JANET YELLEN’S STORYTIME


“Interest-Change” at the Fed


by Ernst Wolff


[This article published on 12/19/2015 is translated from the German on the Internet.]


For weeks the world waited for the US Federal Reserve to redeem its promise delayed for years to raise the key interest rate. In the middle of December 2015 in New York, Janet Yellen announced a 0.25% increase of the interest rate after 7 years of near zero interests.


The economic professor justified the step by saying the Federal Reserve reacts to “considerable economic advances.” The labor market is recovering rapidly and wage development shows clear improvements. The risks starting from foreign countries have declined since the summer and the oil price’s decline is a “temporary” phenomenon.


STRANGE BRAZEN LIES


Seldom has the whole world been told lies in such an impudent way. Not one of the cited reasons has anything to do with reality. The US economy is not picking up speed, wages are not rising and the situation on the labor market has not improved. The free fall of the price of oil together with decreasing worldwide prices of raw materials point to a dramatic demand decline and are first class danger signals. Nevertheless nearly all mainstream media are celebrating the positive reaction of the stock markets to Yellen’s decision as confirmation of the accuracy of her statements.


In truth, this positive reaction is a proof of the opposite. Yellen’s decision to raise the key interest rate can be compared with the decision of a bus driver who drives up a steep slope and applies the hand brake. The decision cannot make anyone euphoric who is affected by it and has some intelligence. On the contrary, the stock markets would have reacted immediately negatively in a healthy environment. That they didn’t react that way and even moved strongly in the opposite direction only reflects manipulation by the biggest market actors, the central banks in the first place and the mammoth financial institutions and multinational corporations in the second place.


Recalling the development of the global financial system over the past twenty years is vital to understand the backgrounds and actual processes around the supposed “interest-change.”

After deregulation of the financial system in the 1980s and 1990s, the collapse of the hedge fund Long Term Capital Management (LTCM), the worldwide financial system was dragged to the abyss in 1998. To prevent a catastrophe, a group of Wall Street banks helped out at that time and bailed out LTCM.


In 2007/2008 a collapse of the financial system threatened again but this time in another dimension. On account of the subprime mortgage collapse in the US, many big banks all over the world stood at the brink of ruin and would have collapsed if the states had not bailed them out under the pretext that they were “too big to fail.”


“TOO BIG TO FAIL” WAS THE GAME-CHANGER


The world economy did not get going again after the greatest wealth redistribution in the history of humanity (private financial institutions were bailed out with tax funds in the billions). Under the pretext of stimulating, the central banks worldwide resorted to two measures: they printed money and lowered interest rates.


Both measures did not lead to a recovery of the world economy but allowed the wealth of a tiny financial elite to grow exponentially. The reason is simple. The classification of “system relevant” banks as “too big to fail” changed global financial transactions and our whole world for ever. The executive floors of the big financial institutions now know they will be bailed out under all circumstances and therefore allow much more risky investments than before 2007/2008.


The Big Players, firmly in the hands of the ultra-rich, speculate on the financial markets, mainly on stock markets, bond markets and unregulated financial products (derivatives) and do not invest most of their money in the real economy. Through the “leverage” conventional today, they multiply their commissions and partly realize fantastic profits.


They increase the risks many fold through their game in the international financial casino. In addition their business model based on constant uninterrupted infusion of cheap money by the central banks has become largely independent and eludes all control through their sheer size (the financial sector today is many times larger than the real economy).


THE TRIP LEADS TO THE BRINK OF DISASTER

Financial management is like an air-conditioned car whose driver must drive faster and faster to cool down the motor from the outside. After simultaneously heating the car again and again, the motor at the end must break down because of overheating.


Both politicians and heads of the financial industry know a horrific end is pre-programmed. Seven years of zero interest policy transposed them into an intoxicated state where they believe a system completely out of control can be controlled at least in the medium term – at a time when all data indicate that the world economy has fallen into hardly navigable waters.


China’s weaknesses, the falling price of oil, setbacks on the bond markets, the overheating of the stock- and housing markets and many threshold countries fighting for survival – all these factors show we are in a worldwide downswing phase. But that is not all. Since the sum of the credits of states, businesses and private households worldwide has swollen to over $200 trillion and constantly demands interest payments, the system simultaneously screams for ceaseless growth since every stagnation and every recession increases the debt burden in relation to income.


The decision of the Federal Reserve to raise the key interest rate and step on the economic brake is almost like a bad joke in view of this development. This decision was made for two reasons. The first is the helpless attempt to contain the system-endangering global expansion condemned to fail. The second is lulling people into a false sense of security in a time when the most dramatic economic and social dislocations of all time are imminent.


Thus it is no wonder that nearly all the media suggest unanimously “the crisis of 2007/2008 is now finally closed” with the interest-hike by the Fed.


THE MOMENT WAS NOT AN ACCIDENT


That the Fed publicized its decision right before Christmas wasn’t an accident. At the end of the year, stock prices are forced up by the CEOs of corporations and financial institutes – above all by buying back their own stocks – since the bonuses of managers depend on the end-of-the-year results.


Moreover, the “recovery” on closer examination was only half as great as represented to the general public because the interest rate on which the Fed lends money to banks in the future only rose 12 base points (0.12%). This is manageable for the big players on the market and even gives them the chance of assimilating some smaller players.


The threshold countries will bear the main burden of the higher interest rate. These countries are stuck up to their ears in problems on account of the oil price development, decline in raw material prices, devaluation of their currencies and slackening worldwide demand.


Regardless of how the stock markets develop in the next days – the fact that they reacted euphorically to Janet Yellen’s announcement shows the global financial system is manipulated in its foundations and has nothing to do with the reality of the world economy any more. The world was never more removed from a “free market” as today.