YELLEN  CONSIDERS  NUCLEAR  OPTION





Federal Reserve chairmen Janet Yellen testified this week that she is considering a negative interest rate policy.  This means that savings will lose value while on deposit at banks. This can only telegraph that desperate times are ahead.  The Federal Reserve must know that such a policy will lead to withdrawal's by most depositors.  We can only assume that the next step will be limits on withdrawal's of cash from accounts and ATMS, similar to what the policy has been in Greece. It has been reported that there is actually only a fraction of the necessary cash in existence.

 

$870 Billion in stimulus funds and 3 rounds of quantitative easing has thus far not resulted in a strong recovery. The Stimulus bailed out large bankrupt lending institutions and protected government workers from layoffs. Quantitative easing allowed corporations to borrow for next to nothing and  repurchase their own stock to increase the earnings per share. This has helped them to enhance the value of their stock. It has also encouraged speculators to buy assets on credit.  While these measures may have helped some to keep the economy going, it has mostly allowed asset prices to increase.  If the $870 billion would have been distributed equally to every household in America it would have been $8000 per household. This could have been in the form of a debit card with an expiration. It would have been some serious stimulation.  It would not have solved the problem, just kicked the can down the road. 

 

Over 500 small banks have failed and it is now reported that business's are closing at a faster rate than start-ups. We are now hearing of lay-offs coming in many large companies. These trends are world wide, not just in the USA.

 

Former Chairmen Ben "Helicopter" Bernanke, stated within days of the Real Estate Crises that his objective was to provide enough liquidity to bring asset prices up to the inflated levels that existed before the collapse. He was noted to have said years ago that the way to offset a deflationary condition was lots of liquidity, even if you had to drop money out of Helicopters.  In his new book, he states that it took courage to make these decisions. It would have taken more courage to tell the truth about the situation. He also states that some people should have gone to jail for their actions. He should look in the mirror.

 

A negative interest rate policy is a road that is unique in the history of finance. There is little evidence that this will do any more than deplete the savings of Americans, either through charging for deposits or the forced spending to avoid the charges. This can only be a cynical attempt to prolong the inevitable. If this policy is introduced, Yellen will probably resign shortly thereafter. Obama and Yellen will then attempt to lay the blame on the next president.

 

Rather than admit that the market will not be denied, our leaders continue down the road of debt, deficit's, and unsound monetary policy. This will lead to either hyper-inflation or deflation. Right now deflation is holding the upper hand. This could change quickly if confidence in the Governments ability to control events leads to a bond market collapse. Then it will be hyper-inflation in short

order. 

 

Capitalism and free markets are not the cause of this problem. It is Government's attempt to control all aspects of the economy, pick winners and losers, over-regulation, and years of financial irresponsibility.

 

Be prepared to hear, that capitalism and free markets are the cause. They will promise easy, painless solutions, if only they are allowed more government control over all aspects of  our lives.

 

The only real solution is to let the inevitable play out. Debt needs to be liquidated to a manageable level. We need a strong credible leader who is willing to tell the people the truth and lay out a plan to weather the adjustment to a sound economy.