Price-Fixing at the Fed: Global Implosion Is Served?

[The following is from The Dollar Vigilante’s Senior Analyst, Ed Bugos]

Here at TDV, we’ve covered Shemitah and the Shemitah end-day extensively. Without rehashing past analysis, we can certainly speculate that Thursday’s Federal Reserve decision could have an explosive impact on markets worldwide. Call it a Shemitah Trend. You can see a White Paper, videos and book here on that.

The Fed has not raised rates for over seven years now – an unheard of amount of time. It has practically abolished interest rates for the first time ever. The distortions that have been built into the larger marketplace are coiled now like a spring, ready to unwind with a fantastically destructive impact.

How did we get to this point anyway? Why do people accept the idea that a handful of men and women dining on fine food in a series of expensive hotel suites and meeting rooms have the power and knowledge to “fix” the price of credit, manipulate the amount of money, and regulate the value of the world’s reserve currency? Why should anyone have this power?

What should be evident is that the Fed’s central bankers are not free to make an unimpeded decision. They are haunted by the mistakes of the past. Low rates of the late 1990s led to the tech crash of 2001. Low sustained rates of the early and mid 2000s led to the subprime crash of 2008 that echoed around the world.

And now, if the Fed, does not raise rates, the distortions of the past years will grow even bigger and more powerful. The impossible  asset bubbles in high-end real estate (US$100 million apartments and the like – which are already collapsing) and insane valuations in tech-heavy equity markets will make the eventual, inevitable unwinding even more ruinous.

Consequently, rather than looking into operating costs for gold miners in various parts of the world, or studying market data and financial statements in search of new opportunities for us to capitalize on, I have to spend the week speculating about Grandma Yellen’s next move, as though I were betting on a football game.

If she does so and so. then so and so will happen, and if she does this and that, then this and that or so-and-so and-this or so-and-that will happen. While in all likelihood it won’t matter what she does we must at all times stop to consider what the planners want to do with interest rates.

Economists have long learned the trouble with price controls. The knowledge is not new. We know why dairy farmers had to pour over a million liters of “excess milk” into pits and “lagoons” this summer. Prices were too high! They were set high by Canada’s marketing boards, made up of self-interested farmers trying to keep their incomes from falling. Call it protectionism if you want, or you can be more honest and call it cronyism.

Our money planners do the same thing. They fix prices. Should we expect a better or different result than the one experienced by Canada’s dairy farmers?

This was Ludwig von Mises’s insight, that prices provide entrepreneurs with signals and information, allowing them to coordinate their plans with millions of other entrepreneurs, capitalists, labor, etc. If instead of letting the farmers fix their own prices the market had this job then we wouldn’t have had to destroy all that milk.

Think about that the next time you think about starving children in some third world country or families on welfare in your own country. Why do we let our monetary technocrats get away with this kind of thing?

Interest rates send entrepreneurs signals too. They signal (and incentivize) changes in saving rates, denote changes in available credit, and govern the trade-off between consuming and investing. In lay terms interest rates reflect the supply and demand for savings. In a free unhampered market there can be no ‘sustainable’ investment without people saving first.

The more saving and wealth that accumulates the more interest rates should fall on their own to reflect the falling time preference rates of increasingly wealthy individuals.

Prices help entrepreneurs and business owners calculate the cost of their inputs and expected profits; but interest rates help them calculate these costs in another dimension, over time, and therefore they help govern the allocation of productive factors along the various lines of capital goods production, as per the Hayekian Triangle.

So what do you think happens when the government, through the central bank, decrees a lower interest rate? Entrepreneurs and savers alike are given a different set of incentives, which ultimately lead to suboptimal results in the investment boom. The Austrian economists have a term for it: malinvestment. The incentives are so strong that even if you know better you may be drawn into the drama in order to survive your competition. But in the end the artificial incentives lead to making investments in the wrong lines of production, and they punish prudent behavior.

We get the boom-bust cycle solely because of the central bank’s intervention in interest rates.

It leads to an accumulation of debt, especially in the public sector, which is not sustainable – because government officials are not immune to the “easy money” party. This is why Greece and Europe are in the news today, and why the US will be in the news tomorrow. The central bank’s low-rate mania has led us here – not “predatory lending” by commercial banks.

Central bankers and government officials always want to blame the private sector for the system’s inherent dysfunction. Private markets don’t need more fiddling, more adjusting or regulating. It is this price-fixing system of central bank decision-making that ought to be done away.

Today, in the US, the Fed has backed itself into a corner, as even mainstream media sources have begun to notice. As I have been writing for months at the TDV newsletter, there is a huge gap between the economic outlook implied by the Fed’s policy stance and the outlook implied in stock and bond valuations.

There is no easy fix. Asset markets are so inflated that they are sensitive to even the slightest change in rhetoric coming from their fearless leaders at Wall Street’s marketing board.

The truth is that I don’t know what the Fed will do. I would like to tell you that the bounce in US share prices ahead of the decision is a cheat, a sign that they’re going to stay easy or roll out a new QE scheme. But it is a less than normal bounce, and it is happening when you would expect one -after a series of drubbings. So it might not mean anything.

In the end, we will just have to wait until the wise ones at the Fed decide what the single uniform rate of interest should be for the world’s most powerful currency, the US dollar, with all the knock-off effects that entails.

Truth be told they might as well just flip a coin at this point.

Tomorrow, we will have to publish another alert to subscribers after analyzing the fallout from the Fed’s decision making. I only wish we didn’t need to. No one should have this kind of power. The choices at the Fed are disastrous ones. And they have brought it on themselves. For all of us.

Originally Appeared At The Dollar Vigilante