Failed Thinking of The Federal Reserve

Investing is really about looking into the future and trying to determine the direction of the markets in the short and long term. The Federal Reserve does this along with individual investors. There are a couple of reasons as to why things have changed as far as the global markets are concerned. One reason is that the Federal Reserve is no longer buying bonds on the open market which was commonly considered stimulus to the U.S. economy. Instead, the Federal Reserve has quit buying bonds on the open market and let the bonds that they bought previously just mature in a normal and orderly schedule. This action by the Fed causes significantly less demand for bonds and with less demand comes higher interest rates. They have over four trillion to unwind from their balance sheet. That is close to 20% of the U.S. debt.

The second reason why things have changed is because the Federal Reserve has been raising interest rates. The failed thinking of the Federal Reserve Board of Governors is that "this is the way it has always been done." They justify raising rates to keep a lid on inflation, because this is the way it has always been done. In the Fed's mind, inflation is a bigger risk than the U.S. debt.

When you add these two reasons together, then you kind of have a double whammy on the economy that will stifle growth.

As I look back in my lifetime, I can remember Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen and now Jerome Powell. Did any of these people do their jobs in an exceptional manner? In my opinion, no. It is a fallacy to believe that the Federal Reserve Chairman or Chairwoman can actually control the United States economy like the CEO of a business. They all made the same mistakes. They continued the failed policies of their predecessors with a "this is the way it has always been done" mentality.

My question would be this. If we owe close to 22 trillion in debt and the Federal Reserve raises interest rates on that debt, then wouldn't that increase the total debt at a faster clip? The answer of course is yes.

Let's take the reverse of this thinking. What if we let the economy grow at 4% for an extended period of time? In reality, it will never grow at 4% for an extended period of time, because eventually consumers will get tapped out and the economy will slow down. However, let's assume we let the economy grow at 4% for an extended period of time. If the economy is growing, then that is better than if it is not growing. You don't have to be too smart to figure that out. A growing economy is good. A shrinking economy (recession) is bad.

If consumers' incomes are rising, then they will spend more and pay more in taxes. If consumers are spending more, then corporations are making profits. If corporations are making profits, then they are paying more in taxes. If they are paying more in taxes, then the deficit will come down. Do we want the deficit to come down? Apparently, no one at the Federal Reserve cares about the deficit coming down.

Look it is not that complicated. The Federal Reserve's convoluted way of thinking is that inflation is a killer and because of Jimmy Carter days, we have to get a handle on it and keep it in check. Otherwise, these Fed Governors think we will see a repeat of 18% interest rates. This is so idiotic it is not even funny. We are never going to see 18% interest rates again. That was an anomaly.

The Fed believes it is better to kill economic growth, because we cannot have 18% interest rates again. This is such a stupid way of thinking! The Fed would rather increase interest rates and thus increase our deficit.

If the economy were allowed to grow, it would reduce the deficit and burn itself back down. By that I mean, if you got a raise and bought a new house, then bought new furniture and a new car, then you are tapped out. Six months from now, you are not going to move to a new bigger house, buy more new furniture and trade in your six month old car for a new more expensive one. The Fed thinking is that yes you will do all that and they want to stop you by raising interest rates. This is stupid thinking. The economy will slow down on its own, because people will slow their spending at some point. Specifically, after they have purchased their new house, their new furniture and their new car. Mortgage rates will have to come down to attract buyers. Furniture companies will have to offer deals to get you to buy new furniture and appliances. Car dealers will have to offer incentives like lower interest rates to get you to trade in that car you bought six months ago.

Don't you see? We are never going to see 18% interest rates again. Consumers will stop it before it ever happens. Economic growth is a good thing and it will make things better for all of us. Too bad the Federal Reserve is stuck with the failed thinking of "that's the way it has always been done."