Economics

Is this lady about to trigger the next recession?

Fact: recessions happen. Fact: on average, they arrive 58 months after the last recession. Final fact: it’s been 73 months since the last one.

If the talk about the so-called “deep state” has any merit to it whatsoever, then this is the place you ought to focus your attention: the Fed. There’s a good reason for that, too, that doesn’t involve any conspiracy theories.

It’s the fact that they have been granted an exclusive monopoly over the most marketable commodity in the world: money. They have direct control over the monetary supply, which is the central economic institution.

Every so often, the financial news media comes to life with reports from the Federal Reserve chairman and board of governors. Janet Yellen (in the picture) is the current chairman of the board.

Have you ever wondered why any of that matters to you?

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The main reason you should pay attention is because the Fed determines if there’s going to be a recession. For you, that could mean losing your job if you aren’t prepared for it.

INTERPRETING THE JARGON

But here’s the problem: the Fed speaks in technical jargon — I’d say it’s more like gibberish. That makes it hard for regular people to understand what they’re talking about. This is intentional. It’s like a priesthood. The priesthood is granted special knowledge. It keeps the laity away from this knowledge by shrouding it behind a veil of mystery. In this case, the veil is technical jargon.

Fortunately for us, one branch of the Fed publishes all kinds of charts. It updates them weekly. We can pay attention to what the Fed is doing by simply following the charts. It helps to know how the Fed’s actions impact the economy first, though.

So let me break it down. It’s easy.

If the Fed is expanding the money supply, which they call the monetary base, this is called “inflation.” The monetary base is called high-powered money (at least, in the past, prior to 2008 when everything changed). When the Fed is “inflating,” they are attempting to either kick-start an economic boom, or else keep one going.

If the Fed has stopped expanding the monetary base (keeping it stable, or flat), or actually started contracting it, then it is trying to engineer and economic recession.

That’s all there is to it, really. Is the monetary base expanding? Then the Fed is trying to create or sustain a boom. Is the monetary base stable or contracting? Then the Fed is trying to initiate a bust.

Now, let me show you one of these charts I mentioned:

This is the Fed’s monetary base over time. You can see that, until the end of 2008, it grew at a relatively slow, but steady, pace. But then, in 2008, that’s when everything changed. The monetary base leaped up out of its shallow pond and began scaling a series of cliffs.

There is a pattern there: leap, flat. Leap, flat. Leap, flat. These were the various rounds of “quantitative easing,” or “QE” for short. This was monetary inflation on an unprecedented scale.

NOT AS WE EXPECTED

But with those tremendous increases, there normally should have been massive price inflation worse than what we experienced in the 1970s. But there wasn’t. So what happened?

The banks. The banks took that extra digital cash that the Fed created out of thin air and sat on it. They put it in their own savings account. And the Fed, for the first time in its history, began paying a very small interest rate on that deposited cash: 0.25%.

In other words, the banks, with the Fed’s assistance, sterilized that money. Normally, the banks would have taken those trillions of new dollars and converted them into loans. New money would have flooded the economy. Prices would have increased.

Instead, the banks did not create new loans. They were too afraid of the economy because they were in the middle of the Great Recession. So, thankfully for us, the Fed’s actions didn’t destroy our economy, or the value of our money like in Germany following the end of World War I.

The Fed stepped in like a drug dealer offering a hard-up crack addict a small fix, just to keep’m coming back. That’s what the interest payment on excess reserves is.

This is how the Fed engineered the biggest back-door, taxpayer-funded bailout of the banks that the world has ever seen. It was also never voted on. No, this was not TARP. That was a smokescreen.

But some of that money has begun to leak out into the economy. Finally, as the economy’s recovered, the banks have once again began making loans:

If this were to continue, then eventually we would see a return of mass price inflation, the likes of which we haven’t seen since the 1970s. Instead, the Fed has begun taking steps to dampen the bank’s excitement. Specifically, they have increased the rate of interest that they get paid for keeping that money in their savings account with the Fed. It’s now at 0.75%.

WHAT’S ABOUT TO HAPPEN

The latest report suggests that the Fed is about to increase that rate to 1.00%. Not only that, but now let me show you a chart of the monetary base over just the last three years:

How would you characterize the trend? Growth, stability, or contraction?

Best case, I’d say it’s been holding stable since September of 2014. Worst case, I’d say it’s actually being contracted slightly. So now, let’s add everything together.

The Fed pays interest on the excess reserves that the banks keep in their savings account. The Fed dramatically increased the monetary base beginning in 2008 to buy up all those toxic mortgage-backed securities, and that money was converted into cash with the banks. The banks put it in their savings account, and the Fed began paying 0.25% in interest.

The banks were scared. They could have lent that money to the public at higher rates than what the Fed was paying them, but that would require taking on extra risk. In the middle of the Great Recession, and for years afterward, the economy has been too shaky and uncertain for the banks to want to take on great risk. Besides, they already had lots of underperforming assets on their books. They needed time for real estate prices to rise again to start unloading those bad loans.

(I’m sure you heard the stories after 2008 about people living in their houses for years without paying a mortgage payment?)

Money from the Fed was a guaranteed, safe return.

ADDING IT ALL UP

So, the effect that the Fed’s paying interest has on the bank’s savings is that it tends to restrict economic growth. It tends to reduce their tendency to want to make loans, which generates economic expansion.

With every quarter-point that the Fed raises the interest that it pays on Excess Reserves to the banks, it makes them even less apt to loan their money to the public. This tends to slow economic expansion.

Lastly, the monetary base is contracting, or at least remaining stable. This is how the Fed engineers a recession. It hasn’t inflated the monetary base in over two years.

When you combine a stable (or deflationary) monetary policy with increasing the rates paid on Excess Reserves, then you get a recessionary monetary policy.

Is raising the interest rate surely going to trigger the next recession? The economy’s so complex that it’s impossible to predict the timing. But what we can say for certain is that if we were trying to drive the economy into a recession, then this is a sure-fire way to turn the rudder in that direction.

America’s economic ship is large; large ships turn slowly.

When the next recession arrives, people will blame Trump. That’s because they always blame the President, as if he has some control over when recessions strike. They ought to direct their anger towards Janet Yellen, chairman of the board of governors of the Federal Reserve. They ought to blame the Fed.

If you read to the end, and you want to follow the charts for yourself, then there’s the link:

Federal Reserve Adjusted Monetary Base

If you want to read how the Federal Reserve creates the economic business cycle (alternating periods of booms and busts) in detail, then click here to read “How the Business Cycle Happens.

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