Washington, DC -- (ReleaseWire) -- 02/18/2016 --DAWN BENNETT: Danielle DiMartino Booth is a former adviser to the Federal Reserve Bank of Dallas and publisher of the financial forecasting service Money Strong, specializing in analyzing the actions of the Federal Reserve. And as we all know, the Federal Reserve just hiked rates a tiny bit in December and following that, the markets plunged worldwide, which implies further loss of the Fed's credibility. And that's actually where I want to start today. Danielle, how are you? Welcome back to Financial Myth Busting.
DIMARTINO BOOTH: Nice to see talk to you this morning.
BENNETT: On Friday, the dollar sold off and commodity prices rose, especially the share prices of miners and oil and gas producers. Was this the beginning of the process of Fed damage control? The Fed hike in December has really bashed stocks, and it's really hurt the dollar. Are further hikes on hold because of damage done to equities?
BOOTH: You know, I think the Fed had an out here, but by the same token, I think that some of the comments that are being made are disingenuous, given the clear signal that other sectors of the economy are sending. OPEC's a little late to the game, or I should really say, more effectively, the Saudis are a little bit late to this game. They can try and affect an increase in the price of oil. They obviously have hit their payment when oil crashed to $26 a barrel in Thursday's trading. But I find a lot of the comments that are coming out of the Fed right now, as I said, to be fairly disingenuous, given some of the other things that we're seeing.
BENNETT: I think this even brings us to an even bigger story, which is how the Fed maneuvering has obscured a larger economic truth here in the United States, which is the almost depression-like state of the U.S. economy. I think central banks like the Fed create recessions and they create depressions, and their constant interference in the marketplace makes it difficult for consumers and investors to discern the truth. Yellen last week said that our economy's back to normal, and I can't even imagine what world she's living in. Our recovering economy is nothing of the sort, with almost 40 million people on food stamps.
BOOTH: Right, exactly.
BENNETT: And almost 90 million have ceased even looking for formal employment. So to your point, I think it's disingenuous.
BOOTH: Look, I'm a fairly contrarian-minded person, so I think that there's easily an opportunity for financial markets to rally going into the next few days. And it was breath-taking to see the media's response to the retail sales figures. They failed to mention that credit card lending has regained traction in this country; they failed to mention that one in five automobile loans in this country today are super-prime, meaning aspirational people with very high credit scores are driving around in Ferraris, but they can't necessarily afford them. So yes, we've seen a bounce in some of the data, but there are underlying drivers, I think, that are not being covered in the media that should be.
BENNETT: On a bigger picture basis, do you find that central banks are financial and monetary dissemblers?
BOOTH: You know, look, I think right now what central banks are is prideful. I think central banks refuse to acknowledge the limits of their powers to effect change in the global economy. Look at the tremendous backfire that we've seen in Japan. And policy makers presumably understood that there was this gigantic so-called carry trade associated with making bets that the yen would fall in value. It had to be unwound, given what was happening, and it took it all out of the Japanese stock market. But again, these are desperate moves by people who are driven by academic models, who believe, as you said earlier, that the real economy is improving in the face of what people on the ground are communicating to be an absolute opposite message. So again, I go back to my first word, and that's disingenuous. I worry that pride is really pushing central bankers to making some extremely irrational decisions on behalf of the people they think they're helping.
BENNETT: It's as if they're undermining economies while pretending to protect them. And I think their moves almost make it impossible for the average person out there to figure out what's going on. I wonder if their inevitable goal is to move towards a greater globalization and to move towards an authoritarian type of elite control. Do you think that's possible?
BOOTH: I try and steer clear of conspiracies. I try really hard. However, there is an organization called the Group of 30, and the Group of 30 is kind of a who's who in central banking. Don't get me wrong; Paul Volcker is Emeritus Chairman. But I was happy to have been informed about this particular organization, and these are the top 30 thinkers amongst central bankers; Bill Dudley is on it, Kuroda, Mark Carney, to name a few. I happened to notice this organization right before Japan instituted negative interest rates, and only for that reason was I not surprised. Somebody sent me an article this weekend that Morgan Stanley's preparing for a cashless society. These are massive decisions that are being made that would completely change the ecosystem of the global financial system. And again, they're being made by people who have pensions and don't even have to invest in the market, to take but one example of how far from ground zero they really are.
