Follow Up: The Great Wind Down: Are Central Banking Maestros up to the Task?
By David Schane, USA – 20 June 2019
In my piece linked here entitled “The Great Wind Down: Are Central Banking Maestros up to the Task” (which I wrote in the immediate aftermath of the first Federal Reserve interest hike at the end of December 2015 after the deep recession of 2009), I postulated that the Fed would be much more “subdued” than anticipated and that the Fed Funds rate would reach at most 2.50% before the next rate cutting cycle would commence. (That was a bold forecast back then which has now been historically vindicated after yesterday’s Fed meeting statements announced likely easing not far ahead). Indeed, we see central bank activism and interference in markets remains omnipresent some ten years after the 2008-2009 financial crisis. Per my late 2015 article linked above, market dependence on central banking activism resembles a drug addict’s need for additional narcotics, as dependency of any kind is difficult to wean. While the recent politicization of the Fed (with President Trump regularly critiquing Chairman Jerome Powell’s policies and management) is a new development that was beyond analysts’ capacity to reasonably forecast in 2015, I believe central banking independence is important in our system (even though I believe central banks should generally have a more modest policy footprint, especially during non-emergency times).
Looking at the Fed (and other central bank policies), they have deprived savers and retirees (generations who led prudent lives and should be rewarded for their contributions to society) – of decent income as the amount of sovereign bonds in major G-7 nations yielding negative interest rates (even fully ten years out the interest rate curve) is again at or near record levels. Central bank policies have contributed to the divergent and ever widening wealth gap between the 1% and everybody else within the USA – as stockholders have been regularly rewarded by central bank largesse while retirees and citizens with few equity holdings (a distinct majority) draw next to no yield on their fixed income and cash investments. Central bank activism has rewarded partisan and recalcitrant legislators who have signed few bills into law during these last several years – as the Fed’s ongoing market backstop has removed the need to develop responsible bi-partisan legislation that serves the economy and the body politic. In sum, central bank activism has distorted markets, stoked asset bubbles and created greater social disharmony, taking central banks far from their historical remit. For Swiss readers, I’d add that the Swiss National Bank (and its underlying stock) is utilized by some traders as a surrogate for investing in a veritable hedge fund (with the SNB owning concentrated positions in major international technology equities, just like a hedge fund).
David Schane, USA – 20 June 2019
Disclaimer: The opinions expressed here are his own. The other contributors at Geopolitical Economics may not necessarily agree with the views of Mr. Schane. All contributors to our website express their own independent opinion based on their research. Thus, their articles are not edited by this website. Furthermore, no comment should be interpreted as an investment recommendation or suggestion.