The powerlessness of the Fed…
They’re going to blame Trump for any recession…
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Dear Reader,
Today is September 15 — the ides of September.
This week the Federal Reserve’s Open Market Committee, so-called, huddles at Washington.
That very committee will almost certainly reduce its target rate come Wednesday.
CME’s FedWatch gives 96% odds — 96.2% odds — of a 25-basis point rate reduction.
The Federal Reserve does not like to throw Wall Street into unpredictable discombobulation.
It will therefore deliver Wall Street what Wall Street expects. In this instance, a 25-basis point rate reduction.
Yet will a rate reduction work the promised positive economic effects?
The answer is no, says Freedom Financial News contributor Jim Rickards.
Listen: The Fed Doesn’t Really Matter
Mr. Rickards believes the Federal Reserve is at best an economic nuisance. At worst he believes it is an economic menace.
Overall, its various flits and capers reduce to gimmicks and tricks.
At times, the Fed seems to be at the center of the financial universe. It’s not…
It is true that the Fed is the central bank of the United States and that it has the power to print (really, digitally create) the U.S. dollar, the currency in which 60% of global reserves are denominated…
But the power narrative crumbles quickly when we look at what the Fed actually does and how they do it. That’s a task the Fed does not want you to do because they prefer to hide behind a curtain of monetary omnipotence.
Thus this monetary Wizard of Oz operates a sort of confidence game. Or, if you prefer, a shell game.
It directs its target audience towards its showy and gaudy capers. Yet deeper revelation reveals there is no substance behind them.
SPONSORED: BANYAN HILL
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Reagan's former advisor has identified 3 companies positioned to explode when this news breaks.
George Gilder's track record is legendary. He gave Steve Jobs the iPhone idea in 1990. He foresaw Qualcomm’s rise BEFORE it soared 2,600% in one year.
Both sounded ludicrous at the time, but there’s a reason he’s been called “America’s #1 Futurist.”
Now he believes a rare "super convergence" event will create more millionaires in the next few years than we've seen in decades.
A bombshell announcement scheduled just days from now could trigger it all.
It’s All Just a Mirage
Mr. Rickards tracks the misdirection:
The Fed does print money (called M0) by buying U.S. Treasury securities and mortgage-backed securities from a select list of banks called the primary dealers. I was chief counsel and chief credit officer of a top primary dealer for ten years and we spoke to the Fed daily. So, I’ve had a front row seat of this process. When the Fed buys securities from a dealer, they pay with dollars pulled out of thin air.
But since 2008, those dollars are then put on deposit with the Fed by the banks in the form of excess reserves. Those dollars don’t go anywhere. The Fed is simply expanding its balance sheet with securities on the asset side and deposits on the liability side.
The Fed pays interest on those excess reserves, so the banks are fine with the arrangement. The actual dollars are not lent, spent or invested. They’re sterilized on the Fed balance sheet.
It’s all a mirage.
The FOMC target rate for fed funds (called the policy rate) is… irrelevant. It is likely to be cut by 0.25% at the September 17 meeting. But the fed funds market to which that rate applies has not functioned since the 2008 financial panic. In other words, the Fed is targeting a rate for a market that doesn’t exist.
A mirage indeed — yet a mirage Wall Street continues to chase — like a phantom oasis glistening above the waterless wastes of Arabia.
The deluded pursue it.
Where Money Truly Originates
Where are the true water springs located?
The answer is the large commercial banks. It is they who hose monetary water into the economic landscape.
Mr. Rickards:
Money creation that is useful for the economy doesn’t happen at the Fed. It happens at commercial banks. They also create money out of thin air (called M1) by making a loan and crediting the borrower’s account. That’s the money that can be used by business for investment, new jobs, working capital or other productive purposes.
M1 is also created for consumers in the form of mortgages, credit cards, lines of credit and other extensions of credit. If you want to know where money comes from, don’t look at the Fed.
Look at the banks.
Alas, Mr. Rickards does not like what the banks are showing him.
Kinks in the Monetary Hose
The commercial bank monetary hose has developed kinks:
Unfortunately, bank lending is starting to dry up. Consumer credit losses are piling up. Some consumers are cutting back on their credit cards as a precautionary measure. Mortgage creation is slowing because homeowners don’t want to sell since they’d have to refinance their current low-rate mortgages (from 2021-2024) at higher rates.
Businesses don’t want to borrow because investment opportunities are scarce, and new hiring has hit the wall. When borrowers don’t want to borrow and banks don’t want to lend, you have the makings of a recession.
So-called “fed stimulus” won’t change that.
Mr. Rickards fears the United States economy is careening towards recession. Is it?
I do not know.
Last week I cited unemployment data indicating that recession may have descended last spring.
Again, I do not know.
Blame Trump!
Yet I do know — I am certain of it — that the president would brunt full blame for any future recession.
His foes would cite his tariffs. They would cite his deregulation. They would cite his “tax cuts for the rich.”
They would cite his federal government personnel axings, etc.
Yet again: Would the president be guilty of the charges of economic negligence he would certainly face?
In the main, I hazard, he is likely not guilty of the charges arrayed against him.
I concede the tariff charge against him may carry the greatest heft — though even here guilt is far from certain.
Yet it matters not one jot to the president’s foes.
Let the American People Decide
Be that foe guilty of the economic charges against him — or innocent of the charges against him…
The president’s foes will finger him for blame.
Thus they will haul him into the dock ahead of the 2026 midterm elections.
The Democratic prosecution may well find the American electorate a receptive jury.
That jury may convict President Trump of economic crimes against the American people — rightly — or wrongly.
As things presently go, Democrats may well deliver Congress to Democrats in 2026.
Yet if you believe Democrats will resolve America’s central woes in 2026 or 2028… upon which rock do you stand?
You represent, essentially, the status quo dynamic.
Please — I say —can the American people decide upon matters central to their well-being??
For once… possibly?
Regards,
Brian Maher
for Freedom Financial News
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