Armstrong Economics Blog/Central Banks Re-Posted Nov 23, 2021 by Martin Armstrong
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Ever since 1927, when the Federal Reserve lowered interest rates in a failed attempt to help Europe, which still ended up defaulting in 1931, Keynesian economics succeeded in brainwashing the analysis of how people look at the central banks. Where the 1927 G4 attempt to lower rates in the US was intended to deflect capital back to Europe, smart capital began to smell a rat, and they were correct. The capital inflows to the United States intensified and aided in creating the 1929 bubble high just as the 1989 Japanese bubble aided by capital inflows.
Then there was the G5 in 1985 that stupidly tried to lower the value of the dollar to reduce the trade deficit. They were clueless that at the same time, that would devalue US assets by 40%, which resulted in the 1987 Crash. You cannot lower the value of the dollar to sell more goods without also lowering the value of everything in your country. They don’t teach that in economics class because the government is supposed to be all-powerful.
Now people claim the entire rally is because the Fed has been engaging in QE since 2008. They claim the Fed has inflated the assets and the entire movement they attribute to the Fed’s actions. This is no different than the commands from Fauci to wear masks when at the beginning he stated that masks do nothing. There are people who wear a mask when driving alone in a car because they are incapable of independent thought. This is the same problem – as Stanley Milgrim called it, blind Obedience to Authority.
Post-Great Depression, the analysis became MARXIST. Oh, the Fed will raise rates because they do not want us to buy assets so the stock market should drop. But the Fed raised rates all the way into the rally until COVID. That did not prevent the rally. Yet analysts continue this brainwashed analysis that raising rates is bearish for the market.
Now they claim that, oh, it’s QE. They never look at the system as a whole, which includes international capital flows. The Fed failed to produce inflation while engaging in QE between 2008 into 2019. They ignore that, just as the global warming crowd ignores everything before 1850. If the Fed issued $1 trillion and buys in US Treasuries, I hate to tell you, but it has ZERO impact. Why? Because debt today is simply cash that pays interest.
Once upon a time, you could not borrow against government debt. Thus, it was deemed non-inflationary as long as it could not be used as money. Today, you post bills as collateral to trade futures. The old theories no longer exist in this new strange world we live in. Hence, all the QE was merely swapping the debt for cash.
Then it all depends on who is actually the seller of the debt to the Fed. If China sold its debt for cash, then the dollar went offshore and the domestic money supply never increased. There is a lot more to this game than the simplistic analysis that leads to brainwashing the financial community and investors. I know. I have been one of the few international advisers dealing with people on all continents.