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Hang on to your wallets!

Friday, September 18, 2015

The decision of the Federal Reserve to leave the Federal Funds Rate at 0.00%-0.25% included a foreboding little tidbit in what is called the "dot plot" chart the Fed includes with its guidance.

Each dot in this graphic represents the expectations of a member of the Federal Open Market Committee (FOMC - also known as the "Bishops of the Temple of the Free Market").  The horizontal lines represent where they think the Federal Funds Rate will be looking forward. That rate, then, influences the "bond market" - which in turn determines the everyday interest rates we pay for things like mortgages and auto loans as well as what we receive for money we keep on deposit.

The most interesting thing about this month's dot plot is the existence of a single dot - one unidentified member of the FOMC - below the zero line for 2015 and 2016.  This means one FOMC member thinks the Fed will have to set a negative interest rate - which means the big banks will have to pay the Fed to hold on to their reserves - as soon as before the end of the year and then keep it there through 2016.

But if you pay attention to the Orwellian language games played by the 'political-financial complex' it becomes clear that we have already arrived at the beginning of this. JP Morgan Chase is now charging a 'balance sheet utilization fee' against large deposits. In other words, while they are paying interest on those deposits at sub-1% rates, they are now charging a 1% 'balance sheet utilization fee'.  Put these two things together and it washes out to a de facto 'negative interest rate' in the -0.25% to 0.50% ballpark - exactly what that one dot suggests be done.

Before getting into why these things are happening, let me just put the implications out there in everyday terms: YOUR CASH IS AT RISK!

This is already the norm in Europe.  The European Central Bank 'pays' -0.20% interest - or charges 0.20% on deposits it holds.  The ECB can do this out in the open because European society is generally oriented to look to the State to manage the economy.  That, in turn, produces a view of money that sees it as principally a tool of the State.

Here in the U.S., though, our social compact is built on a foundation that views money as a measure of wealth belonging to individuals.  The 'Federal Reserve Note' makes it possible to exchange that wealth efficiently.  Our money, rather than the State's money, is a utility enabling everyday commerce, not a tool used by the political-financial complex to impose an order preferred by elites.  Indeed, a government "by and for the people" presumes this particularly American view of money.

This is why all but one FOMC member has yet to openly predict negative interest rates.  Instead, they have to coin a euphemism to at least attempt to establish negative interest as an acceptable norm by calling it 'balance sheet utilization'. The manner in which the Treasury, the Fed and the banks colluded to prop up the debt-driven status quo during the last financial crisis should make it clear that these kinds of decisions are being made in concert with the Treasury and the Fed.

And the Bloomberg article linked to above has accurately captured the economic implications. It has also captured the political implications, but has badly oversimplified them as merely being a Tea Party agenda controversy.  Thomas Jefferson opposed the very idea of a central bank, and was very skeptical about the merits of "paper money." His concern centered around the integrity of the 10th Amendment.  In a letter to George Washington urging him to veto a bill establishing a central bank, Jefferson wrote:
I consider the foundation of the Constitution as laid on this ground that “all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people.” To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, not longer susceptible of any definition.
Lastly, the dot plot might also explain why the Dow is getting hammered once again.  If you look at the grouping of dots and think of the 'standard deviation' (or the 'bell curve') the 2015 plot looks 'normal'.  It means expectations on interest rates follow what one would otherwise expect in a 'normal' situation.  But 2016 and 2017 form a 'narrow' shape, which if looked at from the point of view of a standard deviation from the norm, means there is nothing 'standard' about the dot spread and therefore nothing 'normal' about the expectations.  The plot does not 'normalize' until the 'longer run' expectations are plotted out.  All of this basically tells us that 2016 and 2017 are not expected to be 'normal' and they have no idea whatsoever what the 'longer run' looks like.

This is where a 'statist' view of money has gotten us.  It is going to be painful, and the only answer which bears the promise of restoring a meaningfully prosperous future for our kids is to recover our original understanding of money and put proper restraints on the money supply.

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