{"id":918680,"date":"2022-12-11T03:43:25","date_gmt":"2022-12-11T03:43:25","guid":{"rendered":"https:\/\/dissidentvoice.org\/?p=136076"},"modified":"2022-12-11T03:43:25","modified_gmt":"2022-12-11T03:43:25","slug":"what-does-the-feds-jerome-powell-have-up-his-sleeve-2","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2022\/12\/11\/what-does-the-feds-jerome-powell-have-up-his-sleeve-2\/","title":{"rendered":"What Does the Fed\u2019s Jerome Powell Have Up His Sleeve"},"content":{"rendered":"

“There is no sense that inflation is coming down,\u201d said Federal Reserve Chairman Jerome Powell<\/a> at a November 2 press conference, \u2014 this despite eight months of aggressive interest rate hikes and \u201cquantitative tightening.\u201d On November 30, the stock market rallied when he said<\/a> smaller interest rate increases are likely ahead and could start in December. But rates will still be increased, not cut. \u201cBy any standard, inflation remains much too high,\u201d Powell said. \u201cWe will stay the course until the job is done.\u201d<\/p>\n

The Fed is doubling down on what appears to be a failed policy<\/a>, driving the economy to the brink of recession<\/a> without bringing prices down appreciably. Inflation results from \u201ctoo much money chasing too few goods,\u201d and the Fed has control over only the money \u2013 the \u201cdemand\u201d side of the equation. Energy and food are the key inflation drivers<\/a>, and they are on the supply side. As noted by Bloomberg columnist Ramesh Ponnuru in the Washington Post<\/em><\/a> in March:<\/p>\n

Fixing supply chains is of course beyond any central bank\u2019s 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.<\/p><\/blockquote>\n

So why is the Fed forging ahead? Some pundits think Chairman Powell has something else up his sleeve.<\/p>\n

The Problem with \u201cDemand Destruction\u201d<\/strong><\/p>\n

First, a closer look at the problem. Shrinking demand by reducing the money supply \u2013 the money available for people to spend \u2013 is considered the Fed\u2019s 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<\/a>. The problem is that shrinking demand means shrinking the economy \u2013 laying off workers, cutting productivity, and creating new shortages \u2013 driving the economy into recession.<\/p>\n

Demand has indeed been shrinking, as evidenced in a November 27 article on ZeroHedge<\/em> titled: \u201cThe Consumer Economy Has Completely Collapsed \u2013 \u2018It\u2019s A Ghost Town\u2019 for Holiday Shopping Everywhere<\/a>.\u201d But retailers have cut their prices about as far as they can go. While the rate<\/em> of increase in producer costs<\/a> 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<\/a> or closing up shop. Layoffs are on the rise<\/a>, and data reported on December 1<\/a> showed that U.S. factory activity is contracting for the first time since the lockdowns of the Covid-\u200b19 pandemic.<\/p>\n

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%<\/a> 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\u2019s Analytics, interest payments could exceed<\/a> the country\u2019s entire defense budget, which hit $767 billion in fiscal 2022. That means major cuts will be needed to some federal programs.<\/p>\n

Breaking the \u201cFed Put\u201d<\/strong><\/p>\n

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<\/a> that the Fed\u2019s goal is something else:<\/p>\n

The Fed \u2026 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 \u201cdragon\u201d (they would need to be much higher to do that). The purpose is to break a generalized \u201cdependency habit\u201d on free money.<\/p><\/blockquote>\n

Danielle DiMartino Booth, former advisor to Dallas Federal Reserve President Richard Fisher, agrees. She stated<\/a> in an interview with financial journalist and podcaster Julia LaRoche:<\/p>\n

Maybe Jay Powell is trying to kill the \u201cFed put.\u201d Maybe he\u2019s trying to break the back of speculation once and for all, so that it\u2019s the Fed \u2013 truly an independent apolitical entity \u2013 that is making monetary policy, and not speculators making monetary policy for the Fed.<\/p><\/blockquote>\n

The \u201cFed put\u201d 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<\/em> article titled “The Stock Market Is Freaking Out<\/a> Because of the End of Free Money \u2013 It All Has to Do with Something Called \u2018The Fed Put\u2019\u201d:<\/p>\n

