The Federal Reserve is Out of Control

We came to Aiken, SC, partly to get away from Maryland’s ice and snow…partly so Elizabeth could enter horse riding competitions. But Ol’ Man Winter must have snuck into the back seat.

He arrived here in South Carolina when we did. An ice storm hit yesterday, immobilising almost the entire South. The horses were left shivering in their stables. And we were stuck too…

But let us turn to the financial news…then we’ll come back to the hotel, where we are currently snowed in.

Stocks don’t seem to know what direction they want to go. Gold seems to want to go up.

Our guess is that gold won’t go very far up…not yet. There’s little inflation pressure. And the expectation that QE would lead to higher prices has largely faded from investors’ imaginations.

The more experience we get of the Federal Reserve’s experimental policies, the more we realise that they neither stimulate a recovery…nor inflation. We’re in Japan, in other words. And we may be there for a long, long time. Buenos Aires will have to wait!

Yesterday, the Senate went along with the House. No debt ceiling problems this year, it said.

Government finances are looking better. January’s deficit was only $10bn…down from $100bn for the same period a year ago. The CBO is calling for a $514bn shortfall for this year…and a $478bn deficit in 2015.

That’s good news, isn’t it? Well…depends on your point of view. Deficits are a way for the feds to waste money on their favourite projects. Billions for the bankers. Billions for retirees. Billions for the halt and the lame. Take away these billions and we’re better off in the long run. Government spending is consumed, not invested. It does little to build a real economy.

But deficits are also ‘stimulus’. When the banks won’t lend and the people won’t borrow, they’re about the only way to get money into the hands of consumers. In the short run at least, this money keeps the lights on and the wheels turning.

Economists are such simpletons; they believe this spending by the government is as good as spending by the private sector. They cannot tell the difference between ‘demand’ that comes from real people, with real money they get from real wages…and the ‘demand’ that comes from the feds spending funny money from the Federal Reserve.

The difference is critical. One leads to real growth and wealth. The other leads to a disastrous debt bubble and poverty.

But remember, that’s in the long run. In the short run, we’re in a spell of Tokyo-style deleveraging. And QE and deficit spending have not been enough to overcome the private sector’s resistance to take on more debt. As in Japan, only the public sector – bless its stupid, shrivelled up little heart – goes deeper and deeper into debt.

Already, the feds have more debt than they can repay. The biggest financial story of the next quarter century will be what happens to that debt.

Stay tuned…

Now, back to Aiken, South Carolina…

Cornered in our hotel, we were afraid we would develop a kind of cabin fever. We might go crazy and become a danger to the other guests. Instead, we found the whole thing kind of a lark.

The hotel was redone a few years ago. It has wood panelling in the lobby, with fireplaces on each end. Richly furnished, it is not a bad place to be holed up…as long as the food holds out and the power stays on.

Last night, a pianist played for a few hours – Scott Joplin, Gershwin, Cole Porter. The small crowd of refugees who had slid into the hotel before the traffic stopped gathered round. Among them is a thespian troupe, who are supposed to perform in a local theatre…unless it is cancelled.

One of them sat down at the piano and began a lively medley of show tunes, while others began singing. ‘Boisterously’ and ‘enthusiastically’ probably describes their singing style better than ‘elegantly’ or ‘smoothly’. It was lively and uninhibited.

Today, we sit in the lobby…working on our computer…as the other denizens of the hotel come and go…looking out the window at the sleet and snow…

It’s not letting up,‘ says one.

Guess we’ll be here for a while longer,‘ says another.

Hope they don’t run out of vittles‘, adds a third.

One young woman sits before the fire knitting. Another works on her computer on a side table. Her companion keeps an eye on his stocks, looking at a laptop computer.

Hey…I knew I should have bought more of that‘, he said.

I’m going to short Amazon and Green Mountain Coffee,’ he announced to no one in particular.

A little later…’Gold is the worst. You can’t spend it. You gotta store it…

He went on…and on. His companion, a pretty woman in her 40s, put her head down on his shoulder. ‘Would you shut up…‘ she seemed to say.

Meanwhile, the theatre group is rehearsing ‘(Get Your Kicks On) Route 66’ at the other end of the room.

No,‘ says the hotel manager, speaking into a telephone, ‘No ma’am. We’re not open. We’re only serving lunch to our hotel guests.

A couple of retirees showed up at the door, driven from their home by cold, hunger or boredom. They came in. The manager rushed over.

The poor couple looked around. About a dozen people were in the lobby, drinking tea in front of the fire…sitting at the bar sipping wine…practicing their musical numbers…checking their stock prices.


Bill Bonner
for Markets and Money


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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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