by Martin Armstrong, Armstrong Economics:
Janet Yellen signaled that the Fed is grappling with the problem I have been warning about: the dollar has become the de facto currency and the Fed is indeed becoming the world’s central bank. Yellen has admitted that everyone is lobbying the Fed to surrender its domestic policy objectives for international ones. This is precisely what took place in 1927. Yellen stated that the Fed should worry less about inflation domestically than about global growth risks. She pointed to the slowdown in China and depressed commodity prices, but Europe is a real basket case. She used the words that “caution is especially warranted” when it comes to raising interest rates. This has put most Fed watchers off from expecting any possible rate hike into retirement as they expect nothing before September.
The BREXIT will most likely be rigged because it is exactly opposite of what they are telling the Brits, who have been told that they will be isolated and the economy will collapse if they exit the EU. Nobody mentions that Britain did fine before it joined the EU. They may say it did well only in 1973 or that it is the other way around — with BREXIT, Europe will fail. This heated issue in Britain is most likely the final nail in the coffin. Britain will collapse with the euro and should have just handed its sovereignty to Brussels. Europe will never reform, so it will be a policy that brings everyone down together. The political risk in Europe is tremendous and Yellen cannot prevent that simply with interest rates.
It is ironic that the conditions setting up today were also the case in 1927. The Fed back then lowered U.S. rates to try to deflect the capital inflows to help bailout Europe. The markets eventually backfired and capital shifted. It poured into the USA and doubled the U.S. share market, despite doubling interest rates to try to prevent the crisis they helped to create. This all led to the 1931 sovereign debt crisis and those economic declines resulted in political chaos. In 1933, FDR came to power, but so did Hitler and Mao. That was all made possible because of the collapse in government debt. We are in the very same position today as the Fed is surrendering domestic policy objectives for international concerns.
It is astonishing just how brainwashed society has become. They cheer lower interest rates as if this will eventually work to stimulate the economy and markets. Interest rates decline with economic declines and rise with economic booms. The analysts on TV are just ass-backwards. When a stock is doing well, the price rises because there is a bidding war. Mr. Larry Summers, the father of negative interest rates, admits he cannot forecast anything. Yet, he advocates manipulation, in pure stupidity, without any understanding of the consequences of his theories. He remains clueless as to how history or markets even move.
We can see that the Fed raised rates from 3.5% in 1927 up to 6% in 1929, and the stock market doubled on capital inflows. The Fed cannot lower U.S. rates to prevent a crisis in Europe or to reverse the Chinese economy, no less bring a bid back to commodities when the economy is not expanding. As the stock market rises, Congress will criticize the Fed for making the rich richer, and the Fed will then be forced to return to domestic policy objectives and raise rates to try to stop the rally. Yet, the rally will begin to take off when the public at large begins to realize government is in trouble. This is part of the four elections coming with the Year from Political Hell (see also).
The risks and the reality that the Fed has lost any real ability to manage the economy have become so real that it is slapping people in the face, and still they cannot see it. The Fed has little conventional monetary policy ammunition to counteract a downturn at this time. Larry Summers’ negative interest rates are destroying the fabric of the global economy by wiping out pension funds and the elderly to help bankers who have owned him since puberty. Far too many pension funds are unfunded and many countries in Europe, by law, require they be managed “conservatively” and invest EXCLUSIVELY in government bonds. In fact, only Canada and Australia fund pension funds as a rule. The risk of a total meltdown beginning in 2017 is on the horizon.
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