Wealth Consumption

There aren’t many professions out there where there are no readily applied and real-time performance standards.  In fact, in the corporate world today, there’s a fanatic fixation on tying numerous metrics to performance.  You name it…

If it’s measurable, verifiable, and reportable…then performances are planned and benchmarked against it.  Gross margin, operating margin, net margin, profit after tax, net operating profit after tax, earnings before interest and tax, earned value, and on and on.  There are spreadsheets, charts, and graphs for all of them.

Where is the enterprise according to plan?  Where is it going?  Are profits going up?  What about costs?  What is the percent spent verses the percent complete?  Where are costs being disproportionally spent?

All of these metrics, in our opinion, have taken all the fun out of business.  There’s no energy left for creativity.  There are no allowances left for taking deliberated risks.  Not when days are spent tracking and charting performances.

Nonetheless, they do serve a valuable purpose.  Moreover, they provide critical information and signals that allow managers to make corrections as they go.  By making a lot of small corrections along the way, they’re able to keep things from ever getting too far off the tracks.  Their jobs depend on this.

Throwing Darts in Blizzard

This is the working world we operate in.  It is likely the working world you operate in.  But it is not the world of the Federal Reserve.

For the Fed can spend without a budget.  They can borrow without limits.  What’s more, when they make a mistake they can correct it by making another.  Indeed, earlier this week, the top Fed head admitted they have metrics without standards…

“There’s no formula and there’s no mechanical answer that I can give you about when the first rate increase will occur,” said Fed Chair Janet Yellen during the question-and-answer portion of her testimony before the Senate Banking Committee on Tuesday.  “It will depend on the progress of our economy and how we assess it based on a variety of indicators.”

In other words, they’re just winging it.  They’re making it up as they go, without any particular standard to guide their decision making.  They could be heading straight for a train wreck and have no possible idea.

But why should we expect any different?  Monetary policy isn’t a science.  Nor is it anything like running a profitable business.  Instead, it’s more like throwing darts in a blizzard.

Wealth Consumption

For it’s not in any one man- or- woman’s power to properly set the price of money.  The Fed certainly tries, with the effect of sending false signals to lenders and borrowers.  These false signals produce amazing distortions in the economy.

When some government meddler blindly sets the price of money artificially low – below the rate of inflation – extraordinary and unintended consequences occur.  Stocks go up.  Junk bond yields go down.  Businesses borrow money to buy back shares of their own company.

Of course, these inflated asset prices will reverse when the Fed loses their ability to artificially control interest rates.  Ultimately, the market – willing lenders and borrowers – determines the real rate of interest which should be charged.  Not an appointed stooge armed with graphs and charts…and no standards to guide their decision making.

Yields on the 10 Year Treasury note dropped below 2.5 percent yesterday.  Who in their right mind would make this investment?  We can’t think of anyone, with the exception of the Fed.

For the current 12-month CPI, is 2.1 percent.  That means, in inflation adjusted terms, treasuries are yielding just 0.4 percent.  But everyone knows inflation is much, much higher than the government number crunchers let on.  What we mean is treasuries are currently offering a negative yield.  They’re consuming wealth.

Only the Fed could distort markets in such a way to pull off this achievement.  The rest of us would be out of a job.

Sincerely,

MN Gordon
for Economic Prism

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