Janet Yellen, meet Isaac Newton

The mutual admiration society of the Federal Reserve and their economists, nourished by theories from the ivory towers of academia flush with accolades and degrees, have created a mess.  An inextricable mess.  The stimulus has become the crutch.  A six-year-old crutch.  Even more disconcerting, the low interest rates have actually had real and substantial unintended consequences.  The theories were a bit myopic, the theoreticians a bit stubborn.

Hayek stated that central planners (Central Bankers) cannot know, cannot possess the aggregate knowledge that market participants possess collectively.  Those central planners who disregard the powers of free markets and all the efficiencies that derive from free market price discovery labor under a great misconception: that they know better, that their knowledge is greater than the market’s knowledge.  

Those at the Fed have mentioned that they will not raise rates if it will harm the economy.  We now know, from their recent admissions, that what they really mean is that they will not raise rates if it hurts their stock market.  But they are now trapped by their own designs.  For the longer Janet Yellen and the Fed wait, the greater the impact of a rate rise will be upon the market.

The Fed’s game has not gone as planned.  There have been unintended and unforeseen consequences of what can be described only as their forced imbalances in what is remaining of the free-market economies.  Laws of economics seem to have been tossed aside by Central Bankers, who possess a belief that “we know better.”

Newton’s Third Law of Motion states that for every action or applied force, there is an equal and opposite reaction.

If body A exerts a force F on body B, then body B exerts an equal and opposite force −back on body A.  The mathematical expression for this is:

FAB = −FBA

Economics does not defy this law, but that would be news to the Federal Reserve.

The stimulus has become a crutch, and the crutch, while supporting the stock market, the bond market, the real estate market, and other assets, keeps inefficient businesses in production.

Thus, the misallocation of resources prompted by the low interest rates boosts production beyond a level that would be in action if rates were “normal.”  Therefore, the artificial low rates have artificially boosted production, created supplies, and dampened prices.

Zerohedge notes, “By lowering the cost of borrowing, QE has lowered the risk of default. This has led to overcapacity (see highly leveraged shale companies). Overcapacity leads to deflation. With QE, are central banks manufacturing what they are trying to defeat?”

Answer: yes.

The Saudis have pointed to this in the oil market.  They suggest that the artificially low rates have allowed the fracking industry to expand its production, thus suppressing prices.

This trend can be applied to other industries as well.  But the net effect is that overproduction is the result of artificially low interest rates.

And the force of such is to a degree that it negates the misguided efforts of Central Bankers to promote inflation.  The reaction rises to meet the action (Newton).

This overproduction weighs on prices, halting any inflationary efforts by the Federal Reserve, and actually promotes deflationary pressures. 

Oh, what tangled webs we weave, when first we believe we are smarter than the markets.

Janet will wait.  There is probably a formula for the inertia of the Federal Reserve.  It would provide equations such as “the direct relationship to the protracted degree of rate decisions, the greater the impact of those decisions” or “A Fed at rest, with a rising stock market, tends to stay at rest.”  Why?  Because it’s comfortable.

The comfort of rising stock and real estate markets is in direct relation to the likelihood of no Fed action.  Thus, the misallocation of resources will continue, and any chatter of rates hikes is now beginning to resemble the sign behind the bar.  “Free beer tomorrow.”

The mutual admiration society of the Federal Reserve and their economists, nourished by theories from the ivory towers of academia flush with accolades and degrees, have created a mess.  An inextricable mess.  The stimulus has become the crutch.  A six-year-old crutch.  Even more disconcerting, the low interest rates have actually had real and substantial unintended consequences.  The theories were a bit myopic, the theoreticians a bit stubborn.

Hayek stated that central planners (Central Bankers) cannot know, cannot possess the aggregate knowledge that market participants possess collectively.  Those central planners who disregard the powers of free markets and all the efficiencies that derive from free market price discovery labor under a great misconception: that they know better, that their knowledge is greater than the market’s knowledge.  

Those at the Fed have mentioned that they will not raise rates if it will harm the economy.  We now know, from their recent admissions, that what they really mean is that they will not raise rates if it hurts their stock market.  But they are now trapped by their own designs.  For the longer Janet Yellen and the Fed wait, the greater the impact of a rate rise will be upon the market.

The Fed’s game has not gone as planned.  There have been unintended and unforeseen consequences of what can be described only as their forced imbalances in what is remaining of the free-market economies.  Laws of economics seem to have been tossed aside by Central Bankers, who possess a belief that “we know better.”

Newton’s Third Law of Motion states that for every action or applied force, there is an equal and opposite reaction.

If body A exerts a force F on body B, then body B exerts an equal and opposite force −back on body A.  The mathematical expression for this is:

FAB = −FBA

Economics does not defy this law, but that would be news to the Federal Reserve.

The stimulus has become a crutch, and the crutch, while supporting the stock market, the bond market, the real estate market, and other assets, keeps inefficient businesses in production.

Thus, the misallocation of resources prompted by the low interest rates boosts production beyond a level that would be in action if rates were “normal.”  Therefore, the artificial low rates have artificially boosted production, created supplies, and dampened prices.

Zerohedge notes, “By lowering the cost of borrowing, QE has lowered the risk of default. This has led to overcapacity (see highly leveraged shale companies). Overcapacity leads to deflation. With QE, are central banks manufacturing what they are trying to defeat?”

Answer: yes.

The Saudis have pointed to this in the oil market.  They suggest that the artificially low rates have allowed the fracking industry to expand its production, thus suppressing prices.

This trend can be applied to other industries as well.  But the net effect is that overproduction is the result of artificially low interest rates.

And the force of such is to a degree that it negates the misguided efforts of Central Bankers to promote inflation.  The reaction rises to meet the action (Newton).

This overproduction weighs on prices, halting any inflationary efforts by the Federal Reserve, and actually promotes deflationary pressures. 

Oh, what tangled webs we weave, when first we believe we are smarter than the markets.

Janet will wait.  There is probably a formula for the inertia of the Federal Reserve.  It would provide equations such as “the direct relationship to the protracted degree of rate decisions, the greater the impact of those decisions” or “A Fed at rest, with a rising stock market, tends to stay at rest.”  Why?  Because it’s comfortable.

The comfort of rising stock and real estate markets is in direct relation to the likelihood of no Fed action.  Thus, the misallocation of resources will continue, and any chatter of rates hikes is now beginning to resemble the sign behind the bar.  “Free beer tomorrow.”