A new type of superstition has got hold of people's minds, the worship of the state. — Ludwig von Mises (1881 – 1973)
Now I would never have the audacity to match the intellect of Ludwig von Mises, but I would like to add a small extension to his phrase.
In addition to the people having blind faith in the state, they also have an insane belief in central banks and the leaders of central banks.
The powers that are concentrated in the hands of central bankers are immense. They get to decide the economic environment and growth policies for the people of their country. Whether we make wise decisions or not, at least we elect our president and congressmen. These central bankers are not even elected. They are appointed and actually anointed with incredible power to influence our lives.
They get to decide where we will invest. They determine whether we should save our earnings or go out and spend it foolishly. European central bankers are now all lowering interest rates to negative, whereby they are forcing savers to spend on frivolous widgets, whether we need them or not. They believe they can influence free will, when even God stepped aside and allowed man free will.
The role of the central bank is to create an environment where the market risk-takers take the necessary risks and grow their businesses. If the Federal Reserve created ZIRP (zero interest rate policy) and did QE (quantitative easing), and if the businesses then took on risk and grew their businesses, we would have a robust recovery.
But the Fed's extraordinary efforts to force market risk-taking and inflate financial assets actually discourage productive risk-taking in the real economy. The easy money policy by the Fed is abused by the corporates by indulging in non-productive uses such as stock buybacks, launching an IPO and instantly turning around and buying back their own stock because business are bereft of good business ideas. No investor is willing to invest ahead of global growth because no one believes that the leading indicator of that growth — the stock market — means what it used to mean.
We all know that and yet when the Swiss National Bank artificially pegged the Swiss franc to the euro, the world market accepted that without argument or asking why a central bank decided to squander its reserve on non-productive tactics. Instead, the speculators and manipulators took that artificial status and played with the currency. They believed the gospel truth than the 1.20 peg would hold forever.
When the euro began to melt last summer and dived from 1.40 to the U.S. dollar to 1.20 to the U.S. dollar, the speculators did not for once imagine that the artificial peg would not hold.
Neither did they ever consider the fact that no artificial intervention from a central bank has ever lasted long against market forces. Not once did they stop to understand the implications of the peg and why it was destined to fail.
I see the same blind faith that global investors have in the U.S. dollar. They believe ever word uttered by the central bankers here as if it is written in stone. In fact, they imagine meanings of words and decode to bet millions of dollars on that view.
Right now the consensus view is that the Fed will raise interest rates in the second quarter of 2015.
With oil at seven-year lows and having a disinflationary effect on the prices along with low inflation to start with (as measured by central banks, not by common man terms), what will cause the Fed to raise rates? Rates are usually raised to slow down inflation and tame an overheated market. In our case, the only thing raising rates would tame is any fledgling of growth we might have.
So when the Fed does not raise rates in the second quarter or even throughout 2015, the markets will once again be "surprised" rather than acknowledging that they were over exuberant. The dollar will come down from its lofty levers and oil will trade back to $60 to $70 per barrel.
Is it time to buy oil yet?
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