‘Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth’.
Arthur Conan Doyle
As you know, on December 16th 2015 the American Federal Reserve Committee finally produced a 25 point increase in its short term lending rate indicating that the most recent phase of QE is over. This is what Churchill might have referred to as the ‘end of the beginning’ in the ongoing Quantitative Easing saga that has been unfolding in the seven years since the Credit Crunch…
There are pundits and bystanders who said this day could never come- lots of them. The idea that central banks would forever be unable to taper QE became accepted wisdom in a whole host of chat forums, blogs and media outlets.
But the Feds clear determination to go ahead with rate increases has recently resulted in much rhetorical trimming. Just as the smart money started to get out of junk bonds so smart mouths began to get out of ‘no taper’ talk.
As is always the case with these things, over the coming months it will get increasingly harder to find anyone who will be prepared to admit to having ever argued that the Fed could not taper. By next summer all that will remain of the ‘libertarian’ insurgent critique of Fed policy will be a hard core rump that doggedly maintains:
- Rate increases don’t mean anything because they are part of some kind of elaborate international financial scam.
- Rate increases are the cause of imminent fiscal Armageddon; first for the American economy and then for the world.
For years Crackernomics has consistently predicted and anticipated increases in interest rates as part of the ongoing democratisation of money. Not only did I argue that interest rates must happen, but I even went so far as to specify what the final general rate of interest would be.
I argued that the Federal Reserve, together with the Bank of England will lead a global move to implement gradual interest rate increases until they reach a level of around 3%.
There is a solid logical reason why interest rate increases are happening and why they are happening now. This decision is not arbitrary or meaningless. There is also a solid logical reason why central bank interest rates will finally be pegged at around 3%. This is not arbitrary either. But the reasons that interest rates are being modeled this way have nothing to do with the ragbag of guesses and speculations commonly cited in both mainstream and alternative media.
We can apply Conan Doyle’s famous dictum: ‘Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.’ to the various explanations and excuses usually given for tightening. Once we have finally cleared out of the way what can’t be, we can close in on what the only logical reason for rate raising can be – implementing the democratisation of money.
Since the mid 1970’s inflation has been the granddaddy of all excuses for Monetarist central-bank intervention in the setting of bank interest rates. In Monetarist lore inflation is the ISIS of economics necessitating distasteful but necessary waterboarding of the traditional ‘free market’ economy in the interests of defending the status quo. So could inflation (or deflation), be the reason that the Federal reserve has decided to trigger an interest rate rise now?
Such an idea will stand up for about thirty seconds. It has become entirely clear that central banks are unwilling or unable to systematically affect the inflation rate in the USA, England or anywhere else –most famously in Japan, (the home of ‘QE’), where the economy is into the second decade of missed inflation targets.
It is important to remember that in the initial period of the post Credit Crunch crisis Britain regularly recorded inflation much higher than the target 2% rate. But since the essence of QE was to lower interest rates to the zero bound, after QE started there was no available means of affecting inflation by QE monetary policy.
Fair enough, this much was understandable, even predictable given the restraints that QE places on monetary policy. However, when it became apparent that inflation was going to fall a long way below the 2% target mark, you might reasonably ask: Why did the B of E take no effective action and raise rates then ?
When inflation started to fall Monetarist central bankers didn’t propose any serious action to prevent it. Instead they immediately cited other factors in support of what was the obviously already made decision to maintain low interest rates.
Throughout the entirety of the credit crunch and the ensuing crisis Monetarist central bank targets for inflation have consistently either been over or undershot, and by a significant margin. The failure to achieve two percent inflation is simply avoided or effectively dismissed by the vast majority or economists and media whenever questions are raised about it. For whatever reason it is absolutely clear that the Fed and B of E are unwilling to directly and systematically produce a 2% inflation rate.
It is clear that controlling inflation/deflation cannot be the reason why the Fed has decided to raise interest rates now.
The rate of employment is often cited as the most important secondary factor in the decision to raise interest rates. The rate of employment is often given as a rough and ready measure of the health of the economy.
In the USA the official estimate of employment at this time stands at around 5% but credible unofficial estimates of unemployment can be as high as 10-15%. This is a massive discrepancy and not one that is easily explained. No problem though; just like the unachieved inflation target, mainstream economics simply does not bother trying to explain it.
Whether or not the actual unemployment figures stack up, we should ask the question: Does tightening monetary policy help create sustainable employment?
