December 4th, 2015
Before getting to the real point of the title “Policy error or on purpose?”, it needs to be pointed out the entire financial system is a “policy error”. We live in a world where even the real economy is increasingly run via central planning. As for the financial side of the coin, central planning has taken on an Alice in Wonderland hue. Whether it be the suspension of mark to market, markets entirely managed and “priced” by force, debt by definition needing to expand or the central banks need for continual asset inflation …they all have ramifications. What I am alluding to is the law of unintended consequences in relation to bad policy.
Now, we hear day after day the Fed will raise rates by a quarter percent and are assured “this is a good thing”. Well yes, in normal times when a central bank raises interest rates it means the underlying economy is strong and inflation (monetary growth) needs to be cooled off. This is obviously not the case today and has not been for most of the last seven years. We have been inundated with “negative surprises” and an economy only limping along.
The latest illustration of a weak economy being this:
The obvious needs to be pointed out here. The last two times we had a recession (and EVERY recession prior), the Fed lowered rates or added liquidity into the system. They did this to aid and jumpstart the economy. Can you imagine the Fed talking about raising rates while ENTERING a recession? This is exactly what is happening!