Federal Reserve Caught In Its Own Trap

In reaction to the market crash that followed the banking crisis of the late 2000s, the Federal Reserve cut interest rates to historically low levels.  The idea was that injecting cheap money into the economy would raise stock prices.  It worked.  The problem is that it has now gone too long.  As Sven Henrich, the lead market strategist at Northman Trading and contributor to various financial publications states in Marketwatch, "We are witnessing a historic unraveling here."  What is happening is an ever increasing dependence on debt to increase stock market values.  Even the slightest hint of an interest rate increase causes a dip in the market.  What is unprecedented is that the Federal Reserve seems to react to these dips.  If an increase is announced and markets dip, a FED Spokesman runs out to a press conference and says, "Just Kidding."  The latest turn around prompted CNBC to run with a headline on Friday of "It's no longer a question of if the Fed will cut interest rates, but when."  A major problem is that other central banks must follow the Fed's lead.  This has created a world debt crisis that is unsustainable.

Nobody can predict when, but two outcomes are certain and one is probable.  The first certain outcome is that the current period of economic growth will come to an end.  Some, like Henrich, believe it has come already but that Fed promise of easy money is delaying the inevitable.  However, delaying the end of economic growth historically means rather than growth ending, we have create a crash.  Although demographic factors indicate this may not happen soon, a deep recession may be in our future.  The second certain outcome is inflation.  The way government calculates inflation was changed in 2015 so that inflation is not as evident in official figures.  Everyone who buys gas for the vehicles and groceries for their bellies notices the effects of inflation over the last ten years.  It can only get worse if easy money continues to be available.  The probable outcome that may not happen is that the Federal Reserve Board of Governors may be forced to "wake up" as it did in the late 1970s.  To stave off the debt and inflation crises, it may over tighten.  Millennials do not remember 18% interest rates on home mortgages, or even 8% interest rates.  It is difficult to predict how they will react. 

There is a way to avoid all of this.  Stop the system of currency manipulation and return to a system of sound money.  It is doubtful that the bankers will want to give up the power to make markets go up and down.