by Mish

Here is my question in the form of a Tweet Poll:

Please think through your answer before reading further.

The question stems from a question by “Cautious Observer” who commented earlier today “Mish, you infer the Fed should be easing. Other than the very short term, how does that help?”

His comment was in response to my sarcastic statement “Hike away” in Retail Sales Dive (And It’s Not Just Autos).

“Cautious Observer” was bang on in his assessment, in question form:

If the real economy is contracting despite near zero nominal rates and negative real rates, why would even more negative rates and asset purchases via CB balance sheet expansion be expected to make the underlying economy start growing? Easier credit and more QE may grow the asset bubbles, but the only way I can see that increasing economic activity in even the short term is if the average person starts using their home as an ATM again (refi with net cash out). That works for a while, but we all know where that leads. Do we have to keep reliving this over and over? Mish, you infer the Fed should be easing. Other than the very short term, how does that help?

Hike Away!?

As for inferring that I would like the Fed to cut: I have stated repeatedly the Fed does not know where interest rates should be, and neither do I. At least I know that I don’t know.

The Fed has never managed to see a bubble in real time. Three consecutive bubbles prove the Fed does not know where rates should be.

“Should the Fed hike?” is the wrong question given there should not be a Fed in the first place!

Self-Assessment Scoring Answers

  • Hell Yes: 0
  • Hell No: 0
  • Hell, I Don’t Know: 50
  • Those genuinely thinking “Hell, I don’t know, nor does anyone else including the Fed” get a passing grade of 70.
  • Those voting “Other” for the wrong reason get a 50.
  • Those voting “Other” for the specific reason there should not be a Fed get 90.
  • Those voting “Other” for the specific reason the free market should set interest rates also get 90.
  • Those voting “Other” for the specific reason the free market should set interest rates while also noting there should not be a Fed score 100%.

Professors, this would make for a good pop quiz in an economics course. Give students 10 minutes to write up an explanation for their answer.

Fed Uncertainty Principle

I wrote about this long ago. On April 3, 2008, prior to the knowledge the Great Recession had even begun, I wrote about the “Fed Uncertainty Principle“.

The Observer Affects The Observed


The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.

Fed Uncertainty Principle: The Fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Gaming the System

Please don’t tell me the Fed (central banks in general) just follow the market.

There would never be negative or zero interest rates in a free market. There would never be a Fed in the first place!

Also, please don’t tell me the Fed knows what it is doing. Three bubbles prove otherwise.

The Fed Uncertainty Principle is my all-time favorite post.

Mike “Mish” Shedlock.

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