A Collapse in Credibility

Tomorrow (06.15.2016) the Federal Reserve will announce their latest monetary policy maneuver. Less than two weeks ago many professional economists and pundits thought that an increase in interest rates was a foregone conclusion. Today the implied probability of a rate hike sits at precisely 0%. Since economists have a nagging habit of needing to explain everything, blame has been portioned out to a variety of sources. The leading suspect was the ghastly jobs report for May that threw cold water on the narrative that the economy is doing great and is sufficiently strong to endure higher interest rates.

Before I jump into my main point, I should point out that if we give it more than a moment’s thought then we should conclude that getting a precise number of jobs created for a month in real time is a futile exercise. The folks over at the Bureau of Labor Statistics certainly agree, because they don’t even try. Instead, the enlightened economists and statisticians come up with a model based on a sequence of assumptions and seasonal adjustments in order to give the data just enough freedom to conform to their view of what the numbers should be. Take a look at the magic of economic modeling in the form of the Birth/Death adjustment: BLS Birth/Death Adjustment

Essentially, the good people over at the government assumed that in May enough new businesses came online to account for 224,000 jobs. To put it politely, this assumption is total garbage. It is based on nothing other than the need to print a headline number that matches a particular narrative. However, because all of the people can’t be fooled all of the time, the number must also be in a sweet spot that doesn’t raise any red flags. For instance, if the BLS claimed that 1,234,000 jobs were created in May there would be a total loss of credibility – or the assumption that a typo was involved. Therein lies the rub.

We are entering into a period where the trend of eroding institutional credibility passes an inflection point and begins to speed towards collapse. Why should anyone believe what the Federal Reserve says when they are quite literally always wrong about their economic expectations? Why do we trust government and media outlets that incessantly demonstrate their capacity to and perhaps even zest for lies and deception? How can the desperately inflammatory rhetoric of those who want Britain to remain in the European Union be taken seriously? At what point will enough people simply say to these marauders ‘tell us the truth or we’ll replace you with someone who will’?

I can’t predict the timing of this switch in sentiment, but when it occurs it will be jaw-dropping in speed and intensity. A switch will be flipped and there will be no way back. The Fed could flip the switch by surprising everyone with a rate hike tomorrow, but I sincerely doubt that they would do that because they would take the blame for the chaos in the markets that would follow. The Brits could flip the switch by pulling the rug out from under the European Union – amidst interesting commentary that plans for an EU Army could be announced on June 24th, one day after the Brexit vote. There are too many moving pieces for me to predict the precise timing, but the trend is clear.

If you’re in the camp that still ascribes credibility to various institutions, then you should consider what it would take for them to lose that credibility that hasn’t already occurred. If these institutions have already lost their credibility in your eyes, then do your best to ask, research, and understand the potential consequences of a more general collapse in credibility. Always remember that the only thing holding up our economy and our currency here in the United States is confidence. How long can current trends continue before a tipping point in confidence is reached? If even 1% of the money Americans have in the banks were withdrawn tomorrow the system wouldn’t make it to Friday. We must be proactive because the change will be too rapid for us to react. Take necessary action while the window of opportunity is still open.

I discussed these topics and more – including a quick overview of a Ponzi Scheme – this past Saturday during my radio debut on Brothers on the Wall: Brothers on the Wall – 06.11.2016 (Also check out the show’s website: Brothers on the Wall)

-Steven

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