For decades, the way the Fed enacted policy was like a put option contract<\/a>, stepping in to prevent disaster when markets experienced serious turbulence by cutting interest rates and \u201cprinting money\u201d through QE [quantitative easing] .<\/p>\n

\u2026 Since the beginning of the pandemic, the Fed had supported markets with ultra-\u200baccommodative monetary policy in the form of near-\u200bzero interest rates and quantitative easing (QE)<\/a>. 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.<\/p>\n

\u2026 The idea that the Fed will come to stocks\u2019 aid in a downturn began under Fed Chair Alan Greenspan. What is now the \u201cFed put\u201d was once the \u201cGreenspan put,\u201d 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.<\/p><\/blockquote>\n

But the \u201cfree money\u201d era seems to be over:<\/p>\n

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\u2019s also left many wondering whether the era of the so-\u200bcalled Fed put is over.<\/p><\/blockquote>\n

Killing the Parasite That Is Killing the Host<\/strong><\/p>\n

The Fed put favors the rich \u2013 investors in the stock market, the speculative real estate market, the multi-trillion dollar derivatives market. It favors what economist Michael Hudson calls<\/a> the \u201cfinancialized\u201d or \u201crentier\u201d economy \u2013 \u201cmoney making money,\u201d formerly called \u201cunearned income\u201d \u2013 which drives up prices without adding productive value to the \u201creal\u201d economy. Hudson calls it a parasite<\/a>, which is sucking out profits that should be going toward building more factories and other economic development.<\/p>\n

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:<\/p>\n

Fed policy feeds passive investing \u2026 because you don\u2019t 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 \u2026 if there is a competitor in their world they simply absorb them. They acquire them, which quashes \u2026 the entrepreneurial spirit that made this country so great.\u2026 If the Fed succeeds, Main Street will be the main winner.<\/p>\n

\u2026 [T]he trick here is for the Fed to not break anything big, and that\u2019s the delicate balancing act, \u2026 if \u2026 they can slowly, methodically take the rot out of the system without breaking anything big that forces them to pull back.<\/p><\/blockquote>\n

The \u201crot\u201d in the system is particularly evident in the housing market:<\/p>\n

Since the financial crisis, there\u2019s been a lot of private equity that\u2019s entered the space and snapped up all these homes and they\u2019re renting them \u2026 It\u2019s definitely exacerbated this housing cycle. It\u2019s added an element of speculation because so many of them are all cash buyers. Don\u2019t get me wrong, they\u2019re levered \u2014 it is borrowed money \u2014 but they\u2019re coming in as all cash buyers, and that I think created a lot of these massive bidding wars \u2026<\/p><\/blockquote>\n

DiMartino Booth discusses the risk of derivatives contagion using the example of AIG, a giant insurance company brought down by derivatives exposure<\/a> in 2008:<\/p>\n

During the financial crisis \u2026 we rescued AIG because we didn\u2019t 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.\u2026 We never tested the derivatives market, so that risk continues to lurk out there\u2026. I\u2019m 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.<\/p><\/blockquote>\n

Financial blogger Tom Luongo<\/a> takes this argument further. He maintains that Fed Chair Powell is out to break the offshore eurodollar market<\/a> \u2013 the speculative, unregulated offshore money market where the World Economic Forum and \u201cold European money\u201d (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\u2019s virtually free dollars to satisfy a surge in demand for them, these highly-leveraged dollar investments will collapse. (\u201cLeverage\u201d is an investment strategy that uses borrowed capital to increase potential returns. The risk is that if the investment sours, losses are also increased.)<\/p>\n

Pushing \u201cUntil Something Breaks\u201d<\/strong><\/p>\n

Whether or not popping these raging speculative bubbles is the goal, the Fed\u2019s interest rate hikes are having that effect. According to a November 25, 2022 article on CNBC.com<\/a>, \u201cInterest rate hikes have choked off access to easy capital \u2026.\u201d As a result, \u201cInvestors have lost roughly $7.4 trillion, based on the 12-month drop in the Nasdaq.\u201d<\/p>\n