BENNETT: Why don't they want us to notice what's going on behind the curtain?
BOOTH: Gosh... You know, I was inside the Fed for nearly a decade myself, and I really believed that I was in the right place to make a difference. But let's just say you could've blown me over with a feather when, in the aftermath of the financial crisis, the models that were used which didn't flag the crisis were maintained. They didn't go back and say, 'You know what? Something really bad happened here. Our ability to forecast is obviously broken. We should go back and re-engineer the way we look at the world. Maybe something's wrong here.' But that didn't happen, and at the time, that was one of the most surprising things, that they decided to remain anchored to such broken metrics as the core PCE to gauge inflation, which does not take into account financial asset inflation, it didn't take it into account in '07, and it's not taking it into account today. And yet, they say inflation remains too low. By what measure?
BENNETT: Nobel Prize winning economist Joseph Stiglitz once said that the International Monetary Fund and the World Bank loaned money to third world countries as a way to force them to open up their markets, but it also is a resource for looting by the West. Do you think that central banks do something that's similar?
BOOTH: I tend to be fiscally conservative in my leanings. To me, the gravest sin of the modern era central banker that was born during the era of the Greenspan initiated in 1987 is this: the widening of the inequality divide, not just in this country, but throughout the world. When you make money cheap for too long a period of time, you're going to go back to an era of the late 1920s, and the robber barons of the world, and that's not what creates genuine economic growth that is considered to be sustainable. We have to educate the youth. But if you leave interest rates low for long enough, then you'll be able to widen social safety nets that effectively stagnate your labor force and disincentivize ingenuity and work. That's not the American way.
BENNETT: Professor Richard Werner created the concept of quantitative easing. He documented that the central banks intentionally impoverish their host countries, just to justify economic and legal changes. I'm wondering if they do this, they crush the economy in order to promote and justify some type of structural reform.
BOOTH: I've really never thought about what you just said, but I pray you're wrong, because that is such a deeply frightening concept, that sovereign nations don't have the intellectual wherewithal to guide themselves, and that some greater being should reach down with this massive invisible hand and try and be their benefactor, be their structural benefactor and try and effect change on their behalf. No, that's a frightening concept. I hope you're wrong.
BENNETT: Richard Werner focused on the Bank of Japan, which he said introduced these huge bubbles and then deflated them, and they're crushing Japan's economy in the process. He says they're doing that to promote and justify structural reform. As you know, the Bank of Japan's had a pretty heavy hand on the Japanese economy for many decades, but it's stuck in a pretty horrible slump. He's also saying about the European Central Bank that they've used loans and liquidity as a weapon, to loot these European nations, which makes them so weak that they just have to take on any type of reform.
BOOTH: Well, Dawn, look. I'm going to expand on Professor Werner's theory here for a minute. Look at what Federal Reserve policy has done here in the United States to pensions, to public pensions. If your theory's right and they have proactively pushed pensions out on the risk and liquidity curve so that the end result is that the entire pension system blows up and that people learn, once and for all, that they need to be on 401Ks—it's not that I necessarily disagree with that, but I'm taking your theory and I'm extrapolating it to here in the United States. But the problem is, along the way, you're going to have riots in the streets of America.
BENNETT: Right, and who's to say they aren't going to happen? Some people believe that our own Federal Reserve has actually discouraged banks from lending to Main Street, which of course has increased unemployment and stalled out the economy. So I hope it doesn't happen either, but it was an interesting observation that he was making, and I was curious about what your thoughts were on that.
BOOTH: Look, I don't take anything away from any economist, any academic who tries to think outside the box, because that's what we need a lot more of.
BENNETT: Yes, because the Group of 30 you mentioned, the great central bank thinkers, do they all just compliment each other? We never hear anything different.
BOOTH: Well, no. And when you look at my friend Sarah Eisen, an anchor on CNBC, she pointed out that Kanye West and negative interest rates were the two most googled terms over the past week. It's fascinating trivia, if you will, but it's amazing that it's taken off like kindling. And this whole notion of negative interest rates that the greatest thinking minds out there think need to be instituted in a capitalistic banking system society, and that, 'It's going to okay. Just shush, shush, it's okay if we put the money market fund industry out of business, because we've come up with a better mousetrap.' And you have to sit there, scratch your head, and say, 'Really?'
