The Fed Rate Hike

interest rates up June 2017
Gold Market Discussion

Another Hike

So, President Trump’s objections notwithstanding, the Fed raised interest rates once again on Wednesday.  

That’s its fourth rate hike this year.

The Fed does not seem to realize the stress the US economy is under: stress from stock market volatility, political uncertainty, trade wars, threatened hot wars, growing deficits, big debt, global de-dollarization, and high taxes.

But what about the tax cut we got last year?  How can I include high taxes as a major stress on the economy when we got the Trump $1.5 trillion tax cut last year?  

Remember two things:

First, the tax cut was supposed to pay for itself with all the new growth it would unleash.  But instead, economic growth is now slowing, not increasing.  (Third quarter GDP growth was slower than second quarter growth.)  Hence, we have run an astonishing $1.3 trillion deficit over the last 12 months.  

rising interest rates

Second, remember the words of Milton Friedman:  the amount of taxation is equal to the amount of government spending.  Let me state that differently.  Every dollar the government spends must come from somewhere.  It either comes from open, overt taxation, from the hidden taxation of inflation, or from borrowing, which itself comes at the expense of other borrowers in the form of higher interest rates (and still ultimately must be paid back by overt or hidden taxation).

The point is that if government spending is growing (and, boy, is it growing!), then taxes are climbing.  That adds to the load the already overburdened economy must carry.

There is no indication that the Fed understands the stress the economy is under.  That means when a crisis strikes, when reality becomes clear, the Fed will overreact.

It always does.  It drives rates artificially low and creates bubbles like the dot com bubble and the housing bubble.  Or it drive rates unrealistically high and kills off whole sectors of the economy like housing or automobiles.  

Why did the Fed raise interest rates this time?

A better question than why the Fed raised interest rates is this:  why is the Fed meddling in interest rates, up or down?

Interest rates, like all prices, should be determined by the law of supply and demand.  When prices reflect actual conditions of supply and demand, good things happen.  When the price of money, interest rates, are set by politicians or bureaucrats, bad things happen.

Interest rates should be determined by what able borrowers are willing to pay and by what creditors are willing to loan.  

When the Feb sets rates instead of the market, it creates distortions.  Sometimes (the last ten years), it sets rates to help troubled banksters, while it crushes people on fixed incomes.   Sometimes (today), it sets rates to try to offset the harm from its prior credit meddling, money printing, or Quantitative Easing.  

As the economy slows, tax receipts decline.  Government social spending climbs.  The deficit widens.  Then the Fed, to make up for its past meddling, overreacts and does something stupid.  

In the current scenario that boils down to printing money like mad.  

That’s where we are.  That is why gold is moving up.  That is why informed people are buying gold.