The answer must certainly be no. Restricting the money supply by increasing interest rates always has an adverse effect on employment rates. The actual argument employed by rate hawks is that the economy can stand increased interest rates despite the adverse effect this will have on employment.
So promoting increased employment (whatever the actual rate of employment is), cannot be the reason for tightening interest rates.
Credit bonds and markets
Bond and equity markets have increasingly become skewed towards riskier activity as a result of QE. The energy sector, in particular bonds issued by fracking companies, are often cited as a particularly egregious example of this ‘misallocation’ of capital.
It is generally agreed across the board that increasing interest rates means that a disordered exit from bonds and equities is made more likely. It follows from this that companies with dodgy credit will not able to fund further development and expansion. It is only a matter of time before this inability to raise capital and service debt will have serious, and probably fatal, consequences for a whole range of business concerns. Systematic financial breakdown is baked into this interest rate rise cake.
The trend for stock buy backs and other forms of equity manipulation will also begin to shut down under the effect of incrementally increased interest rates. We can expect a whole raft of stock market activity to cease and indexes to shift permanently significantly lower. Again, like employment this is a negative factor, but the argument from hawks is that rates should be raised despite these effects.
So protecting and improving the prospects for bond and equity markets cannot be the reason for increasing interest rates
International Movement Of Capital
Closely related to the effect on domestic bonds and equities is the effect on international capital markets of an increase in American interest rates. This will result in a rise in the exchange rate of the dollar, making access to dollar capital more difficult for developing economies and existing dollar denominated debt much more difficult to pay back. As a result developing nations will inevitably be forced to move further away from the dollar denominated sphere of influence.
None of this is positive for dollar trade with the world. Rebalancing the international credit and debt markets in favour of dollar trade cannot be the reason for increasing interest rates.
Personal debt is always threatening to get out of hand in both America and Britain. This new credit reality is closely related to semi permanent bubbles in both the housing sector and long term educational expenses which continue to expand relentlessly in the Anglo Saxon world. Any interest rate rise can only have one effect on personal debt- and it is not a good one.
So preventing widespread personal debt meltdown cannot be the reason for raising interest rates.
There you have it. I have briefly reviewed the main factors that are supposed to have been taken into consideration in the feds deliberations and shown how in each case they argue against a rate raise, if they affect the outcome at all.
Central bank rates:
- Have had no direct calculable effect on inflation or deflation so far
- If increased, raise unemployment
- If increased, cause dislocation in capital equity and bond markets
- And cause dislocation in developing economies
- If increased, exacerbate personal debt problems
Does this mean that interest rate manipulation has no relationship to the real economy? Not at all, but it is not the relationship we are encouraged to discuss.
The Real Relationship Between ZIRP, QE And The Economy
Things have changed over the past seven years and QE has worked- in some territories more comprehensively than others. It has provided the time and space for a systematic restructuring of both consumer and labour markets.
We can easily observe that what has changed dramatically over the past seven years is the definition of employment (and therefore unemployment). It would not be an exaggeration to say that this change in the definition of what employment is has become the defining factor in describing the modified post credit crunch economy.
Changes in the form and content of labour are portrayed as technical innovations but in fact they can more accurately be described as the effects of the democratisation of money. The ‘sharing’ or ‘gig’ economy created by ‘Uber’ etc. is not an expression of supposed advances in mobile technology anymore than Bitcoin is the result of a few lines of code; it is an expression of a comprehensive breakdown of the post WWII social order.
Work is increasingly becoming casualised; the traditional protections and benefits that have been associated with full-time working in the developed world have been eroded to the extent that they are now only really applicable to a small and ever decreasing minority of workers in the public service sector and government.
The proliferation of zero hour contracts are a striking example of this casualisation of labour, and for a very specific reason. It is not simply a matter of worse terms and conditions or the failure of wages to keep up with prices.
Innovations such as zero hour contracts make it virtually impossible even to be able to understand who is actually employed and who is not employed. Employment and unemployment as we previously understood them have been defined out of existence. Is someone on a zero hours contract employed or unemployed? There is no way of telling until you go and take a look- just like Schrodinger’s Cat…this is quantum employment.
A massive leap in the number of people who are effectively self employed has produced a corresponding leap in the numbers who are effectively self unemployed.
