Federal Reserve harms the economy

2013-12-06 15:25, Edited at: 2013-12-09 10:44

I think it is very important for the world´s richest politicians that they must make visible the factors which dampening the economy. I have seen how all companies are using their strategies to oppose the central bank interest rate policy. The dismissal of staff has given positive cost savings. All companies maximizes the profit margins despite a weak turnover. Profit raises dividend. The unemployment rate not drops as it was hoped. Despite low interest rates and stimulans.

It is time to reforming finance policies by setting up an emergency fund. All largest companies must every quarter set aside 3% of profit before tax to the fund during the five-year period. This for a future support in the event of a economic crisis, so that taxpayers do not have to pay more.

Regarding the economy, I want to point out that the Fed has made big mistakes in their judgment. It is known that the Federal Reserve chairman Ben Bernanke and Vice Chair Janet Yellen fattens bank owners through an insane strategy with super-low interest rates while they let the Fed lend up and deliver the equivalent of 85 billion dollars each month. They know that the money goes straight into the pockets of bank owners and ordinary taxpayers are left with the rapidly growing debt.

To temporarily boost the economy is totally ok, but this has now been going for over 30 years and the situation is getting worse every year. Mr Bernanke and his complaisant dovish colleagues constitutes a dangerous development of the economy. I do not think their plan is to deliberately bankrupt taxpayers to benefit the bank owners, they become rather exploited by bank owners, who threatens that there will be chaos and riots if they do not continue pumping more money into this gigantic financial bubble.

A dying patient with blood clots can be pumped full of drugs to prolong his life, the eventually the body will stop working. It is the same with the financial system.

Obviously, there will be chaos and riots when the whole system collapses, but to constantly defer the problem is a bad solution and just makes the problem ever bigger. Just look at the southern European countries, who have not been able to manage the balancing act.

The growth in value of equities and housing has increased since 1980 in the U.S. and the EU is exclusively reliant on artificial capital injections and changed laws to allow banks to lend more money than they actually have.

Today, banks have the legal right to lend 20 times more than they had to lend in 1980. Therefore amending the laws governing how much banks are allowed to lend in relation to the equity and customer deposits are needed. At the moment, a bank need only to have 1 billion in euity and customer deposits to lend 25 billion. This would explain clearly why the whole world has problems today.

In one aspect it does successfully stimulate the economy through interest rates that are so low that noone cares about the costs of goods and service they buy. This, in combination with the fact that bank earn huge sums by lending money, leading to that people are tricked into thinking they are buying homes and stocks that have ”gone up in value”.

For the past 30 years a culture has been cultivated based on consumption growth, which can be seen both important and good on the one hand, but has turned out, unfortunately, to be wrong. Keynesian economic theory should be scrapped immediately. It does not work in modern times.

I want to show you a graph development between the Dow Jones Industrial Index and the U.S. governmental debt. It covers the period between 1970 and 2013. Before 1970, both the Dow Jones Index and U.S. government debt has been close to each other. The deregulation of the credit markets that began in the 1970s has changed the picture. Then, came the liberalization of lending rates and the liberalization of the ceiling.

These deregulation triggered a vigorous expansion in lending to companies and individuals. The development led to financial crises in different periods. When major deregulations definitely was settled in 1982 then the Dow Jones Indexes rose upward while U.S. government debt surged.

The Dow Jones index in the early 1970s was traded between 600 and 950, while the U.S. national debt amounted to 371 billion dollars. 40 years later, the Dow Jones Index traded up to 16.097 and U.S. government debt shot up to 17.200 billion dollars. It has formed a gigantic gap between the stock market and the government debt. It also applies to other countries in the world.

The table show how the Dow Jones Index and U.S. government debt developed in 40 years. It is clear that we have a market that only speculates at great hopes of better ernings and margins. Rising stock prices will lead to increased demand for goods and products. The credit market has expanded very rapidly. But the market has forgotten about the runaway U.S. national debt which in the furure can be very hard against the financial system. Therefore it is very important to the creation a new index that counts only on stock market indices and government debt. This is to give the market a better control over the development of real economy. It still missing on the market today.

Gigantic stimulus in the U.S., China and Japan have already put the ECB in a very difficult situation.The ECB has cut interest rates several times but it has not helped to support economy in the right direction. Why?

It's the Federal Reserve that is biggest problem. They continue to keep the monetary policy throttle hard pressed for a while and this has helped market interest rates to have fallen back in the fall and that the stock market continues to go strong.

Like a curling parent continues the Federal Reserve to sweep away any barriers for economic recovery, and the financial market thank and receive. Fed president for Philadelphia, Charles Plosser was the only one who objected to the Fed's commitment to continue with quantitative easing and zero interest rate. Mr Charles Plosser pointed out several times that the stimulus has already caused an unstable financial market with rising prices. It's not inflation that is the problem, without zero interest rate that may lead to disruptions in financial markets and misallocation of resources.

The Federal Reserve is thus caught in a leghold trap because of their fear of chaos and riots in the market, if they drag down asset purchases. It is totally wrong that the economy will controlled by greedy investors on the stock market.

It is important tat the world´s politicans to expose the factors dampening the economy. Despite low interest rates and other economic stimulus measures unemployment will not decrease worldwide. To a large degree, this is because companies oppose central banks interest rate policy, taking advantage of the situation for their own good. Laying off staff instead of hiring, and thus maximizes profits despite low sales. Yet rise inflation not at this.

Policticans and taxpayers will be the other hand, sharply drawn by the nose.

It is therefore important to reform fiscal and tax policies to close the loopholes. One way could be to create an international emergency fund, where companies each quarter over a five year period, for example, allocate 3 percent of earning before tax. This is for future support in the event of an economic crisis, making the taxpayers do not pay more.

So why aren´t they socially responsible?

I think it is extremely important for the world's economists to speak up to stand up to the Federal Reserve, the Bank of Japan and Bank of China encouraging them to cease stimulus because they are actually hurting the economy. It has been reported that revenues are increasing but spending is also increasing. Therefore, many businesses and individuals are taking additional loans, to manage their economy. The credit must be reviewed with new restrictive rules. This is to make both individuals and businnesses less dependent.

One can not pretend that the economy is doing well. Federal Reserve, The Bank of Japan and Bank of China must start taking the tempo and let the economy be self-sustaining. Many of the world's central banks and politicians have worked for a long time for the development of a world economy. I hope our time politicians can come up with new initiatives, which can be a role model and guide for the world economy. It would also restore them to their original position and dignity.