Adam Piggott

Gentleman adventurer

The butt backwards US economy.

An interesting aspect to the Trump presidency is the fact that one of the many institutions that hate him and want him to fail is the Federal Reserve. To this end they have gone against all of their long held economic dogma and switched it back the front in the belief that this will cripple the economy and thus cripple Trump. (Any suggestion that they might desire to do their job properly so as to give the average American the best chance at a fair shot at the old title is naturally verboten. Or not even verboten; it doesn’t even factor into the equation.)

To this end they have reversed their decades long policy of lowering interest rates in an attempt to stimulate the economy and have instead steadily raised rates in defiance of Trump’s wishes. Thus to be fair it should be noted that Trump is wrong as well as he too wishes the Fed to cut interest rates. But it is the rising interest rates which have done the most to set off the US economy like a firecracker.

One of the very best economists in the world is Steve Kates, which is why nobody of note listens to him. Kates has been a long time advocate of Say’s Law and an opponent of Keynesian economic theory upon which the last 70 years of government manipulation has been based. As he points out, low rates are economic poison.

Keynesian economics has ruined our understanding of how economies work in many many ways, but near the top is the belief that low interest rates promote growth and stimulate economic activity. It’s all part of the absurd notion that demand is what drives an economy. What actually drives an economy is the supply-side, and what low interest rates do is allow many low productivity and no productivity activities to access funds in place of truly value-adding investments which either remain unfunded, or receive fewer funds than they ought to receive given their relative economic potential.

It may be the one issue of significance I disagree with Donald Trump about. The Fed in the US has been raising rates and the economy keeps getting better. The Fed does it because they are trying to spike Trump’s success, and Trump worries that they might succeed. There is also no doubt that rates can be raised too high, but there is also no doubt that rates can be too low. In the US it is hard to tell, but in Australia rates are too low and lowering them further will only make the economy worse. Falling real incomes are the surest sign.

If you’re serious about understanding this stuff, pick up Kate’s wonderful book, Free Market Economics.

Vox Day takes note of some interesting developments in the financial sector as well as Deutsche Bank prepares to lay off 18,000 workers. I suppose that they’re all going to learn to code. If one of the world’s largest banks is in that much trouble then things might be blowing the way of previous troublesome moments. Remember, the world did not recover from the GFC in 2008; it has not been allowed to. Instead trillions of dollars were wasted in propping up moribund companies that should have been allowed to fail. This is what recessions are for, they are the natural clearing away of the flotsam and debris that accumulates in the arteries of the economy.

Without that cleansing effect the problems have built up and are ready to burst once more. Which could well mean a much more destructive depression. FDR tried to manipulate his way out of one of those and it completely failed; the only thing that saved the American economy was WWII.

The American economy has had the artificial breaks removed by the ignorant Federal Reserve and as a result it is going gangbusters. But economic clouds are on the horizon and very plain to see if you care to look. For myself I’m avoiding debt and squirreling away my pennies. Just a few cigars and some scotch whiskey when the mood strikes me. One must live after all.

 

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7 Comments

  1. TechieDude

    I’ve long since given up any hope of any politician or gubmint official to do the right thing for the people they represent. One side sort of knows that misery is on the horizon, but is utterly feckless in doing anything about it (and squandered their opportunity when they had it). The other side is perfectly willing to burn the whole thing down in order to rule over the ashes, utterly ignorant of history or even basic math.

    It was November 2012 when I got this nauseous feeling that we were too stupid as a nation to see disaster looming, and there were a lot of nobs in this country that are going to learn a hard painful lesson.

    Including propped up moribund companies that should have been allowed to fail failing, all the debt will have to be reconciled, one way or the other. I don’t agree with Vox that Student debt should be forgiven for this very reason. Just because you make it go away from the slobs in debt doesn’t mean it’s gone, and won’t cause horrific collateral damage.

    Gonna be ugly and the Fed won’t help. They’ve done little but debase the currency for over a century.

    Get out of debt.
    Learn to live simply.
    Buy guns and ammo while you still can.

    (BTW – Booze is an asset in a collapsed economy. Makes sense to stock up)

  2. Production will always defeat a financial system. Our current economy is a house of numbers, built upon stock market speculation and complex gambling.

  3. liz

    Jim Rogers, six years ago (interest rates had been low for long while by then, there was even talk of negative interest rates like Japan and that sure hasn’t seemed to pan out for them):
    Throughout our history – any country’s history – the people who save their money and invest for their future are the ones that you build an economy, a society, and a nation on.
    In America, many people saved their money, put it aside, and didn’t buy four or five houses with no job and no money down. They did what most people would consider the right thing, and what historically has been the right thing. But now, unfortunately, those people are being wiped out, because they are getting 0% return, or virtually no return, on their savings and their investments. We’re wiping them out at the expense of people who went deeply into debt, people who did what most people would consider the wrong thing at the expense of people who did the right thing. This, long-term, has terrible consequences for any nation, any society, any economy.

    After wiping out savers and encouraging debt, now we have a society of debtors with interest rates increasing. Fortunately, I’m not a debtor. Interesting times.
    Side note: Ammo is very cheap now, and has been for a couple of years since Obama left. Thank you Trump.

  4. Marco

    Putting those hard earned pennies away, saving with discipline, and getting a measly 2% p.a. as a reward… it’s frustrating but it seems the least worst choice at the moment

  5. Someone

    There is only so much Trump can do. There are too many systemic problems created by past administrations. Punching China in the face should have been done a long time ago, but Rapist Bill along with help from Team R was more than happy to help corporate America sell Americans downriver from some shekels.
    http://www.shadowstats.com

  6. I would recommend Milton Friedman before Kates. Haven’t read Kates’ book but MF has everything you need to know.

  7. Post Alley Crackpot

    Took me a while to find this amusing bit in Adam Curtis’s series “Pandora’s Box”, but there’s an episode that talks about “The League of Gentlemen” and how their theories nearly killed off the British economy for good …
    But why is this bit amusing? Some enterprising engineer took it upon himself to take the “hydraulic flows of capital” put forth by Keynes and create an actual machine that worked according to these principles.
    Naturally, the thing barely worked at all, and when it did, it leaked worse than the Lusitania.
    The whole thing’s worth watching, but I’ve put a marker at 4m48s so you can skip directly to watching the astounding machine operate somewhat less than astoundingly:
    https://www.youtube.com/watch?v=mBZCdNsXbQg&t=4m48s

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