There
is
no sense that inflation is coming
down,” said
Federal Reserve Chairman
Jerome Powell
at a November 2 press conference, —
this despite eight months of
aggressive interest rate hikes and
“quantitative tightening.” On
November 30, the stock market
rallied when he said
smaller interest rate increases are
likely ahead and could start in
December. But rates will still be
increased, not cut. “By any
standard, inflation remains much too
high,” Powell said. “We will stay
the course until the job is done.”
The Fed is
doubling down on what appears to be a
failed policy, driving the economy to the brink
of recession without bringing prices down
appreciably. Inflation results from “too much
money chasing too few goods,” and the Fed has
control over only the money – the “demand”
side of the equation. Energy and food are the key
inflation drivers, and they are on the supply side. As noted
by Bloomberg columnist Ramesh
Ponnuru in the Washington Post in March:
Fixing supply chains is of course
beyond any central bank’s power. What the Fed
can do is reduce spending levels, which would
in turn exert downward pressure on prices. But
this would be a mistaken response to
shortages. It would answer a scarcity of goods
by bringing about a scarcity of money. The
effect would be to compound the hit to living
standards that supply shocks already caused.
So why is the
Fed forging ahead? Some pundits think Chairman
Powell has something else up his sleeve.
The
Problem
with “Demand Destruction”
First, a
closer look at the problem. Shrinking demand
by reducing the money supply – the money
available for people to spend – is considered
the Fed’s only tool for fighting inflation.
The theory behind raising interest rates is
that it will reduce the willingness and
ability of people and businesses to borrow.
The result will be to shrink the money supply,
most of which is
created by banks when they make
loans. The problem is that shrinking
demand means shrinking the economy – laying
off workers, cutting productivity, and
creating new shortages – driving the economy
into recession.
Demand has
indeed been shrinking, as evidenced in a
November 27 article on ZeroHedge titled: “The
Consumer Economy Has Completely
Collapsed – ‘It’s A Ghost Town’ for
Holiday Shopping Everywhere.” But retailers have cut their
prices about as far as they can go. While the
rate of
increase in producer costs is slowing, those costs are still
rising; and retailers have to cover their
costs to stay in business, whether or not they
have customers at their doors. Rather than
lowering their prices further, they will be laying
off workers or closing up shop.
Layoffs are on the rise, and data
reported on December 1 showed that U.S. factory activity is
contracting for the first time since the
lockdowns of the Covid-19 pandemic.
It is not
just activity in shopping malls and factories
that has taken a hit. The housing market has
fallen sharply, with
pending home sales dropping 32% year-over-year in October. The stock
market is also sinking, and the cryptocurrency
market has fallen off a cliff. Worse, interest
on the federal debt is shooting up. For years,
the government has been able to borrow nearly
for free. By 2025 or 2026, according to
Moody’s Analytics,
interest payments could exceed the country’s entire defense budget,
which hit $767 billion in fiscal 2022. That
means major cuts will be needed to some
federal programs.
Breaking the “Fed Put”
In the face
of all this economic strife, why is the Fed
not reversing its aggressive interest rate
hikes, as investors have come to expect?
Former British diplomat and EU foreign policy
advisor Alastair
Crooke
suggests that the Fed’s goal is something
else:
The Fed … may be attempting to
implement a contrarian, controlled demolition
of the U.S. bubble-economy through interest
rate increases. The rate rises will not slay
the inflation “dragon” (they would need to be
much higher to do that). The purpose is to
break a generalized “dependency habit” on free
money.
Danielle
DiMartino Booth, former advisor to Dallas
Federal Reserve President Richard Fisher,
agrees. She
stated in an interview with financial
journalist and podcaster Julia LaRoche:
Maybe Jay Powell is trying to kill
the “Fed put.” Maybe he’s trying to break the
back of speculation once and for all, so that
it’s the Fed – truly an independent apolitical
entity – that is making monetary policy, and
not speculators making monetary policy for the
Fed.
The “Fed put”
is the general idea that the Federal Reserve
is willing and able to adjust monetary policy
in a way that is bullish for the stock market.
As explained in a Fortune Magazine article titled “The
Stock Market Is Freaking Out Because of the End of Free Money –
It All Has to Do with Something Called ‘The
Fed Put:’”
For decades, the way the Fed enacted
policy was like a put
option contract, stepping in to prevent disaster
when markets experienced serious turbulence by
cutting interest rates and “printing money”
through QE [quantitative easing] .
