bad situation worse.

Maybe they’re right. But those zero-bound rates must be causing distortions that we don’t know about. The junk bond market, for one. And the corporate bond market, in general. How were we to know those rascal corporate execs would borrow money at our low rates just to goose up their shares, via buybacks, so they could earn even fatter bonuses?

And now, stock prices depend on our ultra-low rates. That’s crazy. They must know we’ll raise rates sooner or later. Then the people who bought stocks at some of the highest valuations in history… like those gamblers at Goldman… they must realize that they’ll lose money.

I guess it’s almost our duty to teach them a lesson…

But what if all these dumb-heads who’ve been gaming the Fed… betting that we’ll keep ZIRPing along for far longer than we probably should have… what if they panic?

What if we get a couple days of 1,000-point drops on the Dow? Won’t they all start pointing their fingers at me… claiming I caused the panic?

Of course, I did nothing of the sort. It’s not my fault they bought stocks at such high valuations. We were just trying to boost asset prices so the “wealth effect” would make Americans rush out and spend.

We have to raise the interest rate at some time, or the entire system will become unmoored… drifting to who knows where… and washing up on who-knows-what rocks.

But what if Larry is right? What if a rate increase makes credit conditions too tight? What if that provokes a sell-off in stocks… and sets in motion a chain of events such as those that led to the Great Depression?

Then stock markets plunge. The “wealth effect” turns negative. World trade collapses even further. Unemployment rises. And we end up in a new depression that lasts 10 years…

What if they say it’s my fault? What if they call it the Yellen Depression?

Oh, no… It’s not fair… It’s not fair… Boo-hoo… sob… sob… I should have stayed at Harvard. I’d have tenure. I’d have a nice pension. George and I could go the Martha’s Vineyard in the summer. It would be such a nice life.

Reprinted with permission from Bonner & Partners.