I spoke a little bit on the show today about the failure of the Federal Reserve to actually do the thing that it was originally formed to do. Reserve banks are typically formed in order to provide a reserve of currency for member banks against panics during uncertain economic times.
In addition our reserve banks in the Western world picked up the additional task of smoothing out the business cycle, checking inflation, and providing for full employment.
There was an astonishing chart, however on, CNBC that should have us re-thinking what the Federal Reserve actually does.
The people at CNBC- and the technical analyst they had on- were talking about this as the end to 32 year long bull market in bonds. It just shows you that sometimes you can't see the forest for the trees.
Because if you use interest rates as a proxy for the business cycle you can see that we substituted the normal business cycle for a business super cycle. If you look at the gigantic V pattern on the right and of the chart from approximately 1946 to the present day, you'll see you a period of rising interest rates unlike any we've ever seen in our history. Then of course from 1981 to the present day we've seen a period of falling interest rates unlike anything else we seen in our history.
What it looks like it's happened here is that we've concentrated a number of many business cycles into one gigantic business cycle. While it appears that the Federal Reserve's activities on a daily basis have some positive effect on the business cycle, the actuality is that it's really having a negative effect on the business cycle.
You need only arrange the cycle to look at periods of time longer than 5, 10 and 20 years.
That's because the chart shows that there's more interest rate of volatility in a business cycle then there was in the past. And that's the exact opposite of what proponents would expect the Federal Reserve Bank to do when it comes to monetary policy.
I'm guessing that if you look at inflation that you'd see more volatility in the inflation numbers as well.
Ps. Hope you don't own bonds.
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