International Forecaster Weekly

Fed Parlor Tricks Continue

A near-zero rate is a tacit admission that the economy is so dismal that any extra burden on bank lending would squeeze up the credit markets entirely.

James Corbett | September 20, 2014

For the umpteenth time in this era of “new normals” and “jobless recoveries” and “quantitative easing,” all eyes were on the Federal Reserve chair this week as she delivered a statement on whether or not the Fed would raise interest rates now, soon, or later. And for the umpteenth time, no one was surprised by the result.



            The official word is that the federal funds rate will remain near zero for “a considerable time” after the end of the Fed's QE3 bond purchase program next month, feeding in to expectations that the first rate hike since the rapid fall to “near zero” (0.0%-0.25%) in 2008 won't occur until next summer. Celebration on the markets was as immediate as it was predictable: the Dow Jones hit a new all-time high before some last minute profit taking at the closing bell and the S&P similarly launched straight up as soon as Yellen's remarks were delivered, also hitting an intra-day high. Let the good times (continue to) roll...

            For those not in the know, the federal funds rate is the rate at which banks lend to each other from their Federal Reserve balances. The rate is agreed on on a case-by-case basis between the banks involved. The average of all such transactions is the “effective rate.” The Federal Open Market Committee, meanwhile, sets a “target rate” and uses open market operations to expand or contract the money supply in order to get the effective rate into the target zone. The theory is that a low federal funds rate frees up banks to lend more of their cash, meaning they can lower their own lending rates and consumers can secure mortgages, credit cards and other consumer debt at lower prices. A near-zero rate is a tacit admission that the economy is so dismal that any extra burden on bank lending would squeeze up the credit markets entirely.

            The dismal economy since the Lehman shock of '08 has been the justification for all the QE craziness that followed. Because the economy is so slow, the Fed needed to chop the federal funds rate to nothing and start quantitative easing (mortgage-backed securities and bond purchases) in order to avoid the next Great Depression. But this perception has always been a balancing act; they want people to know the economy is in a dire enough position to need the QE operations, but not so bad that people realize the productive economy of the U.S. has essentially fallen off the cliff and is now being propped up by bubble after bubble. They have done this by focusing on heavily manipulated numbers like the “unemployment rate” which they can interpret however they want to justify whatever decisions they want. This time around Yellen straddled the fence by tempering enthusiasm over seemingly positive jobs numbers this year with August's dismal showing and worries about the labor participation rate (which they have carefully excluded from consideration hitherto).

            The purpose of all of this is to keep the punch bowl of the “new normal” bubble economy spiked for as long as possible. The longer they keep these quantitative easing operations and near-zero federal funds rate in place, the more the few at the top of the financial pyramid collect. Just like a spiked punch bowl at a school dance, however, the results of all of this bubble blowing will be a terrible headache the morning after. The Fed's answer? Hair of the dog that bit you! QE2! QE3! Near-zero federal funds rate forever! In effect, the Fed has painted itself into a corner, much to the delight of the equities markets.

            The delicate dance now involves the Fed and its cohorts in the talking head media convincing Americans that the “new normal” is actually good for everyone and the current economy really is as good as it gets. This is being accomplished by a steady drip feed of manipulated and misleading economic statistics that are coming out on a nearly continuous basis.

            Take this headline from yesterday's New York Times: “Household Net Worth Has Rebounded Since Financial Crisis.” The story sounds like unmitigated good news, and starts off with a barrage of feel-good numbers: “The net worth of American households is now 20 percent higher than it was before it began to decline in 2007, the Federal Reserve reported this week. It said the households together were worth $81.5 trillion at the end of the second quarter, higher than ever and up 10 percent from a year earlier.” Of course, you have to read the fine print to find the true story. Firstly, the data is not adjusted inflation, making direct comparison of the 2007 data and the 2014 data meaningless. Secondly, as the Times sheepishly admits in the fourth paragraph: “The recovery in household wealth has come in ways that favor the wealthiest households.”

            Specifically, the biggest gains have come in the equities markets, exactly as we've been reporting here at the Forecaster for years, and the biggest holders of equities are those at the top of the pyramid, with central banks and other state-run institutional investors having pumped $29 trillion into global markets in recent years. 2012 tax returns show that over one-third of all dividends went to those earning more than $2 million a year. Meanwhile, investments in equities by Joe and Jane Q. Public have fallen to the lowest level since record keeping on the subject began in 1959. Even in the depths of the dotcom bubble hangover of 2002, investors had 42% of their investments in equities; in 2012 that figure had dropped to 37.1%, despite the largest bull run in modern history.

            In short, the “net worth” numbers being touted by the Times don't tell the true story. Net worth has indeed increased apace for the banksters and their cronies, but not for the majority.

            Or take this headline from the CIA's favorite newspaper, The Washington Post: “Poverty Rate Drops For the First Time Since 2006.” The story reports how the Census Bureau released its annual look at poverty and income in the US this week, and the numbers paint a rosy long as you don't look too closely at them.

            Examining the fine print we find that, although the poverty rate did decline according to the Census Bureau figures (from 15% to 14.5%) the numbers are crunched in such a way to give the rosiest possible picture (stop me if you've heard this one). The rate is calculated on the basis of gross income and does not take into account various non-cash forms of government aid, including food stamps. Saying that the number of children in poverty dropped from 16.1 million to 14.7 in 2013 million sounds good, but an entirely different picture is painted when we take into account food stamps and other signs of financial stress. The percentage of households on food stamps has doubled in the past decade, from 10% in 2004 to 20% in 2013, with no signs of an improvement.

            If the economic burden is such that millions of households have started collecting food stamps from the government over the past 10 years, then why is the poverty rate dropping? According to the Post: “the decrease in the poverty rate was attributed to the growth in year-round employment by 2.8 million jobs in the United States, government officials said.” But again the raw numbers tell a different story to the economic outlook. As ZeroHedge pointed out after the dismal jobs report earlier this month, a startling 53 million Americans, or 34% of the nation's workforce, qualify as “freelancers,” a broad category that includes all manner of non-stable employment from contract workers moonlighters to temps. In other words, the jobs that are coming back are coming back in the form of weak, unstable employment that lack benefits of any kind and can be terminated on a moment's notice. Welcome to the new economy.

            What's more, median wages show no sign of growth according to the Census Bureau figures, yet another disturbing indicator that real wages (adjusted for inflation) are continuing their long and steady decline. In fact, median incomes are a full 8% lower than they were in 2007 and 11% lower than they were in 2000. The stagnation of incomes that has come to define our economy continues...At least for those at the bottom of the economic pyramid. Those at the top continue to grow their incomes at a faster and faster rate as the paper casino financial funny money economy continues to outstrip the stagnating productive economy and bankers and executives continue to take home disproportionately larger and larger paycheques. Over the last 25 years, the income of the top 1% of the economy has grown by 200.5%. The bottom 99%? Their income grew by just 18.9%.

            I could go on. And on and on. But I think you get the picture. The Fed is trying to put the best face they can on the Frankenstein economy they've helped engineer. Yes, of course you see that times are tough for yourself and those around you. But look at these statistics and figures! Everything is great after all. Quantitative easing has been a success! And if the Fed succeeds in convincing the public of this they may just take the punch bowl away entirely and hope that no one notices their lies.

Weekly Market Wrap Up w. Hannah Bernard VNN (Sept 19, 2014)