The False Fundamentals Narrative Begins to Envelop the West

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On December 14th last year the Federal Reserve increased interest rates for the first time in twelve months, only the second time they’d done so in over ten years. December’s rise brought the rate up to 0.75%, five weeks before Donald Trump was officially inaugurated as President.

Inflation figures in the US have also been on the rise. Since September, which produced a figure of 1.5%, they have been steadily increasing. October came in at 1.6%. November, 1.7%. Next came December’s number. Forecast to be 1.9%, it surpassed mainstream expectations at 2.1%.

The 2% figure is significant because both the Federal Reserve and central bankers in Europe target this number (or marginally lower) as a marker for economic stability. They promote it as both sustainable and sufficient in being able to solicit growth in the economy.

An intended consequence of approaching or indeed surpassing the coveted 2%, however, is an increase in interest rates. As inflation nudges up, and economic data points to an improving economy, it provides a growing impetus for rates to rise with it.

Price Stability‘ and ‘Sustainability‘ are both key terms when it comes to this subject. Jens Weidmann – President of the Deutsche Bundesbank – has obsessively labored the point for many months now, most recently at the end of January when he said,

“The economic outlook at the beginning of the year is quite positive and the inflation rate is gradually approaching the ECB’s definition of price stability. If this price development is sustainable, the requirements for the withdrawal from the loose monetary policy are met,”

For Weidmann, a rate of 1.7% inflation inside the Euro area is “broadly consistent with what the council defines from price stability.”  A few days after these comments were published by the Financial Times, the rate increased to 1.8% from 1.1% in December. The highest number since February 2013.

Jens Weidmann’s agenda has been clear to anyone who reads through his numerous speeches to the German Bundesbank and elsewhere. He wants an end to the ECB’s ‘ultra loose‘ monetary policy. The central bank instead announced in December 2016 a reduction in its monthly asset purchases – from €80 billion to €60 billion – effective from March this year. A move which Weidmann publicly disagreed with.

The ECB’s asset purchasing programmes, which first began in 2009, are currently worth a massive €1.6 trillion. Far surpassing this, though, is the ECB’s overall balance sheet, which totals €3.7 trillion. This amounts to 36% of the Eurozone’s gross domestic product.

Today, the Euro area’s interest rate stands at 0%, and has done since March 2016. Is an increase on the cards? Not according to the ECB. In their economic bulletin issued on January 31st, following a rise in inflation to 1.8%, they said:

“As expected, headline inflation has increased recently, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued.

The Governing Council will continue to look through changes in (headline) inflation if judged to be transient and to have no implication for the medium-term outlook for price stability.”

What the ECB are referring to here is core inflation as apposed to consumer price inflation. Core inflation does not take into account the continual fluctuation in energy and food prices, meaning it only stands at 0.9%.

Supporting the ECB’s outlook on inflation is Ewald Nowotny, chairman of Austria’s central bank and a figure on the ECB’s 25-member Governing Council. Whilst hinting that the ECB may look into gradually ending its QE programme in the summer, he was also cautious about the jump in inflation and the growing rhetoric coming from Germany:

Mr. Nowotny stressed that the ECB “can’t just react to one country.” He said that significant differences in inflation rates across the currency bloc reflect the varying effects that the economic crisis had on countries within the currency zone.

He said that Germans needed to recognize that while low interest rates may depress returns on savings accounts, they benefit people wanting to borrow and invest.

Countering Nowotny’s perspective is German finance minister Wolfgang Schaeuble, who told Germany’s Tagesspiegel newspaper that,

“The ECB must make policy that works for Europe as a whole. It is too loose for Germany. 

When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus.

I promised then not to publicly criticise this (policy) course. But then I don’t want to be criticised for the consequences of this policy.”

There is clearly discord between the position of the ECB – which consists of 19 EU states – and that of Germany’s economic figureheads. Something to consider on this front is how Jens Weidmann, as well as being President of the German Bundesbank, is the chairman of the Bank for International Settlements (BIS) board of directors. ECB chairman Mario Draghi is also on the board, but is beneath Weidmann in the BIS hierarchy.

