Janet Yellen and the US Economy
The monetary landscape today looks pretty grim. We are in the middle of the perennial decline in the rate of interest. Central bankers are convinced they can get us all out of this mess. But can they really?
Janet Yellen recently tried to go against the decade long trend by raising rates at the end of last year. It has not panned out so well. In fact, rates have declined despite her announcement and subsequent plan to keep raising rates throughout the year.
Zooming out a bit we get a much clearer picture of the long term trend.
If it’s not obvious already, it should become very obvious soon. Central bankers have a lot less influence over interest rates than they lead us (or themselves) to believe.
Under Bernanke’s regime the Fed supposedly “lowered the interest rate” several times post 2007-2008. However, again if you zoom out a bit, a different narrative starts to emerge. The following chart, courtesy of Keith Weiner, shows that the interest rate has been in a long term falling trend since the late 70’s and early 80’s.
Again, with this long term view in mind, it becomes apparent that the Federal Reserve, along with everyone else, finds themselves swept up by a powerful long term trend with no real good answers for how to get out from under it. Now, this is not to say that central bankers have no influence whatsoever. They most certainly do, particularly over short term interest rates. But the above chart clearly shows that the Fed is a follower of the broader market, not a leader. This quote by Joseph Calhoun at Alhambra Investment Partners drives the point home:
For the Fed does not lead, it follows. It follows the market because frankly it can’t be any other way. The Fed is not now nor has it ever been sufficiently powerful to overcome the market and force it to bend to its will. And last week we got more evidence that despite decades of practice, years of trial and error, the torturing of mounds of data with ever more powerful processors, the Fed still hasn’t mastered this forecasting game any better than the aggregated opinion of millions of traders and investors embodied in what we call ‘the market.’”
For anyone who was seriously hoping that Yellen’s announcement would signal the turnaround for the US economy, or even in interest rates, they have to be deeply troubled at this point. Long term, interest rates don’t look to be going anywhere but down. Negative interest rates are already a reality in Europe and in Japan. There is the growing threat they will eventually make their way to the US. Yellen has even hinted at this possibility. All this casts a shadow of doubt as to the competence of central bankers to effectively “manage” the economy. Not to mention the ability make good on their many promises.
Mario Draghi and the ECB
Having focused on Yellen, let’s now turn our attention to Mario Draghi at the European Central Bank. Undoubtedly, Draghi has a different personality than Yellen. He carries himself with bravado and tends to make bolder pronouncements. Perhaps Draghi’s most famous and defining moment was in the summer of 2012 when he appeared in public and dramatically pledged “ to do whatever it takes to preserve the euro, and believe me, it will be enough.”
Four years later and no one can doubt that Draghi has done a lot. In fact, during his tenure as the President of the ECB, nearly one out of every four policy meetings resulted in some kind of monetary stimulus package. Yet, at the end of the day, what does the Euro and the Eurozone have to show for it? How exactly can Draghi’s hypothesis of preserving the euro be validated? And at what cost? If we use his own metrics, he is still way short of the 2% inflation target. Official inflation levels have consistently been coming in at near zero and have even been reported at negative levels a few times. They currently stand at around 0.2%. That’s a long way from 2%. This is despite repeated use of “unconventional measures” in order to achieve those stated goals, all of which will have to be unwound at some point. Nobody really knows what that is going to look like. Given the magnitude of stimulus we have seen thus far, it may not to be so pretty.
This Foe is Beyond Any of You
There are a lot of problems with the euro and the Eurozone. Some of the euro problems are unique to the euro, while others are the same fundamental problems that the dollar has here in the US. Despite their personality and geopolitical differences, both Yellen and Draghi share one problem in common – they are both caught up in forces far greater than the power they each individually, or collectively as central bankers, possess.
It’s very easy for one person on top of a mountain to move a little snow around. But once that snow starts to accumulate more and more snow, and gather more and more momentum, then it becomes an avalanche and who can stop it then?
So it is with our central bankers. Yellen can’t make an interest rate rise and Draghi can’t lift up the inflation rate no matter how hard he huffs and puffs. They are both working against years of powerful momentum and force put in motion long before they took their oaths of office. They are standing in front of an avalanche trying to make it stop.
Like Gandalf said about the Balrog in the Mines of Moria scene, “This foe is beyond any of you. RUN!”
Who is the balrog? What is the avalanche? It is the eventuality of a closed loop debt based monetary system void of any feedback mechanism for how the interest rate is set. And without that feedback mechanism, that is exactly where interest rates, and the currency systems themselves are all going to end up – in the void.
Empty.
Just like the promises of our imperious central bankers.
A version of this article was originally published here.