The Secret about This “Rate Hike” Panic

The October jobs report was good enough to convince markets that a rate hike is coming in December.

And that was enough to throw volatility (as measured by the VIX) into high gear, up some 15% yesterday.

It also seems to have capped the rally that sent the S&P 500 up 8% in October on hopes that the Fed would do just the opposite and not raise rates in December – go figure!

Now the financial world, which seemingly consists of little more than wits and wags, is holding its breath waiting to see if the Fed will actually decide to raise interest rates by a measly 25 basis points for the first time in nine years! This is pathetic.

Have you listened to what Fed governors are saying? Actually, you are far better off if you haven’t, but some of us have to listen to them for a living. This is the most disorganized bunch of kangaroos we’ve ever had jumping around the Marriner S. Eccles Office Building, which is where the Fed does its work. These yahoos run around giving speeches that contradict each other regarding whether the Fed should raise rates or not. And their fearless leader Janet Yellen just lets them run around with no constraint while she plays Hamlet and changes her mind every five minutes about whether the economy can withstand a miniscule interest rate increase.

I’m going to let you in on a secret.

The economy can not only handle an interest rate increase, but would be in much better shape had these former tenured economics professors started raising rates a year ago. At that time, the economy was producing an average of 260,000 jobs a month rather than the average of 187,000 that it produced over the last three months (even after October’s stronger-than-it-looked report). Low rates are depressing rather than stimulating growth. Sure, higher rates will increase the cost of servicing debt, but lower rates have led to a total collapse in financial discipline and a massive misallocation of resources that are leading us straight to another financial crisis. Higher rates are necessary to restore discipline and sanity to the system.

But do not fear – we won’t see meaningfully higher rates with this bunch in charge. (I remain convinced that even if they raise rates in December, they won’t do it again for a very long time. Read this.) Instead, monetary profligacy will remain the order of the day. And that means that paper currencies will continue to be devalued as central bankers make it their business to try to increase inflation. Inflation destroys the value of paper money, and there’s only one antidote to that…

I’ll be back with you tomorrow to show you.

3 Responses to “The Secret about This “Rate Hike” Panic”

  1. Michael….
    As far as I know, the Fed has never had a “one and done” hike in the overnight rate. Previous cycles have raised rates by something in excess of 200 basis points (the last one was 425 bps in 17 intervals.) The risk the Fed runs with a token hike is the misapprehension by the markets that this first hike is, like all the others, just the beginning, potentially triggering all sorts of nastiness. Perhaps the Fed can attenuate this risk by their vaunted “forward communications” policy but it is risky nonetheless. Ironically, despite being a monetary arsonist, it is far less dangerous, and less controversial, within the Keynesian establishment for Mrs. Yellen not to deviate from her forebears and to simply extend the existing policy–after all, nothing has blown up yet, right? That, combined with the associated risk of strengthening the dollar further and causing more problems for currency and commodity markets, etc., I think they will look for almost any excuse not to move. In which case, as you point out, the inevitable catastrophe may be postponed a bit longer.

    Just one man’s opinion on sports, of course.

    Sam

  2. There will be pressure on all of the global iterations of the Fed to keep costs of debt servicing low.
    I was disappointed in the Republican’s economic debate that there was no mention of the JPMorgan-Chase too-big-to-even-chastise flaunting of commodity trading rules. However, they may have made themselves partially immune to failure by warehousing massive quantities of physical gold and silver after holding silver prices low with their strategic short selling. China and Russia may also have
    gained some immunity in the same way.

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