Will September 17, 2015 be the day the earth stands still? After indicating strongly for weeks that the Federal Reserve would start to raise interest rates this September, they seemed to have backed off. According to the CME Group FedWatch, the probability of the Fed to raise interest rates was halved from 51% to 24% earlier this month. Now, New York Federal Reserve Chief William Dudley said in a statement on Wednesday that “at the moment, the decision to begin the normalizing process at the September meeting seems less compelling.” So the inflation induced question now becomes “will they or won’t they?”
Objectively, you and I or anybody with marginal intelligence can tell you that there is no way that the Fed can raise interest rates. I mean, they undoubtedly should stop controlling them all-together, but not with any positive results in the near future. Let me break it down for you: In an effort to jump start a recovery after the 2008 financial crisis, the Federal Reserve cut interest rates to at or near 0% since early 2009. By forcibly suppressing interest rates, the Fed has been able to maintain this Keynesian illusion of growth and prosperity. In reality, they’ve only created artificial bubbles that confuse the market. When they allow too big to fail banks to borrow at 0% interest, this creates inflation–and so they are effectively creating negative interest and paying large banks to borrow money. This is obviously not sustainable for long term stability as the economy is built upon an entire house of cards.
Let’s say, purely for the sake of argument, that the Fed ignores what is in their self-interest and raises the rates anyway. Why does it matter? Well, there is a number of negative outcomes. First, the stock market will plunge. Just for a little indication of what that may look like, we have to look no further than June 2013. On June 19th, 2013, former chairman of the Federal Reserve Ben Bernanke did not announce a rate increase, but he did suggest an increase would likely occur if inflation followed a 2% target rate and unemployment dropped to 6.5%. After making those comments, the stock markets plunged 4.3% with the Dow Jones dropping 659 points between June 19-23, 2013. We see this trend again during the late part of the trading week last week. As September approaches with a “24%” chance of a rate hike, the Dow Jones had its worst weekly performance in four years plunging 1,000 points; the beginning of this week has been more of the same! Later, on Monday, August 24th, 2015, the Dow Jones opened with the largest one day drop since 2008 with a 1,089 point death spiral before recovering, then ultimately falling again, to the tune of a near 600 point plunge to close out the trading day.
You may be thinking, “Brandon, I don’t have any stocks and a majority of American’s don’t hold wealth in the market. Everything will be absolutely peachy!” If I may steal a line from the great Lee Corso, “Not so fast my friend!” Remember when I said that there is a “number” of negative outcomes? On to negative outcome number two: Housing. History repeats itself ; we are in the midst of a very large housing bubble. If the Fed goes through with the September rate hike as planned, it will send a vast number of mortgage rates skyrocketing. This would be especially detrimental to the families that are just scraping by on a paycheck-to-paycheck basis. But, since the Federal Reserve is run by large private banks, this is unlikely to happen because those privately owned banks also happen to own the majority of real estate. I don’t think they’d be too ecstatic to plunge the housing values through the floor. Unfortunately, by not raising rates or, as the Austrian economists will tell you, “stop controlling interests rates all-together”, the Fed will continue to exacerbate the problem until that large bursting bubble explodes with even more damage than a rate hike in the here and now.
The last and most dangerous negative outcomes are the national debt, federal deficit and unfunded liabilities. Centrally planned economies, as well as fascist and mixed economies have completely and utterly failed. Currently, the US debt is over 18 trillion dollars and unfunded liabilities are somewhere over a hundred trillion dollars. If the Federal Reserve raises rates, the debt would become insurmountable. Seeing as the Federal Reserve bought up a majority of that debt through various QE programs, they would likely roll over the debt. This means they would borrow more money to pay off interest and principle on old debts. This would be the equivalent of sending in your MasterCard to pay off your Visa bill. The scary thing about this is that they would print away the debt out of thin air and cause hyper-inflation. We would find ourselves in an economic wasteland not uncommon to the Weimar Republic or Zimbabwe.
What is most likely going to happen is that the Federal Reserve, and chairwoman Janet Yellen, will continue to flirt with increasing interest rates in order to retain some shred of credibility, but will ultimately roll out another round of Quantitative Easing (QE4). They will tell you not to panic and that everything is fine, but everything isn’t fine. The sooner we can get out of this quasi-fascist system of socialized loses and privatized profits, the better off we’ll be in the long run. It has been a long time coming that we finally allow the free market to determine interest rates and punish those that have taken risks and have been irresponsible with resources. It is time to audit the Fed, if not end it all together. Otherwise, there will be no real economic recovery and we will be stuck with giant artificial bubbles, a depreciating currency, and massive amounts of debt slavery.