Thought For the Day - 29 August 2016

Yet more yakking from the Mainstream Pundit Class this morning that Yellen is about to "raise" interest rates. To be clear, the Fed has no absolute (fiat) control over any interest rate. Not even the Fed Funds rate, which is the one it's assumed to control directly. And that's the overnight inter-bank transfer rate. About as short term as one can get. It's "changed" by the Fed "suggestion" of some new higher/lower rate. Given the structure, banks comply.

Now, if the long term rate on corporate and Treasuries is determined by the internal rate of return on physical capital in the private sector, and it is albeit at some arm's length, then should the Fed/Yellen decide to push up Fed funds, one gets into a rate inversion. One caused by fiat, as it happens, not economic reality. The theory (almost entirely right wing, Greenspanian) is that raising Fed funds will filter out to Treasuries and corporate bonds. But how? The fact is, long term rates are in the crapper just because capitalists have run out of ideas. They're sitting on TRILLIONS of idle $$$, which they can't find useful ways to invest in their businesses. All these TRILLIONS have been chasing Treasuries for years, pushing down yields. The CxO class would rather get 10% (they hope, but so much moolah chasing Treasuries gets them 1/10th that) from Uncle Sugar fur shur, than build out new plant and equipment. Raising Fed funds rate isn't going to cause Gyro Gearloose light bulbs to start flashing over the heads of said CxO class members. They'll still be just as clueless as they are today. They still won't have any more idea how to generate 10% internal rate of return than they do today. All we'll get is an acceleration in wealth transfer from the many to the few.

So they demand that Uncle Sugar pay them 10% or so on Treasuries so that the CxO and hedge fund classes don't have to work for a living. Why should Uncle Sugar, i.e. the little people who pay taxes, agree to such a transfer of wealth from the 99% to the 1%? Where's the free market in all that?

Being a financial engineer in the next few years is an occupation which will keep the gastroenterolgists very, very busy. "Ulcers hab been berry, berry goo to me!!"