Can The Fed Stop The Bleeding?

Surely “they” wouldn’t let the worst happen, would they?

The “subprime” debacle in the last few weeks seemed to come from nowhere to suddenly infuse panic into financial markets from stocks to mortgages to hedge funds to banks to precious metals to consumer spending. Of course, as I have explained in my newsletters and daily updates (and in my book), it did not come from nowhere at all. Blind Freddy should have seen it coming. Nor was it sudden. It took a lot longer to happen than I ever imagined.

As at the date of writing (August 18), central banks around the world (the European ECB panicking the most) have tipped hundreds of billions of dollars into “the system” to try and combat the sudden fear of and thus freeze on lending, even from one bank to another. And now the Federal Reserve has lowered its “discount rate,” which is the desperado last resort that banks can turn to for loans if there is nowhere else, by 0.5%. Will this work? Will this stop the hemorrhaging in the credit markets which threatened to send mortgage rates through the roof and stock and other financial markets into a dive, not to mention the economy?

In a word, NO!

There is a mistaken belief, which is very widespread, that “they” (which usually means governments and/or central banks) can take whatever action is necessary to stave off any monetary or economic disaster that threatens. The belief (hope) is that we could never have another 1930s style depression because we have so many “safety nets” in place and authorities are so much wiser and the global economy is so much stronger than it was 75 years ago and technology advances, China, India, blah, blah, blah.

That is all nonsense! And very few people who believe that pipe dream can back it up with any facts, figures or even any historic evidence or economic fundamentals.

Before I explain why “they” cannot stop an out-of-control speeding locomotive, let’s look at a couple of recent examples that demonstrate just how powerless governments and central banks are in the face of a stampeding herd once the public mood turns sour.

Example 1

At the beginning of the 1990s, against all odds, first the Japanese stock market, then the property market in Japan, then the Japanese economy, went into freefall, and were to remain at or near the bottom of the abyss until this day. Share and property markets fell 80% and the Japanese economy has been in virtual permanent recession, if not depression, accompanied, notably, by deflation, for the better part of two decades. How this could happen, when in 1990 Japan was the post-war “modern-day economic miracle of the world” (like China today, take note) is another story that I have not only written about but strongly predicted back in 1989. The important thing here is how powerless “they” proved to be in trying to not only prevent it, but to fix it once it broke.

The Bank of Japan lowered interest rates to zero. The Japanese government spent trillions of yen on (mostly useless) infrastructure. Did they succeed in getting the economy moving? No. Did they succeed in getting people to spend again? No. Why?

Example 2

Immediately after Thanksgiving Day 2000 the US economy “hit the brick wall.” It was like magic. As if overnight the public just stopped spending. No-one noticed that this happened nine months after the stock market started falling, but that too is another subject.

The point is that the then chairman of the Fed, Alan Greenspan, panicked. On January 3, 2001 the Federal Reserve dropped short term interest rates by 0.5%. The effect was immediate. The S&P 500 spiked up 5% in one day.Yee-hah! The Fed won!

Did it? Over the next 18 months the Fed lowered interest rates a further twelve times in a row, not stopping until the Fed Funds rate got to 1%. Wow, that must have sent the stock market soaring. How much did it rise? The S&P 500 FELL 44%! Why?

The reason is that governments and central banks are followers, not leaders. Any action they take will have at best a temporary effect and any short term “reaction” by the public will always be fully reversed. At worst it will invariably add to the debt mountain which was the underlying fundamental cause of the problem in the first place.

Why is this? Socionomists know the answer. The most powerful force on this earth is the living, seething mass of humanity that moves backwards and forwards, up and down, like the waves in the ocean. Periods of optimism produce growth. But like the worm that has to pull back before he can move any further forward, these periods of progression must be interrupted by periods of regression (backwards). There is nothing that central banks or governments can do about it. And our flawed money system only exacerbates the problem.

The remarkable thing is that collective human behavior has a pattern to it. Mainstream economists ignore this patterning and thus have a wonderful record of getting it wrong. They did not even label the last Great Depression as such until 1933, four years too late to save people from financial ruin. They cannot see this one coming either.

The title of my book is "How to Profit from the Coming Great Depression". Focus on the first three words and you may realise it is not a pessimistic tome. Read that and you will understand what I am talking about.

I reiterate that central bank intervention will not prevent the catastrophe that will flow from the “subprime mortgage crisis,” no matter what form it takes. Subprime is only one symptom of the underlying cause. Only the Wave Principle can explain that real cause.

(These comments are based on my daily update for Monday August 20, 2007).

Happy wave watching