Yellen Says Caution in Raising Rates Is ‘Especially Warranted’ … Fed Chair makes case for go-slow changes with rate near zero … Janet Yellen said it is appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks. The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate. –Bloomberg
Janet Yellen was back at it yesterday, talking down the need for a rate hike.
She is comfortable with the economy running “hot.”
After a year or more of explaining why rate hikes were necessary, up to four or more of them in 2016, Ms. Yellen has now begun speechifying about how rate hikes are not a good idea.
It’s enough to give you whiplash.
It sets the stage for increased stagflation in the US and increased price inflation in China. More in a moment.
Here’s the real story. At the last G20 meeting in February, secret agreements were made between the most powerful economies to lift both the US and Chinese economy.
The details of these deals have been leaked on the Internet over the past few weeks and supported by the actions of central bankers involved.
It is what The Daily Reckoning last week called “The most important financial development of 2016, with enormous implications for you and your portfolio.”
The Fed and other members of the G20, which met in February, intend to maintain the current Chinese system.
They want China to stay strong economically.
The antidote to China’s misery, according to the Keynsian-poisoned G20, is more yuan printing. More liquidity that will supposedly boost the Chinese economy.
As a further, formal yuan loosening would yield a negative impact felt round the world, other countries agreed to tighten instead.
This is why Mario Draghi suddenly announced that he was ceasing his much asserted loose-euro program. No one could figure out why but now it’s obvious.
Same thing in Japan, where central bank support for aggressive loosening has suddenly diminished.
The US situation is more complicated. The dollar’s strength is now seen as a negative by central bankers and thus efforts are underway to weaken the currency.
A weaker dollar and a weaker yen supposedly create the best scenario for a renewed economic resurgence worldwide.
The euro and the yen rose recently against the dollar after it became clear that their central banks had disavowed further loosening.
Now Janet Yellen is now coming up with numbers and statistics to justify backing away from further tightening.
None of these machinations are going to work in the long term. And even in the short term, such currency gamesmanship is questionable in the extreme, as the Daily Reckoning and other publications have pointed out when commenting on this latest development.
In China, a weaker yuan will create stronger price inflation. In the US, a weaker dollar will boost stagflation.
We’ve often made a further point: Everything central bankers do is counterproductive on purpose.
The real idea is to make people so miserable that they will accede to further plans for increased centralization of monetary and governmental authority.
Slow growth or no growth in Japan and Europe, supported by monetary tightening, are certainly misery-making.
Stagflation in the US and Canada is similarly misery-provoking, as is price-inflation in China.
Nothing is what it seems in the economic major leagues.
Central banks are actually mandated to act as a secret monopoly, supervised by the Bank for International Settlements and assisted by the International Monetary Fund.
Deceit is mandated. As with law enforcement, central bankers are instructed to lie and dissemble for the “greater good.”
It’s dangerous too.
The Fed along with other central banks have jammed tens of trillions into the global economy over the past seven years. Up to US$100 trillion or more.
They’ve been using Keynesian monetary theories to try to stimulate global growth.
It hasn’t worked of course because money is no substitute for human action. If people don’t want to invest, they won’t.
In the US, the combination of low growth and continual price inflation creates a combination called “stagflation.”
It appeared in its most serious form in the 1970s but it is a problem in the 2000s as well.
According to non-government sources like ShadowStats, Inflation is running between four and eight percent in the US while formal unemployment continues to affect an astonishing 90 million workers.
US consumers on average are said to be living from paycheck to paycheck (if they’ve even got one) with almost no savings.
Some 40 million or more are on foodstamps.
Many workers in the US are probably engaged in some kind of off-the-books work and are concealing revenue from taxation as well.
As US economic dysfunction continues and expands, people grow more alienated and angry. This is one big reason for the current political season with its surprising dislocation of the established political system.
But Yellen has made a deal with the rest of the G20 to goose the US economy, or at least to avoid the further shocks of another 25 basis point rate hike in the near future.
Take their decisions at face value, and these bankers are too smart for their own good.
Expanding US growth via monetary means has created asset bubbles in the US but not much real economic growth.
And piling more yuan on the fire in China is only going to make Chinese problems worse in the long term. More resources misdirected into empty cities and vacant skyscrapers – all to hold off the economic day of reckoning that will arrive nonetheless.
Conclusion: As we have suggested before, the reality for the US going forward is increased and significant stagflation. Low employment, high price inflation. On the bright side, this will push up the prices of precious metals and real estate. Consider appropriate action.