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The Federal Reserve reduced short-term interest rates to almost zero and took unconventional monetary policy measures to place downward pressure on longer-term interest rates starting back in 2008. This was their response to our nations continuing ongoing current economic contraction. Consequently, this has resulted in higher debt levels whereby the debt has exploded by almost 250% within a decade.
It has been financed through the selling of U.S. Treasuries to the public. The Federal Reserve believes that a dramatic rise in debt levels would lead to inflation or hyperinflation. The inflation that they expected to occur never materialized. The reason that inflation never returned was because we were already in a economic deflationary business cycle.
Central Bankers continue to keep the money flowing, but, at some point, the government must realize that it is impossible to spend more than you earn! All this debt must eventually be paid back or be defaulted on!
The basic idea was to have the banks directly lend to people which, in turn, would encourage them to spend more resulting in growth from aggregate demand. However, it failed to reach out to the working-class population.
Lower interest rates are meant to facilitate easy credit to the corporations which use them to create new jobs and increase wages. This provides job security and extra disposable income into the hands of people, hence, consumption increases. However, since the last financial crisis, the money has been used by the corporations to buy stocks and dish out dividends, thereby, leading to a massive stock market rally but also to a lower growth environment within the economy. Fewer new jobs were created and wage increases are languishing at their slowest pace since 1997, due to which, people are reluctant to spend which, in turn, is leading to lower inflation. The chart below displays the lack of the turnover of individuals monies within the economy. As the velocity of money is decreasing, financial transactions are contracting throughout the entire economy, between individuals and businesses.
Global Central Bankers moved to negative interest rates to get money out of the banks and into the hands of Main Street. If this occurred, people could leverage these low rates into a positive rate of return. However, this did not happen.
This monetary policy of extraordinarily low interest rates has led to the creation of the asset bubbles in stocks. Lower rates also distorted investment decisions. In retrospect, the Federal Reserve rate hike, last December 2015, is viewed as monetary malpractice. The next hike is on hold and there is already talk of QE 5. The Federal Reserve believes that this is likely to forestall turmoil in markets, but investors should be very worried. In fact, it is most probable that 2016 will not be a replay of 2008. It will be much worse!
hey have created the Wealth Effect by levitating equity markets rather than allowing corporations to make money the old-fashioned way!
U.S. Corporations have experienced five successive quarters of declining corporate profits. This is a major red flag that should warn investors to take out insurance against the next big decline in the equity markets!
The picture remains cloudy and it is difficult to interpret in a world where key signals have been distorted by Central Bank Repression.