This was article was published by The McAlvany Intelligence Advisor on Wednesday, September 16, 2015:
John B. Taylor, economics professor at Stanford University (where he got his PhD), thinks the massive, highly complex U.S. economy, generating nearly $20 trillion of goods and services every year, can be fine-tuned with rules and policies. Further, if those rules can be implemented clearly, the economy will do even better. He thinks of the economy as one gigantic organism with a mind and purpose of its own. That’s why he likes Fed Chair Janet Yellen:
Janet is more interested and concerned with policy being more predictable, rules-based, that markets have some sense of where policy is headed over a long period of time … that you’re transparent about your future behavior and you can actually stick to it.
Taylor developed his “Taylor Rule” twenty years ago, intended to foster price stability and full employment while reducing uncertainty and building the credibility of the Federal Reserve as a result. It’s based on a mathematical formula that so impressed Presidents Carter, Ford, Bush I, and Bush II that he served them as an advisor in their efforts to steer the economy in the proper direction.
The fact that the Taylor Rule and its variants haven’t worked in any measurable way since at least 2009 hasn’t diminished his reputation in the slightest. His opinions continue to appear in the New York Times and the Wall Street Journal regularly.
As an establishment economist Taylor is imbued with the idea that this massive economy employing and serving millions of separate individuals can be steered much like a cruise ship or ocean liner. With little tweaks and slight adjustments the ship can be steered to Nirvana: the land where everyone who wants to work is employed, and prices don’t change.
That likely explains why every establishment economist is focused on what the Federal Reserve Board of Governors will do this week regarding interest rates. The all-knowing, all-seeing group of 12 knows what’s best, and the world is waiting breathlessly for the announcement: Will it be a tenth of a percent increase in the Fed Funds Rate, or will it be a quarter of a percent? Or will they, in their infinite wisdom, decide to delay any increase into next year?
David Stockman, President Reagan’s Director of the Office of Management and Budget, has his own opinion about the usefulness of magical formulas and rules and policies like the Taylor Rule:
Needless to say, this [is] about as anti-free market as you can get. Rather than allowing millions of savers and borrowers to clear the money market at the efficient price, it consigned the task not even to the discretion of the 12 member FOMC [the Fed’s Open Market Committee], but to the arrogant, formulaic scribblings of an insufferably conceited academic who, like Janet Yellen, thinks the US economy is a giant bathtub to be plumbed and filled by manipulating the interest rate dials in the Eccles Building.
The Fed and its council of magicians cannot steer the economy, but they can certainly interfere with it – creating unexpected negative consequences. In the short run a slight rise in the Fed Funds Rate might increase a new car buyer’s payments by a couple of dollars, a new homeowner’s mortgage payment by perhaps $50, probably less. Nothing to worry about.
Except that once the Fed begins the process of raising interest rates it doesn’t stop until the Fed Funds Rate hits 5 percent, if past history means anything. The Deutsche Bank analyzed all twelve of the pervious credit-tightening cycles since 1950 and discovered that – hold on – rising interest rates slow the economy! Moving from a zero-interest rate environment to 5 percent is a very big deal.
It will not only slow the nascent housing industry’s recovery, but dampen considerably expectations that the U.S. auto industry will sell 16 million vehicles next year. It will also bankrupt marginal players in the energy industry as well as those states and cities that have gorged themselves on essentially free money since 2008.
The impact will be felt by the U.S. government as it is forced to pay more to service its gargantuan debt. Estimates are that debt service will jump from about $250 billion annually to nearly $1 trillion in less than a decade. That translates to nearly a quarter of all of the government’s revenues.
Overseas, economies will also feel the pinch as debt service skyrockets. The Swiss-based Bank for International Settlements (BIS) has calculated that total debt ratios (debt compared to economic output) are now significantly higher today than they were at the peak of the last credit cycle in 2007, just before the start of the Great Recession. In its own unique esoteric language, the bank expressed its concern: “We are not seeing [just] isolated tremors [in the money markets] but the release of pressure that has gradually accumulated over the years along major fault lines.”
That’s how an international banker expresses dismay at the coming cataclysm.
After reading the report from BIS, Ambrose Evans-Pritchard, writing in the Daily Telegraph, said:
The BIS’ “house view” is that the global authorities may have put off the day of reckoning by holding interest rates below their “natural” [read: free market] rates with each successive cycle, but this merely stores up greater imbalances, drawing down prosperity from the future and stretching the elastic further until it snaps back.
At some point, you have to take your bitter medicine.
This is the natural result of interfering with the free market: It cannot be steered, regardless of all the fancy formulas, policies, and rules dreamed up by college professors with too much time on their hands. That’s the hubris of Taylor and his ilk informing today’s conversation about the Fed’s decision this week.
Daily Telegraph: US interest rate rise could trigger global debt crisis
David Stockman: Goldman Sachs——-Perpetuator Of The Fed’s Jihad Against Savers
The New American: Financial Reform: Expanding Hubris, Limiting Freedom
The New York Times: The Yellen Fed? Precise and Predictable