Through history men and women have conjured up the belief that they can control certain forces of nature and in so doing make their grandest dreams a reality.
The Alchemists were most noted for attempting to “transmute” basic metals into gold. They also sought to create the panacea for every disease. Real success never came to them but not for the lack of trying. Secrecy was always their watch word until a German folk tale, Rumpelstiltskin, showed the light on the foolish idea of spinning straw into gold. The Grimm Brothers exposed the myth of the Alchemist’s power as not a folk tale but a fairy tale.
Before there was seeding of clouds with silver iodide crystals from an airplane there was the American Indian medicine man, the Rainmaker. He exercised various rituals and incantations to cause rain. When he danced and was successful his power held him in awe by the members of the tribe. If he was unsuccessful it was simply a matter of tribal members not believing enough or the rain would come but not at this time. Regardless, the power of the Rainmaker was never questioned. It never dawned on any tribal member that it would rain, or not, regardless of any incantations. The power of nature was uncontrollable even for a medicine man.
From alchemy to rainmaking it is a natural leap to Janet Yellen and the Federal Reserve tribe.
Central to all the Feds actions and basis for their Keynesian strategy is the belief that the power of the business cycle can be controlled. Demand, it is thought, can be created. If you make, and keep, interest rates low enough, for an indeterminate period of time, the consumer MUST consume and the borrower MUST borrow. In so doing growth will be stimulated. The business cycle will be broken. The Central Bank’s power will be exhibited.
Demand results in sales. Once the item is purchased it must be replaced, manufactured. Manufacturing requires people. The employment of people suggests wages and rising household income. That in turn facilitates more purchases and the cycle begins all over again. Controlling the cycle through interest rates would seem as simple as converting straw to gold or dancing for rain.
Unfortunately all of the Fed’s efforts can be summed up in another old idea. “You can lead a horse to water but you can’t make him drink.” The consumer is not consuming in spite of the zero interest rate policy. The consumer is now aware of the negative interest rate policy and continues to act accordingly. Robotics, offshoring, geopolitics, stock buybacks all contribute to making the Business Cycle uncontrollable regardless of the incantations and rituals chanted by Janet and her tribal members.
Ultimately, like the Alchemists and Rainmakers of old, the Federal Reserve’s attempt at trying to control one of the strongest forces in nature, the Business Cycle, will come to a shattering end. Unfortunately much pain and suffering will be endured until the Central Bank is deemed not a “folk tale” but a “fairy tale.” A “fairy tale” WITHOUT the proverbial “they lived happily ever after.”