Sooner or later everyone sits down to a banquet of consequences.
~ Robert Louis Stevenson
Last week, the Federal Reserve decided to keep US interest rates unchanged, marking its 96th month of life at the zero bound. Apparently, for all of its “data dependence”, the Fed feels the economy could still benefit from *just* a little more of its ZIRP happy juice.
But as anyone with a little common sense will tell you, More is not always better. It’s quite possible to have too much of a good thing.
And in its pursuit to kick the can for a little longer, the Fed has crossed a dangerous line. Dangerous not just to the health of our market economy (that line was crossed a long time ago); but to its own existence. A central bank’s authority is based on faith in its power to effect its mandate. Last week’s decision was so toothlessly passive that even the Fed’s cheerleaders are beginning to question if it has any clue for how to escape from the corner it has painted itself into.
The Fed and its central banking brethren (most notably the European Central Bank, Bank of Japan, Bank of England and Bank of China), have decided to sacrifice investing for tomorrow (namely savings, and capital expenditure in productive enterprise) in favor of higher prices today for financial assets. By keeping interest rates historically low — and increasingly negative — around the world, they have pushed capital much farther out the risk curve than it deserves to be. All while adding trillions of more debt into an already dangerously over-leveraged economy, and lavishly rewarding the rich elite at the expense of everyone else.
As Stevenson wrote, sooner or later, the banquet of consequences must be supped on. And for the Fed, the dinner bell is ringing.
This post was published at GoldSeek on 28 September 2016.