Friday, April 13, 2012

Back to the Future: The Central Banker's Destruction of Time and Space!

April 12, 2012

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Welcome to Capital Account. Vice Chairman of the Federal Reserve, Janet Yellen suggested keeping interest rates close to zero until as late as 2015, but what are the costs? Our guest, economist Mike Norman, suggests that when the fed buys bonds and engages in quantitate easing (above and beyond just rate targeting), it is simply chaining the composition of private balance sheets. He says that a dollar is effectively the same as a bond, except that the later comes with duration and yield. This may be true, if you accept that, in practice, the Federal Reserve is not independent of the Federal Government. However, that duration and yield is important, because it connotes an emphasis on time and space. Time is very important. The decisions you are going to make depend heavily on your perception f how much time you have left on this earth. If you expect to live for 30 more years, then it makes sense to save with that expiration date in mind. If you expect to live for no more than 6 months, you may think differently about how to spend your money. I'd rather cash out of a bond now and spend it if I didn't expect to live past next week, than if I thought I had another 30 or 40 years left to go. By manipulating the yield curve, and pushing interest rates negative in real terms, the federal reserve is distorting the space time continuum, and making it profitable for individuals and businesses to make investment decisions that may not seem so intelligent if the world is still around in the future. Ironically, the suppression of interest rates, if it goes far enough, could make the destruction of the future profitable, and so actualize the very thing that it's policies reward. Ironically, this is something that IMF chief Christine Lagarde seems to be aware of. She is on record saying that low interest rates have decreased the number of available risk-free, or nearly riskless assets available for investment. Is this not a consequence of the very policies that she and her brethren support?  Meanwhile, George Soros and Richard Branson, two billionaires, are in the news pushing their own ideas about why the future needs. George Soros thinks that we need more Europe, more centralization, and more quantitate easing. Richard Branson has taken a critical view of debt, specifically student loan debt. We tackle the issue on our segment of "Loose Change!"

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