What You’re Doing

Well, I see you standin' there

With your finger in the air

Everything we do, you wanna leave it up to you

Who do you think you are?

You think you are a star?

Tryin' to run the town

Always tryin' to put us down

Well, you think that you're right

You think you're out of sight

Tell me something, mister

Why'd you have to make us so uptight?

Well, you say you've been tryin'

You know that you're lyin'

I think you need some groovin'

Who do you think you're foolin', now?

Well, you better start changin'

Your life needs rearrangin'

You better do some talkin'

Or you better do some walkin' now

Yeah, you think that you're right

You think you're out of sight

Tell me something, mister

Why'd you have to make us so uptight?

I know what you're doing

All that you been doin' wrong

I don't know what you're feelin'

Oh, but you been feelin' long

Well, you think that you're right

Tell me something, mister

Why'd you have to make us so uptight?

-        RUSH, 1974

Forgive the lengthy introduction, but it all is applicable.  I note the year given the dated terms….It was their first studio album – before Peart.  Cut them some slack.  In any case, intentionally or not, they nailed the philosophy of progressivism – specifically the idea of being ruled by intellectual dictate.

RUSH and John Mauldin in the same post!  Who knew?

“When it becomes serious, you have to lie.”

“I'm ready to be insulted as being insufficiently democratic, but I want to be serious... I am for secret, dark debates.”

“Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?”

“If it's a Yes, we will say ‘on we go,’ and if it’s a No we will say ‘we continue.’”

“We all know what to do, we just don't know how to get re-elected after we’ve done it.”

– All quotes from Jean-Claude Juncker, prime minister of Luxembourg and president of the European Commission

It is fair to ask: What You’re Doing?  Mauldin, in his recent Thoughts From the Frontline, comes about as close to calling BS on the entire system as he has ever come – for example:

Conspiracy theorists will love this Bank of Japan timeline:

Jan 21 – Kuroda emphatically tells Japanese parliament he is not considering NIRP.

Jan 22 – Kuroda flies to Davos.

Jan 29 – Kuroda enthusiastically embraces NIRP and promises more of it if needed.

So, whom did he talk to in Davos, and what did they say to change his mind?

To pretend that he walked into that meeting without having had lengthy talks about whether to pursue negative interest rates strains credulity…the outcome of any important meeting is decided ahead of time through private discussions among those who will participate.

John, it isn’t a conspiracy theory if the conspiracy is a fact.

You want a conspiracy theory?  Ask yourself the question: How is it that they all come to drink the same Kool-Aid?

We often refer to the herd mentality when we talk about investors. Economic academicians and central bankers are equally prone to bovine behavior.

You sit on the Federal Open Market Committee. Almost everyone in the room with you is a committed Keynesian. That is the bulk of your training and experience, too, and everyone agrees with you.

“Almost everyone”?

It is interesting: Mauldin does not lean on the false distinction of Keynesians vs. Chicago-school monetarists; he doesn’t try to sell the “doves” and “hawks” nonsense.  They are all interventionists; they all believe in the central planning of central banking – they must believe this and advocate for this, as otherwise the world would have little use for them.  They are all Keynesians.

To appear in charge, they have to do something:

…you could not sit in the BOE’s meetings, see how impossible the situation was, and do nothing. You had to act.

In such a predicament you rely upon your best instincts and education and training, and then you act. And you hope that the actions you take do more good than harm.

So what will their instincts tell them to do the next time (which may be upon us even today)?

What do you do? You are hearing from everyone that the dollar is too strong and is hurting US business. You worry about the unintended consequences of taking the world’s reserve currency into negative-interest-rate territory, but the staff economists are handing you papers that argue persuasively that the best possible alternative is negative rates. So you throw in the towel.

There is no alternative of allowing market prices to clear.  Not in this club.

You have to understand that in the world of truly elite economists, everyone knows everyone. Many of them went to the same schools, and they regularly talk at conferences, in private meetings, and by phone and email.

They will kick you out of the club; you will no longer be invited to places like Davos.

You need to understand that economists have faith in their theories in the same way that many people have faith in their religion.

So what happens next time?  Negative rates are coming to a currency near you:

Last week, former Fed chair Ben Bernanke said in an interview that the Fed should consider using negative rates to counter the next serious downturn. “I think negative rates are something the Fed will and probably should consider if the situation arises,” he said.

Would this be any more surprising than if someone suggested seven years ago that the Fed should consider quintupling the balance sheet in a few short years?

The same story at MarketWatch mentioned that former Fed Vice-Chairman Alan Blinder has already suggested using negative interest rates for overnight deposits. And Janet Yellen, who said in her confirmation testimony to Congress in 2013 that the potential for negative interest rates to cause disruption was significant, now says they are an option the Fed would consider.

They also have no idea what the consequences of this action might be. 

We have little idea what NIRP’s unintended consequences to our portfolios and to our businesses will ultimately be, but we had better start thinking them through.

They have no idea but they will do it anyway, because this is how they are trained and this is how they stay in the club…they have to do something:

…but we are not really going to get that discussion, except in the context of Keynesian policy. Which is at the very heart of the problem. There would have to be an admission of failure by the economic establishment in order for there to be a serious discussion. It would be like asking the Pope and all his priests to convert to another theological viewpoint. (Emphasis added)

In the world of the leading economists and central bankers, “everyone” believes what “everyone” knows to be true. All their research agrees with them, and any that doesn’t is labeled as flawed. Any empirical evidence that shows quantitative easing hasn’t been working is ignored or explained away, even when it is presented by outstanding academic economists. No, quantitative easing didn’t work because we didn’t do enough of it. Negative interest rates aren’t working because we haven’t gone low enough.

They don’t know what they are doing; they are only certain of one thing – they are right:

Clearly, QE has not worked…. But we can’t acknowledge that, because if we did, we’d have to admit that our theories don’t work. And we all know, because God knows, that our theories are correct.

I beg to differ: God knows better.  So do these guys.

What’s next for the Fed and rates: higher or lower?  It is not difficult to see signs of troubled waters in financial markets.  It is not difficult to see pro-active central bank devaluations in every major economy other than the US (at the moment).  It also is within the memory of many that stagflation is possible.

Unless overwhelmed by the market, and if for no other reason than a face-saving move, the direction of the next move is reasonably certain.  Let’s see what the picture looks like in 24 months.