“What is truth?” Pontius Pilot asked Jesus. A profound question drenched in irony, considering Truth was staring Pilot in the face. But Pilot’s point is clear: he didn’t believe in absolute truth. Pilot held to relativism.
Today, the same rhetorical question is being asked all over the globe. Relativism – the idea that truth is NOT absolute, but “relative” – is in style. Recent studies show that the majority of Americans, especially teenagers, deny the existence of any moral absolutes. Truth, you see, is what they decide it is. But is that statement true? Well, yes, at least for you…for now. Like ships anchored to driftwood, fixed points of truth no longer exist in the minds of many Americans. What is right today may be wrong tomorrow.
Perhaps you’ve heard the familiar refrain: “there are no absolutes”. Millennials wear this phrase like their skinny jeans without unmentionables. They love to say it, but never bother to peak underneath and ask “Am I absolutely sure?” Despite its incoherence, relativism is not just evident in the personal musings of private citizens.
The belief that no fixed principles should guide our actions also permeates economics. This was evident in two recent articles that appeared on Bloomberg. The first, written by the former president of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, is titled “The Fed Is About to Make a Mistake”. Kocherlakota thinks the Fed’s decision to not raise rates this past week was “the wrong move.” The market currently has low inflation expectations and the economy is suffering from lackluster employment. So, Kocherlakota argues, it needs help.
“All this argues for the Federal Open Market Committee, the central bank’s policy-making arm, to provide added stimulus by cutting interest rates a quarter percentage point…”
Kocherlakota’s solution: more stimulus. According to his Keynesian framework, more stimulus is always good for growth. Does it matter that interest rates are already flirting with subterranean levels? Maybe.
“This is all the more important because the Fed’s capacity to respond to further shocks is limited, given its reluctance to take interest rates below zero…”
First off, that is nonsense. The Fed will take interest rates negative in the next recession. Indeed, the Fed is preparing to do so already. And other like-minded central banks around the globe have already done so.
But more importantly, what does it mean to “take interest rates below zero”? It means that banks would actually pay barrowers to take their money. It means that depositors will have to pay the bank to hold their money. In other words, the economic elite running our federal banking system may actually force the financial world on its head. Why? Because if they acknowledge interest rates have an independent purpose based on fixed principles of economics, it would undermine their justification for messing with them. Such financial schizophrenia is the inevitable result of economic relativism.
A Keynesian Fog
A few days later, the editors of Bloomberg published an article titled “The Fed Should Be Clear and Raise Rates”. This article suggests the Fed should raise its rate, but it does so from the same confused economic framework. One thing is certain: if the Fed wants to be clear, it shouldn’t read Bloomberg. Observe the following:
Running the U.S. Federal Reserve has never been an easy job, and the degree of difficulty is only getting higher. Eight years after the crash, the economy is sending confusing signals, and the Fed’s policy makers aren’t sure what they mean.
So the Fed doesn’t understand the current economic data.
The U.S. unemployment rate stands at 4.9 percent, which once would have been seen as full employment. The target for the federal funds rate is currently 0.25-0.50 percent, which once would have been seen as extraordinary monetary stimulus.
New situations require redefining terms. We don’t know what we thought we knew.
So full employment isn’t what it used to be — and interest rates, many economists argue, aren’t as low as they seem.
It “seems” we know less by the sentence.
That’s because the degree of monetary stimulus is best measured as the gap between actual interest rates and the so-called neutral rate of interest — the hypothetical rate that neither adds to nor subtracts from demand. In the U.S. the estimated neutral rate has been trending down, according to the Fed, and now stands at 2 to 3 percent, rather than 4 percent or more.
So the definitions need to change because of the change in the “neutral rate”; the theoretical rate which is arbitrarily determined by the Fed. These are the fruits of economic relativism: redefinitions, hypothetical rates, and analyses that include the words “seems” “appears” and “confusing”.
A Parting of the Clouds
These articles are fairly typical. What is never discussed is whether government intervention into the monetary system is – in principle – good or bad. According to Keynesians there are no absolute principles that can help us know what makes a sensible interest rate.
But that is simply false. In a truly free market, interest rates function as the “price” of money. The interest rate is the “price” the borrower pays for the privilege of using money now, rather than later. That is why borrowers pay interest on loans they take out. In a healthy economy, that price is dependent on the availability of the money (i.e. real savings). All things being equal, the more savings that are available the lower the interest rate. And vis versa: less available savings drives up the price of borrowing. This is a simple application of the principle of “supply & demand” to the “product” called savings.
Today, the Fed determines the price of money – regardless of real savings in the economy – which in turns effects other prices. As history evidences, price controls by central planners always lead to product shortages and a general diminishing of national wealth. Sometimes – as in the case of Socialist Venezuela – it leads to a general breakdown in the very fabric of society.
The problem with the United States today is thus: in the last decade the Fed has created trillions of worthless paper dollars without the corresponding growth in savings. When the Fed prints money without corresponding growth, the resultant credit expansion is “fake” growth. It’s blowing another bubble.
Economic relativism is eating away at the foundation of the US economy. The Fed continues to embrace economic relativism, using its policy tools to inflate asset prices, enrich big banks, squeeze the middle class, and hamper the future growth prospects of the nation. Here at Plan Financial, we are aware of these issues and are working to allocate our client’s portfolios appropriately to best accomplish their objectives. If you would like to know how you can protect your assets from the challenges moving forward, then give us a call.
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