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Reuters/Anatole
Kaletsky/8-15-2014
“Year after year, we have had to explain from mid-year
onwards why the global growth rate has been lower than predicted as little as
two quarters back. … This pattern of disappointment and downward
revision sets up the first, and the basic, challenge on the list of issues
policymakers face in moving ahead: restoring growth, if that is possible.” -
Stanley Fischer, (8/11/14) in his first speech as vice
chairman, Federal Reserve
MK comment: Though the raging bull grips Wall
Street, the rest of the economy languishes. The gold price — paper
bound — reacts to non-existent economic strength which market players
believe will force interest rates higher. Economic reality, to make a
long story short, tells a different story. If you want to know why
Janet Yellen and the Fed are unlikely to raise interest rates any time soon,
take the following into account:
1. The following graph first-posted here by our resident
economist, Pete Grant, has a lost gem of an understanding hidden in full
sight. Can you see it?
 
Every time the Fed raises rates, it causes a recession (the
gray bars). In this disinflationary environment (the one that began in
2008) raising rates would be economic suicide — and the effects would
be widespread, monumental, and too deep and numerous to list here.
All of which leads me to number two. . . . .
2. The Federal Reserve Board is a hot bed of politics
— especially for those who take every utterance from its members to be
a form of economic gospel requiring a full market reaction. It is easy for
Board members to talk like hawks when they know that the chair(wo)man is
unlikely to succumb to their rhetorical positioning. Put those same
individuals in charge of the Fed and make them fully responsible for the
economy and then let’s see whether or not their acts follow the
rhetoric. The indelible legacy of Alan Greenspan is that even the most
conservative among central bankers can go suddenly dovish when the reality of
full responsibility for economic policy hits home. Better to be safe
than sorry. . . .
Stanley Fischer’s comments, unambiguous as they are, might
appear to be an act of courage at this juncture, but they might also
constitute the dropping of a less than subtle hint. With respect to the gold
market, it spells out a message that even the knee-jerk speculators in paper
gold might be forced to take into account. If Fischer represents the
hawkish position at some level, one would have to assume that the Fed’s
hawks might be ready to sound the retreat.
This quote from Kaletsky’s Reuters column speaks
volumes:
“The central message of Fischer’s speech —
that central bankers and governments should try even harder than they have in
the past five years to support economic growth — was closely
echoed by Mark Carney, the governor of the Bank of England, at his quarterly
press conference two days later.
This consistency should not be surprising: Carney was
Fischer’s student at the Massachusetts Institute of Technology in the
1970s — as, even more significant, was Mario Draghi, president of the
European Central Bank. Because of Fischer’s influence on other central
bankers, as well as his unparalleled combination of academic and official
experience, he is probably now the world’s most influential
economist.”
Is this a game changer? Maybe so. Concerns about pushing
on a string will resurface, but if Fischer is at the vanguard issuing a
clarion call, it is bound to affect the flow of capital in the financial
markets and blunt concerns about rising interest rates — and maybe
that is Fischer’s and the Fed’s intent . . . . .
.Something to ponder during a restless weekend toward the end of summer
doldrums.
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