The difference in opinion between the ECB and Germany perhaps explains comments made in a speech by Draghi on February 2nd, reported by the Wall Street Journal. Here Draghi strikes a much more conciliatory tone than in previous months:

“When countries do pursue the right policies, the euro is no hindrance to success,” said Draghi. “Germany did not experience a boom-bust financial cycle, ran relatively sound fiscal policies, and passed a series of labor-market reforms in the early 2000s.”

The praise for Germany comes amid renewed tensions between the ECB and the country over the bank’s easy-money policies. It is unusual because Mr. Draghi has tended to clash with German policy makers in the past—notably Jens Weidmann, president of Germany’s Bundesbank and an ardent critic of the ECB’s bond purchases.

In September, Mr. Draghi also criticized the German government for failing to spend more to support the eurozone’s weak economy. He later tempered those remarks after a meeting with German lawmakers in Berlin.

But in his speech on Thursday, Mr. Draghi praised Berlin’s economic management, and urged other eurozone countries to follow suit.

If the ECB’s monetary policy and rates of interest were to change significantly this year – in particular over a sustained rise in inflation – it would point to pressure having being exerted on Mario Draghi to comply with not just Jens Weidmann, but also the Bank for International Settlements. Whether the apparent conflict that exists between them is authentic in nature is another question. It may well be a product of the Hegelian Dialectic which has been synonymous throughout history in both politics and economics.

Staying within the Euro zone, inflation is maintaining its upwards trajectory. On January 30th, Germany reported an increase from 1.7% in December to 1.9% in January, marking the highest rate since 2013. Before the rate was announced, Sabine Lautenschläger – who sits on the ECB’s six member executive board – said she hoped the bank could “soon turn to the question of an exit” from their QE policies.

A day later, France reported a rise in inflation, with the figure accelerating from 0.6% in December to 1.4% in January. As reported by Bloomberg, ‘French growth accelerated in the fourth quarter as part of a wider economic expansion in the region that is fueling a debate about how quickly the ECB should trim stimulus.’

Spain also came out with their latest inflation number – a huge rise from 1.6% in December to 3% in January. The forecast had been set at 2.1%. The Daily Mail reported on this by saying, ‘Rising energy costs sent Spanish inflation to its highest level in four years in January, well above the European Central Bank’s price stability target, adding to a debate over how long the bank’s monetary stimulus will last.’

Spain’s core inflation, however, showed an annual rate of just 1% in December.

The UK reported their latest inflation figures earlier on January 17th, which showed an increase from 1.2% in November to 1.6% in December. But it did not influence the Bank of England’s decision to keep interest rates on hold at 0.25% for the month of February. The bank also maintained their level of quantitative easing at £435 billion.

What was notable, however, was the change in tone now emanating from the bank. According to Bloomberg, ‘Rate setters repeat that they have limited tolerance for inflation above their 2 percent target. Some members went further and said they are “closer to those limits.”’

Chairman of the Bank of England, Mark Carney, added to this by stating that,

“If we do see a situation where there is faster growth and wages than we anticipated or spending doesn’t decelerate later in the year, one can anticipate there would be an adjustment of interest rates,” 

He went further still as documented by The Independent:

Carney has welcomed the prospect of central bankers moving out of the economic limelight as governments around the world spend more and rely less on monetary policy to deliver healthy growth.

“In many respects we’re coming to the last seconds of central bankers’ fifteen minutes of fame which is a good thing,” said Carney. “In general it’s a much better balance than the only game in town being central banks and monetary policy. This is positive.”

It was IMF head Christine Lagarde who first came out with the phrase of central banks no longer being ‘the only game in town‘ back in 2016. As I wrote about extensively last year, the narrative has been gradually building towards central banks adapting their monetary policy by significantly reducing their asset purchasing programmes. A move which is now gaining wider support throughout both the US and Europe.

The vehicle which globalist institutions like the ECB and Federal Reserve are using to determine their future policy are what economists call the fundamentals. This was made clear by the Fed themselves after their latest interest rate decision.

“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. 

The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Aside from inflation, which has been consistently on the rise since September 2016 in the US, a main source of data that will influence the fed from here on in is employment numbers. They, too, are on the rise. Private sector hiring in January expanded by 246,000 jobs, beating an estimate of 168,000.

