In the modern corporate landscape, few professions operate without established performance standards. There is an overwhelming focus on quantifiable metrics that gauge success. Whether it’s gross margin, operating margin, or any other financial measure, businesses rely heavily on data to drive decisions.
If it can be measured, it is likely being tracked. From profit margins to earned value, companies maintain a plethora of spreadsheets, charts, and graphs that detail performance. They continuously analyze key questions:
- Is the enterprise on track?
- What are the future projections?
- Are profits increasing?
- How do costs compare to revenue?
- Where are funds being disproportionately spent?
While these metrics provide vital insights, they can also drain the creativity and enjoyment from business. Time spent analyzing data often leaves little room for innovation or calculated risk-taking.
However, these assessments are crucial. They enable managers to implement small corrections continuously, ensuring that operations don’t veer off course. Ultimately, their roles hinge on this level of oversight.
The Illusion of Control
This is the reality of the corporate world, likely mirroring your own experience. However, it starkly contrasts with the operational environment of the Federal Reserve.
Unlike corporations, the Fed can spend without budget considerations and borrow without limits. Furthermore, if errors occur, they can often rectify them with additional adjustments. Recently, the Fed Chair acknowledged the lack of rigid metrics:
“There’s no formula and there’s no mechanical answer that I can give you about when the first rate increase will occur,” stated Janet Yellen during her testimony before the Senate Banking Committee. “It will depend on the progress of our economy and how we assess it based on a variety of indicators.”
Essentially, this means decisions are made on the fly, driven by instinct rather than firm standards. They may be navigating blindly, unaware of potential peril ahead.
Monetary policy transcends the boundaries of structured science, diverging significantly from the operational principles of a profitable business. It resembles more of a chaotic chance game, akin to “throwing darts in a blizzard.”
The Effects of Wealth Consumption
It is beyond any single individual’s capability to accurately determine the cost of money. The Fed attempts this, yet their intervention often leads to misleading signals that distort economic realities.
When governmental bodies set interest rates artificially low and below inflation rates, it unearths extraordinary and often unintended consequences. Asset prices soar, junk bond yields plummet, and companies engage in share buybacks.
However, such inflated prices inevitably correct themselves when the Fed can no longer artificially sustain interest rates. Ultimately, it is the market—comprised of real lenders and borrowers—that dictates the true interest rate, not a group of appointed officials armed with graphs and devoid of clear guidelines.
For instance, yields on the 10-Year Treasury note recently fell below 2.5%. Who, in their right mind, would invest in such an offer? Probably no one, except the Fed itself.
Currently, the 12-month Consumer Price Index (CPI) stands at 2.1%. This implies that, when adjusted for inflation, Treasuries yield a mere 0.4%. However, many believe that the real inflation rate is significantly higher than reported, leading to the conclusion that Treasuries are in fact presenting a negative yield—effectively consuming wealth.
This extreme market distortion is a testament to the Fed’s ability to manipulate circumstances in a manner that the average person cannot replicate. In contrast, most of us would likely find ourselves out of a job under such conditions.
Sincerely,
MN Gordon
for Economic Prism