House prices are also tumbling. The third quarter of 2022 saw the biggest home equity drop<\/a> ($1.3 trillion) ever recorded. Fortune Magazine quotes Moody\u2019s Analystics<\/a>: \u201cBefore prices began to decline, we were overvalued [nationally] by around 25%. Now, this means prices will normalize. Affordability will be restored.\u201d<\/p>\n

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<\/a>, 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\u2019s sharp interest rate increases have not \u201cworked all the way through the economy yet,\u201d and that he expects to see \u201cmore Blackstone-type news events<\/a> coming forward in the next year.\u201d<\/p>\n

In May 2022, BlackRock stock (BLK) was down 30%<\/a> for the year. And by November, the cryptocurrency market cap had plummeted from $3 trillion to $900 billion<\/a>, with Bitcoin, its largest component, down 77% year-over-year.<\/p>\n

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 \u201cswimming naked when the tide went out<\/a>.\u201d According to Swiss bank UBS\u2019 chief of investment, \u201cFTX\u2019s collapse shows Federal Reserve tightening is crushing speculative assets<\/a>.\u201d Outing FTX is thought to be only the beginning<\/a> of a succession of exposures of financial frauds to come.<\/p>\n

The Delicate Balancing Act<\/strong><\/p>\n

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<\/a>. In September, risky leveraged bets brought UK pension funds near to collapse<\/a>, 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.<\/p>\n

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 \u201cbank holiday<\/a>\u201das Pres. Roosevelt did in 1933. When the banks reopen, he says, we will have a \u201ccurrency reset\u201d in the form of a central bank digital currency (CBDC). The concern<\/a> is that it will be a \u201cprogrammable\u201d currency, one that can be regulated or turned off altogether based on the user\u2019s \u201csocial credit\u201d score, as is already happening in China.<\/p>\n

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 \u201cwholesale\u201d CBDC<\/a>, 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\u2019s 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<\/a> for a \u201cretail\u201d CBDC, in which Fed accounts would be opened directly with the public.In a Substack article titled \u201cA Grand Unified Theory of the FTX Disaster<\/a>,\u201d author and educator Matthew Crawford lays out a darker possibility \u2013 that the end goal of the powerful network of players behind the FTX scheme is not just a U.S. CBDC but a \u201cGlobal Digital Central Bank\u201d 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.<\/p>\n

Rising from the Ashes<\/strong><\/p>\n

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<\/a>.) The government acted quickly and decisively because times were desperate.<\/p>\n

A bill for a National Infrastructure Bank<\/a> modeled on the Reconstruction Finance Corporation is now before Congress, H.R. 3339<\/a>. 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<\/a>.) As an iconic Depression-era poster declared, \u201cWe can do it!\u201d We just need to roll up our sleeves and get to work.<\/p>\n

\"\"<\/figure>\n
  • This article was first posted on\u00a0 ScheerPost<\/a><\/em>.<\/li>The post What Does the Fed\u2019s Jerome Powell Have Up His Sleeve<\/a> first appeared on Dissident Voice<\/a>.\n

    This post was originally published on Dissident Voice<\/a>. <\/p>","protected":false},"excerpt":{"rendered":"

    \u201cThere is no sense that inflation is coming down,\u201d said Federal Reserve Chairman Jerome Powell at a November 2 press conference, \u2014 this despite eight months of aggressive interest rate hikes and \u201cquantitative tightening.\u201d On November 30, the stock market rallied when he said smaller interest rate increases are likely ahead and could start in [\u2026]<\/p>\n

    The post What Does the Fed\u2019s Jerome Powell Have Up His Sleeve<\/a> first appeared on Dissident Voice<\/a>.<\/p>\n","protected":false},"author":127,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[55260,305,55264,397,54532,55273,352,13619,34588,55274,55290,55293],"tags":[],"_links":{"self":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/918680"}],"collection":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/users\/127"}],"replies":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/comments?post=918680"}],"version-history":[{"count":1,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/918680\/revisions"}],"predecessor-version":[{"id":918681,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/918680\/revisions\/918681"}],"wp:attachment":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/media?parent=918680"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/categories?post=918680"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/tags?post=918680"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}