Also reinforcing the perception of an improving economy was the payrolls number for January, which came in at 227,000. The forecast had been for 180,000. This represented the biggest rise in four months. Average hourly earnings, however, slowed more than was predicted, growing by only 2.5% from January 2016. This is of little surprise when you consider that a majority of the jobs created derive from retail, leisure and hospitality, sectors which are notorious for paying their workers less.

The Fed’s response to this was that,

While the unemployment rate “stayed near its recent low” in December, “some further strengthening” is expected in labor conditions.

In other words, if this and other data continues to show an improved picture, rates are going to increase. It follows the same principles of ‘price stability‘ and ‘sustainability‘. What it fails to identify, though, is that the fundamentals as they are perceived by the mainstream are not all that they appear.

For instance, unemployment in the US was officially classed at 4.8% for the month of January. This is disputed by Shawdowstats.com, who as of last week reported the real unemployment figure to be at 22.9%. To understand how they came to this figure, I highly recommend reading this public commentary on unemployment which is available from them free of charge.

In brief, the US publishes two rates of unemployment each month – the U3 and the U6. The U3 is the headline number which all mainstream channels latch onto and use as a barometer for determining the health of the jobs market. But the U3 only covers people who were actively looking for work during the four week period in which the unemployment calculations were made. The U6 on the other hand includes what the government classify as ‘short term discouraged workers‘, as well as part time workers and people looking for but unable to find a job. If you remain unemployed after a year has passed, the government wipes you from the U6 readings. You are still without a job but the government no longer recognises this fact. They literally cast you adrift whilst improving the unemployment readings by one in the process.

So the U3 number at present is 4.8%. The U6, a marginally more accurate measure for unemployment, stands at 9.4%, up 0.2% for the month of January.

Interesting to note also is that during January, 700,000 people re-entered the labour market in the US. Compare that to the 227,000 jobs that were created. It means 473,000 were unable to find work out of the 700,000 that tried.

But the most sobering statistic of all lies buried beneath the bluster of the headline U3 number. Right now, 94.4 million Americans are not counted amongst the labour force. Rarely is this even spoken about in the mainstream. Brandon Smith at Alt-Market.com covered this subject extensively back in 2015 in an article that I recommend for your own research.

In essence, fundamentals amount to no more than headline data and readings from the stock market. If the number reads positive, then all is well. If the stock market goes up, the economic outlook must be getting better. This myth is perpetuated by mainstream analysts who seek to concentrate minds to a headline rather than the core underlying condition of the economy. And it is headlines which the Federal Reserve and their counterparts are planning to use as justification for increasing interest rates and cutting back on their balance sheet.

Whilst people continue to buy into the fundamentals, not questioning their validity, this game of deception will carry on, all the way down to our own economic demise.

It is a game which leading central bankers in the US have been entirely complicit with. The structure of the Federal Reserve system encompasses twelve Federal Reserve banks and a Federal Reserve board of governors. All of whom have been discussing monetary policy and interest rates in increasing tone since the beginning of January.

First, here is a run down of what some of the governors have been saying:

Fed Governor Jerome Powell – January 7th 2017

“The current extended period of very low nominal rates calls for a high degree of vigilance against the buildup of risks to the stability of the financial system. 

Ultimately, the only way to get sustainably higher interest rates is to improve the broader environment for growth, by adopting policies designed to increase productivity and potential output over the long term — policies that are mainly outside the scope of our work at the Federal Reserve”

Fed Governor Lael Brainard – January 17th 2017

“If fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid.”

“Full employment is within reach and could prove sustainable with the right policy mix,” she said, adding that the Fed’s “gradual approach” to raising rates could change depending on future fiscal policies.

Fiscal policy, as Brainard referred to, is of course under the jurisdiction of Donald Trump’s administration. For many months central bankers have been arguing that monetary policy should take a backseat to fiscal policy. In other words, governments should start to become more self sustainable and not so reliant on central bank support. The data, manipulated or otherwise, is now reinforcing this perspective.

