by
Paul Craig Roberts
PaulCraigRoberts.org
Recently
by Paul Craig Roberts: Stasi
in the White House
One of the
myths of economics is that markets are rational. Theories are based
on this assumption, and the belief that markets are rational fuels
the argument against regulation. The market response to the Federal
Reserve’s June 19 statement that it will taper off its bond
purchases if its forecast comes true is unequivocal proof that markets
are irrational.
The Federal
Reserve’s statement that it “currently anticipates that
it would be appropriate to moderate the monthly pace of purchases
[of bonds] later this year” depends on a very big if.
The if is the correctness of the Fed’s forecast of moderate
economic growth and employment gains.
The Fed has
not stopped purchasing $85 billion of bonds each month. So nothing
real has changed. Indeed, there was no new information in the Fed’s
statement. It has been known for some time that, according to the
Fed, its bond purchases will gradually cease.
In response
to this repeat of old information, the stock and bond markets sold
off in a major way on June 19-20. This market response to the Fed’s
statement indicates that the Fed’s forecast is unlikely to
come true. Low interest rates and a high stock market are totally
dependent on the liquidity that the Fed is injecting by printing
$1,000 billion per year. If this liquidity is not injected, what
will sustain the markets? If the markets crash and interest rates
rise, how can the Fed expect recovery?
In other words,
the participants in the stock and bond markets know that the markets
are bubbles created by the printing press. There is no real basis
for the high stock and bond prices. The prices are an artificial
reality created by the printing press. Rational markets would take
into account the printing press element and would price stocks and
bonds at a much lower level.
Zero real interest
rates mean that there are no risks. But how can there be no risk
in Treasury bonds when the debt is growing faster than the economy?
Normally, high
stock values mean strong profits from strong consumer income growth
and retail sales. But we know that there is no growth in real median
family income and real retail sales.
I suspect that
the reason the Fed made the announcement, which seems to be derailing
the Fed’s forecast of recovery on which the announcement depends,
is to relieve pressure on the US dollar. For several years the Fed
has been printing 1,000 billion new dollars each year. There is
no demand for these dollars. So far these dollars have inflated
stock and bond prices instead of consumer prices. But the implication
for the dollar’s price or exchange value in currency markets
is clear. The supply is increasing faster than the demand. If the
dollar falters, the Fed would lose control. Rising import prices
would soon drive domestic inflation and interest rates far higher
than the Fed’s targets.
Washington
has succeeded in getting Japan and the EU to print yen and euros
in order to eliminate the likelihood of flight to other large currency
alternatives to the dollar. Smaller countries have also had to print
in order to protect their export markets. With so many countries
printing money, the Fed’s statement implying that the US might
stop printing makes the dollar look good, and, indeed, the dollar
rose on the currency exchange markets.
Having neutralized
the alternative currency threat to the dollar, the Fed and its agents,
the bullion banks, the banks too big to fail, are still at work
against the gold and silver threats to the dollar. Massive short
selling of gold began at the beginning of April. Again on June 20
massive shorts of gold were sold at a time of day chosen to maximize
the price decline. Only those who intend to drive down the price
would sell in this way.
Since QE began,
the Fed has deprived retirees of interest income and has forced
retirees to spend down their capital in order to pay living expenses.
Judging from the initial market response, the Fed’s latest
policy announcement is adversely impacting bond, stock and real
estate investors, and the manipulation of the bullion markets continues
to wreak destruction on wealth stored in the only known safe haven.
How can a recovery
happen when the Fed is destroying wealth?
The Fed’s
irrational behavior could be seen as rational if the assumption
is that the Fed’s intent is not to save the economy but to
save the banks. As the Fed is committed to saving the banks “too
big to fail,” it is likely that the banks know of the Fed’s
announcements in advance. With inside information, the banks know
precisely when to short the stock, bond, and bullion markets. The
banks make billions from the inside information. The billions made
help to restore the banks’ balance sheets.
Guy Lawson’s
book, Octopus (2012), shows that front-running on the basis of inside
information has always been the source of financial fortunes. In
order to save the banks, the Fed now supplies the inside information.
How is this
going to play out? I suspect that the recovery, although officially
a weak one, does not really exist. However, thanks to statistical
artifacts that understate inflation and unemployment and overstate
GDP growth, the Fed and the markets think that a recovery of sorts
is in process and that the unprecedented money printing by the Fed
will succeed in shifting the economy into high gear.
No
such thing is likely to happen. Instead, as 2013 progresses, a further
downturn will become visible through the orchestrated statistics.
This time the Fed will have to get the printed money past the banks
and into the economy, and inflation will explode. The dollar will
collapse, and import prices – as globalism has turned the US
into an import-dependent economy – will turn high inflation into
hyperinflation. Disruptions in food and energy deliveries will become
widespread, and a depreciated currency will cease to be used as
a means of exchange.
I wouldn’t
bet my life on this prediction, but I think it is as likely as the
Fed’s prediction of a full recovery that allows the Fed to
terminate its bond purchases and money printing by June 2014.
Americans,
who have been on top of the world since the late 1940s, are not
prepared for the adjustments that they are likely to have to make.
And neither is their government.
June
25, 2013
Paul
Craig Roberts, a
former Assistant Secretary of the US Treasury and former associate
editor of the Wall Street Journal, has been reporting shocking cases
of prosecutorial abuse for two decades. A new edition of his book,
The
Tyranny of Good Intentions,
co-authored with Lawrence Stratton, a documented account of how
americans lost the protection of law, has been released by Random
House. Visit his website.
Copyright
© 2013 Paul
Craig Roberts
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Best of Paul Craig Roberts
This article originally appeared on: Lew Rockwell