… Since the beginning of the pandemic,
the Fed had supported markets with
ultra-accommodative monetary policy in the
form of near-zero interest rates and quantitative
easing
(QE). Stocks thrived under these loose
monetary policies. As long as the central bank
was injecting liquidity into the economy as an
emergency lending measure, the safety net was
laid out for investors chasing all kinds of
risk assets.
… The idea that the Fed will come to
stocks’ aid in a downturn began under Fed
Chair Alan Greenspan. What is now the “Fed
put” was once the “Greenspan put,” a term
coined after the 1987 stock market crash, when
Greenspan lowered interest rates to help
companies recover, setting a precedent that
the Fed would step in during uncertain times.
But the “free
money” era seems to be over:
The regime change has left markets
effectively on their own and led risk assets,
including stocks and cryptocurrencies, to
crater as investors grapple with the new norm.
It’s also left many wondering whether the era
of the so-called Fed put is over.
Killing the Parasite
That Is Killing the Host
The Fed put
favors the rich – investors in the stock
market, the speculative real estate market,
the multi-trillion dollar derivatives market.
It favors what
economist Michael Hudson calls the “financialized” or “rentier”
economy – “money making money,” formerly
called “unearned income” – which drives up
prices without adding productive value to the
“real” economy. Hudson calls
it a parasite, which is sucking out profits that
should be going toward building more factories
and other economic development.
By
backstopping the financialized economy, the
Fed has been instrumental in widening the
income gap of the last two decades, pushing
housing prices to heights that are
unaffordable for first-time homebuyers,
driving up rents and educational costs, and
crushing entrepreneurs. DiMartino Booth
explains:
Fed policy feeds passive investing …
because you don’t have to carefully allocate
your resources. You simply have to be long the
NASDAQ and sit there with your money. What
does that feed? It feeds the monopolization of
America. The largest companies, the companies
such as Google and Microsoft … if there is a
competitor in their world they simply absorb
them. They acquire them, which quashes … the
entrepreneurial spirit that made this country
so great.… If the Fed succeeds, Main Street
will be the main winner.
… [T]he trick here is for the Fed to
not break anything big, and that’s the
delicate balancing act, … if … they can
slowly, methodically take the rot out of the
system without breaking anything big that
forces them to pull back.
The “rot” in
the system is particularly evident in the
housing market:
Since the financial crisis, there’s
been a lot of private equity that’s entered
the space and snapped up all these homes and
they’re renting them … It’s definitely
exacerbated this housing cycle. It’s added an
element of speculation because so many of them
are all cash buyers. Don’t get me wrong,
they’re levered — it is borrowed money — but
they’re coming in as all cash buyers, and that
I think created a lot of these massive bidding
wars …
DiMartino
Booth discusses the risk of derivatives
contagion using the example of AIG, a giant
insurance
company brought down by derivatives
exposurein 2008:
During the financial crisis … we
rescued AIG because we didn’t want to actually
see what it looked like on the other side of
that cliff had derivatives actually been
unwound, and what that contagion might have
looked like.… We never tested the derivatives
market, so that risk continues to lurk out
there…. I’m not a cheerleader for there being
some kind of a systemic risk event, and I do
hope again that the Fed succeeds in managing
this unwind, in seeing risk pulled out of the
system, but one company at a time, not
something that makes the global financial
system implode.
Financial
blogger Tom Luongo takes this argument further. He
maintains that Fed Chair Powell is out to break
the offshore eurodollar market – the speculative, unregulated
offshore money market where the World Economic
Forum and “old European money” (including
mega-funds Blackrock and Vanguard) get the
cheap credit funding their massive spending
power. That is a complicated subject, which
will have to wait for another article; but the
principle is the same. Without the backstop of
the Fed’s virtually free dollars to satisfy a
surge in demand for them, these
highly-leveraged dollar investments will
collapse. (“Leverage” is an investment
strategy that uses borrowed capital to
increase potential returns. The risk is that
if the investment sours, losses are also
increased.)
Pushing “Until Something
Breaks”
Whether or
not popping these raging speculative bubbles
is the goal, the Fed’s interest rate hikes are
having that effect. According to a November
25, 2022
article on CNBC.com, “Interest rate hikes have choked
off access to easy capital ….” As a result,
“Investors have lost roughly $7.4 trillion,
based on the 12-month drop in the Nasdaq.”
House prices
are also tumbling. The third quarter of 2022
saw the
biggest home equity drop ($1.3 trillion) ever recorded.
