Secret Fed deal abroad spurs stagflation at home
By Daily Bell Staff - March 30, 2016

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.”

Say what?

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.

Recently we noted the rise of stagflation in Canada.

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.

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  • Earn nest

    In the look here not there voice the statement “The real idea is to make people so miserable that they will accede to further plans for increased centralization of monetary and governmental authority.” is where we need to focus. It’s true of global warming, debt,other bubbles and the ministering of wars.

  • mary

    Thank you for saying that we have inflation. It is tooo annoying that so many commentators insist we are in a deflationary spiral, at the same time we see the money supply increasing and the cost of living steadily going up. It’s all a psyop–“Do you believe me or your lying eyes?” or maybe that should be empty wallet instead of lying eyes.

  • Praetor

    Excellently written and stated, DB. The thing, the Fed has successfully created is a “Counter Culture”:> ‘A way of life and set of attitudes opposed to or variance with the prevailing social norm’. And this counter culture is made-up of the normal, regular folks. This counter cult, is the ‘peers’ of those who have brought us the Keynesian poisoned collective. The moniker of those of the Keynesian collective of the time, the one that where going to change the world, ‘Hippie’s’.

    Not everyone alive in the 60s and 70s was a Keynesian socialist Hippie. And this new counter culture of the 21st century remembers those Hippies and we can see how they have changed the world, and by gawd it looks more like the old world, but worse.

    The conclusion of the DB is all the normal, regular folk need to focus on. Analysis Excellent and it be true!!!!

  • Steven Hotho

    I don’t argue with any of the points made in this article. I just wonder if it’s true that Japan and Europe have stopped “loosening”? Draghi recently announced that the ECB is moving further into NIRP territory and will discontinue buying certain bonds, but continue buying others. Is the Bank of Japan really giving up on Abenomics? You may be right on all these points, but I’m just a little confused. I certainly agree that all of this is tight coordination between the central banks of the world and that the USA is and, has been, in a stagflation environment.

  • Ron Daugherty

    Thanks for the internet or we wouldn’t receive any solid information within our disinformation society and failing governance. But who’s surprised anyway? Secret “deals” have been burying America since at least 1970, and certainly more increasingly during the last 10-years. Prepare for worse to come, fellow readers of THE BELL.

  • Haywood Jablome

    We are nothing more than lab rats in the central banker maze. They have no idea what they are doing and, although we are about to feel the initial impact of their stupidity, the effects are going to reverberate for decades.

    Another good post by the DB!

  • Black Swan

    The elite psychopaths in control of monetary policy have to raise the misery index higher to help increase profits. The debt slaves have to love their servitude for the Stockholm Syndrome to take effect.

  • apberusdisvet

    I agree that PMs will rise, perhaps dramatically, but as for real estate, far less so. The price of new and used homes is still too high to be affordable to the majority of prospective buyers. I have 3 RE brokers in my immediate family; none of which has closed a mortgage deal in 9 months; their closings have been all cash. When the all cash buyer fades, look out below.

    • Farmland, maybe …

      • rahrog

        Farmland & smaller rural parcels. Even a few acres of good dirt has natural value that cannot be tied to the “market”. G20 strategy sounds like a combination of Three Card Monte & The Shell Game with drunken sailors running it all.

    • Truth4u

      Where do they sell RE?

  • Joseph Deka

    I have tried to start a new point of view with ecomists that criticize modern day Central Banking. To no avail. I studied ëconomics¨at Erasnus University Rotterdam. Economics was classified as a science. I have come to the conclusion that The study Economics is nothing more than behavioral. Economics has become experimental and the outcome to be see in the future. Where is the Hyper Inflation? One very important aspect in CB handling is overlooked. The CB are buying worldwide assets, esp bonds and stocks with money created out of nothing. So these extra monnies don,t show up in themain street economy but on the balance sheets of CB,s; Theit investment banks, hedge funds; all with access to zero interest rate loans. So a transfer of wealth is going on from private to public/semi public hands. Therefor stock markets do NOT crash. The CB,s are simply buying top assets for nothing, Money printed out of thin air. Well come to the tiranny of Money and their masters, the NWO

  • Danny B

    The CBs are just trying to patch things together by any means possible. It isn’t going to work in the long run. They are NEVER going to be able to unwind their bond portfolios. NOBODY is buying FED paper;

    Bill Gross seems slow to understand that everyone is focused on protection OF capital. He thinks that investors don’t see the truth of ZIRP;

    Bernanke is still claiming that very-low-interest is the new norm for the future. This is all part of the Keynesian effort of “euthanasia of the rentier”. The FED can hold interest rates down as long as it is willing to absorb $trillions of bad debt. The FED /GOV can hold down the price of gold as long as it is willing to sell it by the ton. These are short term patches. In the summer of 1971, gold was leaving the U.S. treasury at the rate of 100 tons a week.

    The equivalent is now happening to the FED portfolio. $ 4.5 trillion is BS. Between the FED, ESF and PPT, the number is far higher.

    We have entered the cannibalism stage;

    The F.I.R.E. economy produces nothing BUT, is twice as big as the productive economy;
    The printing will continue until morale improves 🙂

  • Bruce C.

    The only reason why the G20 meeting is secret is because nobody knows what’s going on or what to do about it, and they don’t want the markets to realize that.
    Therefore, what the CBs are doing now is what the markets want them to do. Yellen said herself:

    “(Bloomberg) – Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.

    “She argued that the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed then followed suit this month by reducing its anticipated rate hikes in 2016 to two from four quarter-percentage point moves projected in December.”

    No one was surprised that the ECB and BOJ are backing off on efforts to lower rates and devalue their currencies because both policies are plain nutty. Had they not backed off, markets would have reacted, so those two CBs have also capitulated to market sentiment.

    Raising US rates would only strengthen the dollar more, which is equivalent to weakening the yen, euro and yuan. Therefore, the Fed backed off. Sure, every fiat currency needs to weaken to make the numbers work but they can’t all do it at once.

    I highly doubt, however, that the US will experience “stagflation”. Low growth – yes – and price inflation in insurance and healthcare, but price deflation in most everything else. The 30-year Treasury is headed for 2%.

    (By the way, Rolex is now offering 30 month interest-free financing on all of its watches for qualified buyers. It’s better than lowering its prices, and that compensates them for the 2-3% hit they take on purchases with a credit card. Tough times.)

  • gordon

    A recent article in Zero Hedge also touched on the probability that the secret meeting was all about the US $ and of the need to weaken it (at the behest of the Chinese or else) as it was having an adverse effect upon chinese economic future plans.