Now let’s look at what some of the head’s of America’s twelve central banks have been saying:

Chicago Fed President Charles Evans – January 6th 2017

“I’ve got an outlook and I’m a little cautious. I probably only have two rate increases penciled in for (2017). But if the outlook solidifies,three rate hikes could make sense”

Evans said he’s looking for inflation to increase more noticeably this year and expects it will come a little bit later, given the lags in monetary policy and other factors. Overall, he said the stock market is improving as people anticipate fiscal policy under President-elect Donald Trump.

Cleveland Fed President Loretta Mester  – January 6th 2017

“My own view is that we’re basically at full employment from the point of view of the monetary policy goal, one of our dual mandate goals. 

I’ve been seeing a little more strength in the economy. I have a little more built in inflation pressures in my forecast. I’m probably a little steeper than that in my forecasts but I think the three, the median path is a good summary of where the tenor of the committee is.”

Atlanta Fed President Dennis Lockhart – January 9th, 2017

“The economy today is well positioned for moderate growth and steadily improving conditions. It’s less certain that the economy is positioned for a breakout to markedly higher growth on a sustained basis.

It’s time for the Fed and monetary policy to shift to more of a support role.

The job of cyclical recovery is largely done. The Federal Reserve is quite close to achieving its mandated policy objectives of full employment and stable prices.”

Boston Fed President Eric Rosengren – January 9th 2017

“I expect that appropriate monetary policy will need to normalize more quickly than over the past year.

My own forecast is that we will achieve both elements of the dual mandate by the end of 2017, and as a result, I believe that a still gradual but somewhat more regular increase in the federal funds rate will be warranted.”

Boston Fed President Eric Rosengren – January 9th 2017

It is appropriate for the Federal Reserve to be raising rates. The exact timing depends on economic data, international conditions and what happens with fiscal policy.

Philadelphia Fed President Patrick Harker – January 12th 2017

The Federal Reserve can consider shrinking its massive trove of bonds once the interest rate on overnight lending between banks rises to 1 percent.

“When we are at or above 100 basis points – and we are moving toward that – I think it is time to start serious consideration of first stopping reinvestment and then over a period of time unwinding the balance sheet.”

Harker, however, said his rate outlook has yet to incorporate any possible fiscal stimulus.

Dallas Fed President Robert Kaplan – January 12th 2017

Dallas Federal Reserve Bank President Robert Kaplan said Thursday that it would be wise and reasonable to begin a debate this year on when and how to trim the Fed’s $4.5 trillion balance sheet.

It is “reasonable to be having that debate and discussion sometime in 2017 about at least what our plan of action should be,” Kaplan said. Any action, he said, should wait until rate hikes are “further along.”

St. Louis Fed President James Bullard – January 12th 2017

The Federal Reserve “may be in a better position” to reduce the size of its balance sheet now that it has raised interest rates twice in the past year”.

The Fed “may be able to use its balance sheet as a way to tighten monetary policy without putting exclusive emphasis on higher interest rates.”

“The Fed has not set a timetable for ending the current reinvestment policy.”

San Francisco Fed President John Williams – January 17th 2017

“In the context of a strong economy that has reached our maximum employment goal and with inflation nearing our price stability goal, it makes sense that the FOMC has undertaken a process of raising interest rates.

Looking ahead, further gradual increases in the target fed funds rate will likely be appropriate. If the economy really accelerates faster, inflation really picks up, obviously we’ll have to adjust upward.”

New York Fed President William Dudley – January 17th 2017:

“The risk that the Fed will snuff out the expansion anytime soon seems quite low because inflation is simply not a problem. The economy is not growing much above its sustainable long-term pace. Pressures on labor resources have been increasing, but quite slowly. Finally, the recent strengthening of the dollar will put downward pressure on import prices and limit the ability of domestic producers to raise their prices.”

Philadelphia Fed President Patrick Harker – January 20th 2017

“I see three modest hikes as appropriate for the coming year, assuming the economy stays on track. The economy is displaying considerable strength. Consumer confidence is strong, retail sales are still solid — though slightly slower than previously anticipated — and equity markets are up.

As expectations consolidate around our target rate, it makes it more likely that our target will become reality.”

Richmond Fed President Jeffrey Lacker – January 23rd 2017

“Right now I think we are at risk of getting behind the curve, so lately I’ve been an advocate of pushing rates up a little more aggressively than my colleagues.”

