Title: The FED's Continuing Low Rates are a Major Grand Strategy Mistake.
Author: Andrew M Molchan
Date: Thu April 26th, 2012
4/26/2012. ANDY'S INSIGHTS. One of Today's WSJ News Blurb Headlines was, "FED will Keep Rates Low." This is an On Going Mistake.
There might be an argument for EXTREME low rates for A VERY SHORT TIME. However, to keep RATES forced down to abnormally ultra low levels year for year is a MAJOR MISTAKE.
Today's low rates are Bernanke and Geithner doubling down on the Rubin/Clinton scams of the 1990's. Rubin/Clinton forced rates down to below de facto inflation, and that drove American Bank Account Savings into the stock market.
When Clinton came into office in 1992 the Dow was 3100. On January 14, 2000, when Clinton left office, the Dow was 11,723. The Gov collected a LOT of Tax Money because of the raise in Stocks, and the "Clinton Federal Budget" was Balanced.
The eventual COST of the Clinton/Rubin scam (the Rubber Band Effect, also called the Overextended Effect, also called the Kicking The Can Down The Road Effect), is that by Oct 2002, the Dow had gone down 38% to 7,286.
The long term "Price" of the Rubin/Clinton scam was that in non-inflated dollars the Dow Today is LOWER than 12 years ago, and American Manufacturing is 9% LOWER than 12 years ago with 9% fewer manufacturing (mainly union) jobs.
It's like military strategy. If you over extend your attack and reach out for "A Bridge Too Far" you're going to end up getting Wacked. The current FED's Queer Money and artificially ultra low rates are A Bridge Too Far in the making.
In April of 2007 the Dow was at 13,089. Just about where it's at right now in April of 2012, (AFTER 12% real Inflation). And today's Dow is AFTER Trillions of FED Dollars, and AFTER the FED pushing down their interest rates to ZERO.
Today's artificially ultra low interest rates WILL produce SEVERAL disasters down the road.
DISASTER EXAMPLE. The FED and Treasury are FORCING Banks to write low interest 30 year mortgages. AND to re-write existing mortgages for 30 years at low rates. With the FED pumping out Trillions of Queer Dollars what's the probability of serious inflation NOT arriving in the next 30 years? That probability is ZERO.
America's Banks are going to be stuck with Trillions of dollars of low rated, and fixed rate mortgages that will be way BELOW the future inflation rates. The American Banking system, somewhere in the future, HAS TO END UP being balance sheet bankrupt.
Somebody might say, "The Banks don't have to worry because all of the loans have been guaranteed by Freddie Mac, Fannie Mae, and all of the other Hillbillies that Obama has Nationalized." Those "Guarantees" are for DEFAULT. When a home owner has a 6% 30 year mortgage, and real world inflation is 12% because of the FED's Queer Trillions. The mortgage holder is NOT going to Default. He's MAKING 6% a year on his mortgage. It's the Banks that will be totally screwed.
Today the stock market is high because there's nowhere else to put your money. PLUS, the FED has pumped Trillions of Queer Dollars into every big corporation in America either directly, like General Motors, or indirectly through almost free loans. Can that last forever?
THE FED IS ASS BACKWARDS. The Keynesian Crackpots at the FED sincerely believe that it was Roosevelt's Queer Money manipulations of the 1930s that ended the Depression. As with almost everything, the FED is WRONG.
There is only ONE WAY to cure a problem of too much Debt. You have to WORK and SAVE your way back to solvency. The SAVING RATE in America, for 1942-1945 averaged 25%. In 1944 it was 27%. America SAVED enough to pay off the Debts of the 1920s and that's what ended the Depression. The only long term cure for Debt is SAVINGS. The FED forcing DOWN the interest that banks pay on SAVINGS accounts is the ASS BACKWARDS oppose of what really cured the 1930's Depression.
America had low interest rates after WWII, but they were Naturally Low. American's workers for 1942-1945 had a 25% savings rate. American corporations had NO DEBTS, and lots of cash. Today's FED low interest rates are totally Queer. They are as Natural as a three dollar Bill.
It's not wrong to think of a Nation like America as a family. Suppose an average family goes consumption crazy for a while and runs up $50,000 in credit cards bills. It has two choices. (X) Take out a Home Loan for $60,000 and pay off the credit cards. Or, (A) Consume less, work harder, and save as much as possible until the credit cards are paid off. The right choice is "A." The FED's choice has been and will be "X."
Choice "A" means pain now, but financial health in the future. No pain no gain. Choice "X" is kicking the can down the road and WILL CAUSE even bigger future problems.