Washington, DC -- (ReleaseWire) -- 09/23/2015 --The debate between Republican presidential hopefuls last week might have provided some entertainment, but it provided nothing of substance in the areas that ought to be of most concern. Not one word on the current state of the economy. Nothing on our mountain of personal and national debt. Inflation was missing in action, as was the dollar. No word on terrorism, on ISIS or Iran. It was, pure and simple, a game of tit-for-tat, a stream of trivia that failed to address the most serious issues facing us.
In the same week, the Federal Reserve balked once again at raising interest rates. Janet Yellen has been hinting all year that a rise was coming. In January, it seemed like it would happen in April. In April it was June. And now, we once have seven thousand words of transcript in Fed-speak that do nothing except indicate that the Fed is going to continue to look the other way when it comes to their $4.2 trillion balance sheet, their consistent overprinting of money, and the fact that they are in fact driving the real economy into the ground, even as they prop up the markets.
The question is, why? If the economy is strong enough that it can be basically ignored in a major debate, why not raise the rate the 25 basis points that keep being floated? I believe one major reason may have to do with interbank credit risk, which is absolutely soaring. What does that mean? Banks are required to maintain enough liquid assets on hand to cover a potential run on the bank by their clients, and when they cannot meet that liquidity requirement they turn to the interbank lending market. Banks with with excess liquidity can issue very short-term (usually overnight) loans to the bank with a shortfall and receive interest on their assets. As the risk of default on interbank loans increases, the expected payoffs from providing unsecured funds to other banks decreases, which lowers the incentive to make these sorts of transactions. Interbank lending seizes up as banks hoard liquidity in anticipation of future shortages. The last time we saw a serious problem of this sort was in September of 2008, the month before Lehman Brothers blew up.
Still with me? One indicator of interbank credit risk is referred to as the TED spread, a measure of the difference between interbank loan interest rates and rates on short-term US government debt (or T-bills). Because T-bills are usually perceived as risk-free, and lending to commercial banks carries inherent risk, the difference between these rates is a sign of perceived credit risk in the economy. Now, last week the TED spread rose 21 percent, to its highest point in 36 months. That sort of increase is often a sign to look for the stock market to take a hit.
What does this have to do with the Fed and their continued reluctance to raise the federal funds rate? At a time when interbank lending is already under stress, any increase in the cost of banks' financing could well be the straw that breaks this camel's back. So, we do have to wonder, is interbank credit risk the tail that is wagging the Fed?
If so, it is yet another sign that the Federal Reserve is still doing nothing to fix the problems plaguing our economy before they become a full-blown crisis. The financial meltdown of 2008 taught us that the Fed doesn't feel being prepared is important. Instead they do whatever they can to try to fix problems after the fact. It is a poor general that keeps fighting the last war. Continuing to waffle instead of raising rates removes one of the few tools they have left in their toolbox if we enter a recession, and we are headed for a recession, if we're not already in one. The Chinese general and philosopher Sun Tzu said, "Those who are victorious plan effectively and change decisively." The Fed is a poor general, continuing to fight the last war over again in the face of changing circumstances.
Last week, Mark Spitznagel of Universa Investments was interviewed on Fox Business by Maria Bartiromo. Spitznagel is that rare breed, a hedge fund manager that actually hedges for his clients rather than just gambling on the next Fed bailout. There are many takeaways from the interview, but we'll lead with a slap in the face. When Bartiromo asked about the queasy ups and downs of the stock market recently, and particularly about the absolutely manic selloff on Monday, August 24th, Spitznagel said, "If August was scary for people, they ain't seen nothin' yet." Ouch!
He dug in further, though, to highlight one of the major issues in the market. He blamed the overvaluation of today's markets directly on central bank intervention, and then went on to say that, "...what we're witnessing today is the slow death of one of the great myths of human history: this idea that centrally planned command economies work, that they're even feasible, and that they can be successful." Future generations, he said, will look back and ask how we could make the same mistakes again, how we could have ignored Friedrich Hayek's concept of the Fatal Conceit, the idea that central planners can do better than dispersed information and signals leading to true price discovery.
That brings me back to last week's nearly useless debate. In a Gallup Poll from January of this year, they asked the question: What is the most important problem facing the US? The number one answer was "government, Congress, politicians." In the last decade, it's become clear that we actually have two governments: the one we know about and elected, and a parallel government that has just proliferated into a life and a universe of its own. A 2013 op-ed in the New York Times called this the Deep State, and provided a definition: "A hard-to-perceive level of government or super-control that exists regardless of election, that may thwart popular movements or radical change." This Deep State operates according to its own compass, heading regardless of who is formally in power. Perhaps the Fed's continued inaction and fumbles indicate the extent to which they are a part of this unaccountable Deep State.
With that idea as a lens, look again at the questions that weren't asked in the debate. I believe they could have spent three hours just focusing on debt and our national deficit. Most economists will now admit that, when Obama leaves the White House, we will be over $20 trillion in debt. According to the same economists, when we hit the magic number $24 trillion, we will effectively collapse as an economy. We will be essentially bankrupt as a nation, in the same position as Greece is now. I believe they could have spent three hours on the nightmare of terrorism, of ISIS and an Iran that we have basically helped along the road to becoming nuclear-armed. They could have spent three hours on any number of topics that would have made the entrenched interests uncomfortable, shed some light on the Deep State. Instead, they focused on pandering to human nature's banal self interests and let the real elephants in the room remain ignored.
All data sourced through Bloomberg
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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.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.