As you will have gathered, a majority of these Fed Presidents favour either increasing interest rates, cutting back on the Fed’s balance sheet, or both. On the proviso that the fundamentals hold up.

The most reticent in coming out publicly in support of rate hikes or a cut in the Fed’s balance sheet is New York Fed chairman William Dudley. This is probably to be expected given that he is the vice chairman of the Federal Open Market Committee (the group responsible for determining US monetary policy), a role that puts Dudley second in command to Federal Reserve Chairwoman Janet Yellen. The New York Fed is regarded as the most powerful of the twelve Federal Reserve banks.

So what is likely to happen next in regards to inflation and interest rates?

There remains uncertainty as to what Donald Trump’s fiscal policy will be as his Presidency develops. This will become clearer throughout his first 100 days in office. Beyond that there are two more inflation numbers due in the US before the Federal Reserve determine the next interest rate on March 15th. The second of these numbers will be released only hours before the Fed are due to make a decision.

In a previous blog post – From Coincidence to Conspiracy – When Does Suspicion Become Truth? – I outlined how the United States will breach it’s debt limit of $20 trillion just one day after March 15th. The debt limit is presided over by the US treasury, not the Federal Reserve. If come March 15th the fundamentals are further to the upside then I believe they will use the opportunity to increase rates to at least 1%, with the data acting as the Fed’s cover.

This week Philadelphia Fed Chairman Patrick Harker began to publicly endorse the idea of increasing rates in March. Harker is on the FOMC panel this year and is able to vote on interest rate decisions. He said,

“I still am supportive of three rate hikes this year, of course with a major caveat depending on how the economy evolves and policy, fiscal policy evolves. I think March should be considered as a potential for another 25-basis point increase.”

In Europe the ECB next decide on interest rates on March 9th, with further inflation reports also due for the Euro zone and most notably Germany and France. The leading narrative throughout Europe is now turning towards the French Presidential election, of which the ‘populist’ far right candidate, Marine Le Pen, remains the outsider according to pollsters. Again, the theatre of this election provides a certain amount of cover for the ECB’s stance on monetary policy and the underlying tension between Mario Draghi and the German Bundesbank.

The next ‘populist’ test in Europe comes on March 15th when the Dutch General Election is held. Far right candidate Geert Wilders is seen, at present, as the favourite. Whilst a Wilders victory may provoke a degree of uncertainty and worry for the EU’s future, remember that it is the fundamentals which central banks are responding to.

Recall that in the UK, the expected downturn following Brexit did not materialise. Instead, the FTSE 100 index in London now sits at record levels, with the Bank of England championing reduced central bank support of the global economy.

Following Trump’s election victory in the US, the expected downturn again did not materialise. Instead, the Dow Jones in New York has broken through the 20,000 level, a record high. All amidst calls from leading central bankers to increase interest rates and tighten monetary policy.

Ever since these two elections, the fundamentals have all been on the rise. The pattern is evident to see.

Populist movements are not yet proving the trigger that causes economic calamity. They are being allowed into positions of power, and in turn being given the platform to gain a foothold. Think of it as chess pieces being moved into place. It is a process, one which globalist elites are gradually cultivating.

The next piece could be Wilders, which then may move onto Le Pen. But whilst the political narrative unfolds, how many are paying equal attention to the actions of central banks around the world?

The false dawn of populism – especially with regards to Donald Trump- begins with renewed hope and expectation. With that comes an increase in the fundamentals, and the eventual rise of interest rates off the back of heightened inflation.

As with everything globalists conspire towards, they almost always exercise patience to achieve their ambitions. That way fewer people will look to their actions when political events are positioned as the cause for a strain on the economy.

Every crisis needs a figure of blame. And the economic crisis building under Donald Trump, which was developing all throughout the Obama administration, will eventually come to fruition.

Which is why figures such as Trump have been placed into positions of power. They provide a distraction from the true cause of economic decline – the actions of financial institutions and the bankers scheming from within.

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4 comments

  1. […] On Wednesday April 5th the minutes from the Federal Reserve’s March policy meeting were released. The topic of reducing the Fed’s balance sheet came up for discussion (no more than that at this stage). This is something I debated back in February in a previous blog post (The False Fundamentals Narrative Begins to Envelop the West). […]

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