The wrongheaded dependence on the Fed. The real (only) way to prevent a recession.

From CNN and “Before the Bell”

The Federal Reserve’s decision to cut interest rates by half a percentage point outside of a scheduled meeting — the first time it’s made such a move since the 2008 financial crisis — was aimed at easing financial conditions and restoring confidence as the coronavirus outbreak spreads globally. Investors weren’t impressed.CNN BUSINESS - BEFORE THE BELL

The S&P 500 closed down 2.8%, while the Dow shed 786 points, or 2.9%. The yield on benchmark 10-year US Treasury notes fell below 1% for the first time in history as investors rushed into safe haven assets. Those are big slides on a day that was meant to be about reassurance.

What happened: Traders saw the move and wondered if the Fed Reserve knew something that everyone else didn’t. Instead of assuaging fears about how the virus would hit economic growth, it amplified them.

“Confidence matters in volatile times. It would have been better for the Fed to cut by 25 [basis points] and let markets hope for more,” Holger Schmieding, chief economist at Berenberg Bank, told clients on Wednesday.

The Fed’s primary job is to run the banking system and to stabilize the value of the U.S. dollar via interest rate control.

The Fed’s primary job is not to stimulate economic growth, prevent and cure recessions, prevent or cure large inflationary moves, or to eliminate poverty. Those are the jobs of Congress and the President.

Remember that as you continue reading.

US Treasury yields plummet chart

Some observers are also concerned that the Fed is prematurely running down its already depleted arsenal.

The central bank could still cut interest rates four times, assuming each cut is a more standard 25 basis points, before reaching zero.

But it has far less powder than investors would generally like to see in uncertain times.

Other central banks are in even worse positions.

The European Central Bank and the Bank of Japan, for example, have already pushed their benchmark interest rates into negative territory.

Central banks can still help: Satyam Panday, senior US economist at S&P Global Ratings, points out that while interest rate cuts don’t directly address some of the problems caused by the coronavirus, such as snarled supply chains, they could still prove useful.

The cuts could “offset some of the tightening that has occurred in financial markets” and keep credit flowing, while helping to speed up an economic recovery in the second half of the year, he said.

Cutting interest rates weakens the U.S. dollar, which is mildly inflationary. Inflation and economic growth are not the same thing. So trying to use one tool for two completely different effects will not work.

In short, don’t use a screwdriver to set nails.

What is the right tool to prevent and cure market slumps? What should Congress and the President do?

The Answer: Identify and cure the problems. Right now, many industries are suffering. Anything related to travel — and not just airlines and cruise ships, but anything related to traveling will be hurt — and that includes most businesses to some degree.

When businesses are hurt, what do they do? They lay off workers, and not the top-level executives, but the mid- and low-level workers, who cannot afford to take a hit to their incomes.

These are the great mass of American consumers who make the American economy run.

The fundamental problem is that American consumers will run short of money, so the fundamental solution is to provide them with money. It’s that simple.

Who should implement that solution, and how?

The Answer: Congress and the President should begin to pump dollars into the economy by instituting the Ten Steps to Prosperity (below). Put dollars into people’s pockets, so that the impoverishment caused by the loss of jobs will be softened.

Start with step 1: Eliminate FICA. That would put billions of dollars into the pockets of consumers.

That would help consumers, who don’t lose their jobs, to keep spending, which would help more businesses stay open and not need to lay off people.

Step 2. Free medical care, which would prevent economic disaster, especially for people who lose their jobs.

Step 3. A monthly bonus to everyone, really important for those who lose their jobs.

Go down through all the steps and you’ll see that the Ten Steps to Prosperity can help prevent a recession or a  depression — something the Fed simply does not have the tools to address.

In the near term, investors aren’t satisfied, with markets now clamoring for the Fed to cut rates again at its scheduled meeting later this month.
“The Fed seems committed to frontloading cuts, acting aggressively and forcefully,”

“The market is also pressuring the Fed by pricing in over a 70% probability of a March cut; the Fed won’t fight it.”

The above follows the failed philosophy, “If it doesn’t work, do it again, and if that doesn’t work, keep doing it.”

Sorry “market,” but interest rate cuts, even (God forbid) negative interest rates, will not prevent a recession or a depression.

Only the kind of money supply increases offered by the Ten Steps to Prosperity can do that.

But for investors, the moderate Biden’s surge was a welcome event.

“Investors fear Bernie because he wants to cut off the head of capitalism by raising taxes significantly on the rich and using the funds to provide free everything to everybody else.

He also wants to regulate everyone,” Ed Yardeni, president of Yardeni Research, told clients on Wednesday.

Should Sanders secure the nomination, analysts have predicted that health care, energy and financial stocks would take a hit.

“The policy proposals outlined primarily by Senator Sanders could have negative implications for a significant section of the equity market,” Mislav Matejka, JPMorgan’s head of global and European equity strategy, told clients this week.

Investors understand that if it’s bad for business, it’s bad for the economy. The economy is business.

To grow the economy, we must help grow business, and to grow business we must help consumers consume.

Unfortunately, Ed Yardeni doesn’t understand federal financing. He believes that federal government spending relies on federal taxes. It doesn’t.

The federal government, being Monetarily Sovereign, could institute the Ten Steps to Prosperity without collecting a penny in taxes, and that is exactly what the government should do.

We must not rely on the Fed to prevent/cure a recession or depression. That job belongs to Congress and the President.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

3 thoughts on “The wrongheaded dependence on the Fed. The real (only) way to prevent a recession.

  1. The FERAL Reserve really makes me laugh sometimes, lol. Cutting interest rates is like pushing on a string, and the closer they get to zero, the less effective it is in stimulating economic growth OR inflation. The best it can do is give the stock market a short-term bounce–and even that they utterly failed to deliver. Soon they will be down to zero and thus out of ammunition, and the economy will be stuck in a classic “liquidity trap”, failing to prevent even deflation from happening.

    And negative interest rates like they have in Japan and Europe are even MORE of a joke, and will only cause people to stuff cash under their matteesses (thus taking money OUT of circulation, backfiring mightily) avoid the banks’ maintenance fees.

    Quantitative Easing (QE) is only marginally better, and basically involves printing money to give to Wall Street and big banks in exchange for bonds. (The reverse process is called Quantitative Tightening, or selling bonds in order to take money put of circulation.) Problem is, the money doesn’t really trickle down to Main Street, and only serves to further enrich the banksters and create/inflate market bubbles like the currently bursting stock/bond/derivative bubble. And while the Ten Steps is clearly the best solution of all, especially Step #3, in the meantime the Fed should implement “helicopter money” or “QE For The People” directly in to every American’s bank account and/or prepaid debit cards–though they currently lack that tool and would need an Act of Congress to empower them to do so. And that could be done just as incrementally and apolitically as regular QE and interest rates. That would make too much sense though, of course.

    As for interest rates, they are indeed an important inflation-fighting tool in the short run (and as Keynes said, “in the long run, we are all dead) when they are raised, much to the chagrin of MMT. The best way to get the benefits of higher interest rates without the longer-run drawbacks is to 1) decouple them from the money supply by increasing deficit spending at the same time, and 2) reinstitute a federal usury cap on all consumer loans and credit cards of 10 or 12%, while not having any cap on interest rates of savings accounts, bonds, or anything else.

    Postal banking, like Bernie wants, is also a good complement to that as well.

    Like

  2. An example of “helicopter money” is the up-to $500 checks the federal government sent out during the “Great Recession” of 2008.

    They helped — a bit. They should have been $5,000 or more, but the government was too afraid of . . . something . . . to really cure the recession. See: Stimulus checks

    Like

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