One of the major victories of Monetarism in the Anglo Saxon world has been to redefine unemployment as a private, not a public matter. Just like Grace Jones’ sociopathic 80’s anthem has it: ‘It’s your private life.. leave me out..’
Changes in the definition of employment feed directly into changes in the way that inflation is calculated and understood. The main justification of monetarist central-bank interventionists has always been the danger of a wage inflation spiral. In other words, it is primarily regulating and disciplining wage settlements that make the decisive difference in the battle against inflation.
Without an integrated social labour market mechanism supported by trades union and collective bargaining there is simply no means to systematically produce wage inflation.
This is reflected in the continued failure of wage growth over the past seven years. In response to this developing problem even a nominally right wing government in Britain adopts a long term ‘socialist’ strategy of increasing minimum wage levels to create wage ‘growth’. And across Europe we see the emergence of various guaranteed income proposals and ‘peoples QE’.
Everywhere the state is being forced to consider stepping in to create wage/income ‘growth’ because the complex social structures that supported collective wage bargaining have been deliberately collapsed.
Without systematic wage growth there can be no systemic inflation. This was always the dream of Monetarists; to make inflation episodic and isolated, breaking what they called the ‘wage inflation spiral’. In Monetaristland where inflation broke out it would be suffered in isolation by small groups who would be unable to pass it on to the economy as a whole through wage increases or price rises.
As a consequence, we experience high rates of inflation in some specific areas and deflation in others. Since these isolated and specific patches of embedded long term inflation are becoming the norm, it is becoming untenable to claim that a generalised inflation rate as it is calculated is an adequate reflection of the reality of the economy. Monetarists are entirely aware of this and are making their plans accordingly…
A pattern is beginning to emerge here.
Economic Dark Age
As expressed through employment and inflation democratised money is being used to restructure, redefine, and reinterpret the labour market and the relationship between consumers and workers and the economy as a whole.
The nature of this restructuring is to create a situation where it is harder and harder to see the overall picture- understanding is deliberately being fragmented. I have referred to this on previous occasions as the creation of The Secret Economy. How much employment there is like how much inflation, is becoming unknowable. The economy and the information it represents is becoming balkanised.
This Economic Dark Age is entirely intended. Politics in the last century was about justifying the discrepancy between the wealth that accrues to capital and the wealth that accrues to labour. And elites comprehensively lost that argument. This century is going to be all about obscuring the discrepancy between the wealth that accrues to capital and the wealth that accrues to labour. Elites are moving the fight onto ground that suits them better…
What has been particularly striking about the past year has been the way in which even well established economic perspectives have begun to break down and become episodic and increasingly incoherent.
The entire ‘will she, won’t she?’ rate raising game itself is part of reducing any comprehensive view of the economy to a meaningless tussle over week to week tactics with no consideration of what these changes will mean in the long run. To be perfectly frank, I believe this is entirely intentional.
Intellectual and political elites in developed economies have no interest in contributing to a comprehensive narrative now. In the same way that a declining American empire prefers confusion and chaos to international law and order, the intellectual elites of late term capitalism prefer intellectual chaos to trying and failing to dominate a global argument about economics. The elite is preparing to effectively abandon ordered thought itself, and it was always entirely and inevitably the case that this would be done in silence..
‘This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper..’
But Crackernomics is here to prove it is entirely possible to build a comprehensive picture of the world as it is developing in the 21st C. But that uphilll struggle is going to be harder than even I thought. The very idea that a coherent world view is even possible has become part of the battle.
Since it is easy to show that none of the professed excuses stand up as a reason for increasing interest rates now, if you are at all interested in maintaining some semblance of logical thought, it is clearly time to explore the one reason that has been avoided by mainstream economists.
Despite the wholesale destruction and chaos they have caused, derivatives have been successfully protected from any serious attempt to control and restrict their ever expanding use over the past seven years.
Derivatives (privately issued money), are once again barely discussed in the media. This is a measure of the Monetarist central banks success. And now that derivatives are once again safe and sound and secret, the Monetarist Federal reserve feels free to move on to the next stage of its programme..the division of the world economy into roughly 50-60% government issued currency and 40-50% privately issued currency (derivatives).
That is why interest rates have been raised at this time.
NB: My very best wishes to those who have read and followed the United States of Everywhere through 2015.
Particular thanks to Dave Harrison for his very helpful ‘nudges’ in the right direction..