Fortune Magazine quotes Moody’s
Analystics: “Before prices began to decline, we
were overvalued [nationally] by around 25%.
Now, this means prices will normalize.
Affordability will be restored.”
In 2021, 25%
of all real estate purchases were being made
by institutional investors. In the third
quarter of 2022, investor buying of homes
tumbled 30%. Blackstone, a real estate income
trust notorious for buying up homes and
turning them into rentals, was reported on December 2 to be
limiting withdrawals from its $125 billion
property fund as investors rush for the exits.
George Cipolloni, portfolio manager at Penn
Mutual Asset Management, said the U.S. Federal
Reserve’s sharp interest rate increases have
not “worked all the way through the economy
yet,” and that he
expects to see “more Blackstone-type
news events coming forward in the next year.”
In May 2022,
BlackRock stock (BLK) was down
30% for the year. And by November, the
cryptocurrency market cap had
plummeted from $3 trillion to $900
billion , with Bitcoin, its largest
component, down 77% year-over-year.
Currently
featured in the news is the crypto exchange
FTX and its 30-year-old billionaire owner Sam
Bankman-Fried. FTX was exposed as a Ponzi
scheme by the receding tide of dollar
liquidity, catching Bankman-Fried and team “swimming
naked
when the tide went out.” According to Swiss bank UBS’ chief of
investment, “FTX’s collapse shows Federal Reserve
tightening is
crushing speculative assets.” Outing FTX is
thought to be only the beginning of a succession of exposures of
financial frauds to come.
The Delicate Balancing
Act
Looked at in
that light, breaking the Fed put sounds like a
good idea. But can it be done without breaking
the whole economy? More reputable
establishments than FTX are at risk. Rate
hikes seriously impact
local retailers and wholesalers. In September, risky leveraged bets
brought UK pension funds near to
collapse, forcing the Bank of England to
reverse course and lower its interest rates.
And there is the stress in the U.S. Treasury,
which is dealing with an enormous interest tab
on its debt.
Other
disturbing outcomes are being envisioned. One
podcaster posits that the economy is
intentionally being driven to collapse, at
which point the
government will declare a “bank
holiday”as Pres. Roosevelt did in 1933. When
the banks reopen, he says, we will have a
“currency reset” in the form of a central bank
digital currency (CBDC). The
concern is that it will be a “programmable”
currency, one that can be regulated or turned
off altogether based on the user’s “social
credit” score, as is already happening in
China.
Alarmed
observers note that the New York Fed recently
embarked on a pilot project for a CBDC
(Central Bank Digital Currency). But defenders
point out that it is
a “wholesale” CBDC, used just for transfers between
banks, particularly overseas transfers.
Settlement times of foreign exchange
transactions typically take two days. Project
Cedar, the New York Innovation Center’s pilot
project, found that settlement for foreign
exchange transactions using distributed ledger
technology can happen in 10 seconds or less,
significantly reducing risks. Whether that
technology will be developed and used by the
Fed has not yet been determined. DiMartino
Booth observes that Powell and other Fed
officials have frequently
questioned the need for a “retail” CBDC, in which Fed
accounts would be opened directly with the
public.In a Substack article titled “A Grand
Unified Theory of the FTX Disaster,” author and educator Matthew
Crawford lays out a darker possibility – that
the end goal of the powerful network of
players behind the FTX scheme is not just a
U.S. CBDC but a “Global Digital Central Bank”
run by international powerbrokers. Whether or
not the Federal Reserve intended it,
aggressive interest rate hikes could expose
this sort of parasitic corruption and remove
the money machine that is its power source.
Rising from the Ashes
Meanwhile,
the supply-side issues inflating the prices of
food, energy and other key resources need to
be addressed. Those are matters for federal
and state legislatures, not the Fed. In the
1930s, a federal financial institution called
the Reconstruction Finance Corporation pulled
the economy out of the Great Depression, put
people back to work, and crisscrossed the
country with new infrastructure, including the
dams and power lines that brought electricity
to rural America. (See my earlier article here.) The government acted quickly and
decisively because times were desperate.
A bill for a
National
Infrastructure
Bank modeled on the Reconstruction
Finance Corporation is now before Congress, H.R.
3339. For a local government bank, a
viable model is the publicly-owned Bank of
North Dakota, which pulled that state out of a
regional agricultural depression in the 1920s.
(See here.) As an iconic Depression-era poster
declared, “We can do it!” We just need to roll
up our sleeves and get to work.
This
commentary
is also posted on Sheerpost.com
|
|