BENNETT: You almost wonder if banks honestly know what we're heading into. And as you said, the Federal Reserve is reportedly talking to banks about the potential impact of future negative interest rate policy, and we all know that the Fed has very few tools left in their toolbox to deal with this worsening economic downturn that we're in. Do you think we're actually going to see negative rates, here in the United States?
BOOTH: Gosh, I hope the answer is no.
BENNETT: Me too.
BOOTH: Unfortunately, you touch upon a political question, because I think at the end of the day that it will come down to the lobbyists and their ability to prevent such a turn, because it will come down to a matter of whether or not there's enough political capital to prevent that from happening.
BENNETT: Are central banks simply making it up as they go along right now? It feels like it.
BOOTH: Well, you know, part of the challenge for central bankers is that their own research comes out with a very long lag time. So by the time they looked back at the entrails of the financial crisis and quantitative easing, and their own research determined that quantitative easing was anything but efficacious, they said, 'Oh, wait. We published that. In fact, we published it coast to coast.' Many different Federal Reserve districts and economists at the board in Washington have published papers that have said QE didn't work, basically. So once that hits the news wires, then what? To your point, then what do they do? They look and see what the Swedes have done. Well, that's not working very well. You've seen mortgage rates going up in Sweden, because the bankers will pass along the higher costs associated with negative interest rates. They're not going to put themselves out of business and they're not going to charge their depositors, but they're going to charge more on their loans. Again, a monumental backfire. But if your toolkit is empty and if your own research has shown that what you did last time didn't work, what are you going to do but make it up as you go?
BENNETT: Right. Is there any precedent where negative interest rates have been effectively deployed?
BOOTH: You know, Merrill Lynch had some really good crack researchers that were able to determine that interest rates right now are at their lowest level in 5,000 years. I don't know; I didn't even bother to try and fact-check that one. But no, it makes absolutely no sense in a world where savers would have to pay. It doesn't hold up to the logic test. It's not working where it's being deployed and it smacks, to me, of desperation.
BENNETT: Thomas Sargent, the New York university professor who was announced on Monday as the winner of the Nobel in economics, said that what he called the natural competitive banking system, without a central bank, would be better. He says, 'Nothing could be more surely established by a larger experience than that a government which interferes with any trade injures that trade. So the best thing, undeniably, that a government can do with money markets is just let them take care of themselves.' Do you agree with that?
BOOTH: I think that the central banking system itself is broken, and I think that it is making things appreciably worse. I bet you have read The Lords of Finance. Wonderful book. But our very first generation of central bankers that were brought about to stave off another banking crisis, it was JP Morgan's idea way back when. Our very first generation of central banks produced the Great Depression. So you tell me what history has said about central banking in its 101 year history here in the United States. Look, we're not a third world country. I don't necessarily believe that we can be a central bank free society, but I think they're completely out of control. If you're just talking about a single mandate of inflation, but there should be a policy of laissez-faire and keep your hands away from the ability of markets to discover prices, as they naturally should. Their reach has just gotten to be way too far. I think the Federal Reserve needs to be re-engineered.
BENNETT: Economies around the world right now are generally in a state of weakness—I don't want to use the word collapse, so I'll say weakness—with the exception of the United States, and most central banks are printing as fast as they can. Do you think the United States is actually going to join with another bout of quantitative easing?
BOOTH: I would be surprised to see another round of quantitative easing. That being said, the pushback on negative interest rates might force their hand, so they might take us back down to the zero-bound. I think they might actually raise rates a few more times, just because they think it's the right thing to do, because their models told them that it's the right thing to do, which will put us in recession. And then, again, if the propaganda doesn't take hold quickly enough for negative interest rates, we might indeed see another round of quantitative easing. Let's hope not.
BENNETT: I agree with you. Danielle DiMartino Booth, thank you so much for being on the show. And everybody needs to get to her financial forecasting service called Money Strong. Danielle, thanks so much.
BOOTH: Thank you. I appreciate it.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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