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April 9, 2015

Fed, Masters of MOPE

Narayana Kocherlakota
President of the Federal Reserve Bank of Minneapolis (Reuters)
The FED has kept interest rates near zero percent since the economic crisis began in December of 2008. The FED has printed untold amounts of money, flooded the system with fiat and to what avail?

If you were to base your answer solely on the movement of the stock market, then you would say yes, the FED was successful. The recovery worked and we are all currently reaping the benefits right now.

If you base your answer on reality, by gauging this so-called recovery on the everyday person and the cost of goods, then you would come to a very different conclusion. The economic recovery never happened. Stagnation is the economic reality that we are living in.

Deep down, the FED knows this. They know that underneath the surface, the roots have begun to rot. The system has not corrected itself in any way, shape or form. The problems that existed in 2008, have not evaporated, but have been allowed to fester and grow.

Therefore, it will come as a surprise to many of us in the precious metals community if the FED actually does raise interest rates.

Janet Yellen, a known monetary dove, is stating that she would like to see interest rates begin to rise as early as this year. Yet, does she truly believe that this is a possibility or is it simply more pandering to the masses.

On Tuesday, Minneapolis Fed President Narayana Kocherlakota may of let the FED’s true intentions slip. Mr. Kocherlakota, a known dove, stated that he believes it would be a mistake to raise interest rates this year.

He suggested that the FED wait until 2016 before interest rates are raised and even then, only marginally. Even by the end of 2017, he would only like to see interest rates at 2 percent. Still a historically low number.

His justification for this is rather ironic, as he states a preemptive rise in interest rates could knock the wind out of U.S. economic recovery and would only worsen the stubbornly high unemployment rate issue that America is facing.

This is the truth, at least in the short term. Problems within the financial system will once again rapidly rise to the surface if interest rates begin to tick higher. Kocherlakota is not the only one that knows this. Janet Yellen and her colleagues are quite well aware of this as well.

They know that the system is simply being held together by bits of string and piles upon piles of easy money. If rates begin to rise, defaults will occur and the overleveraged banking system will once again begin to show its cracks. Contagion will set in and before you know it, we will have another full-blown crisis as seen in 2008, only on a larger scale.

Essentially what Mr. Kocherlakota is calling for is more of the same. More extend and pretend. This is no surprise, as this is what the FED does best. It knows nothing else and can ultimately do nothing else.

The FED will continue to talk the talk and act as if it is going to make a move. Perhaps they even will, but will it be this year? Next Year? Or in five years from now? This is what the FED will not tell you.

They truly are masters of MOPE (More Pretend and Extend) and they fully plan on continuing its use. An interest rate rise, is something I’ll believe when I see it. Until then, I wouldn’t hold your breath.

Source: Sprott Money News

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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