Monetary Policy To The Fore

My friend Chris keeps prodding me to post about monetary policy—or something like that. I’m economic and finance challenged, although from time to time I come across articles that make a bit of sense to me. So, today, I came across several items that I want to juxtapose, for what they say about the world we find ourselves in today and about the risks and challenges facing us.

The first item is Karl Denninger’s post today: On CMS, The Budget, And Powell. 

Oddly KD has nothing to say about Powell the person. However his point is straightforward enough—for reasons tied to CMS the Fed is going to be forced, sooner rather than later, to raise interest rates. As it happens, lately we’re hearing Powell discussing interest rate increases on pretty much a daily basis.The consequences of this unavoidable (in KD’s opinion) move will be dire. The post is long and interesting, for an economic ignoramus like myself, but here’s what I take to be the bottom line: 

Since The Market Ticker began publication I have pointed out that two programs -- Medicare and Medicaid -- are on a path to destroy the Federal Budget through unbridled growth that is not tethered to taxation.

…

So what happens when The Fed is forced to remove liquidity from the system?

Interest rates rise, and for the Federal Government the paltry amount currently spent on interest ($153 billion thus far, so at present rates about $600 billion) skyrockets higher.

Indeed it could more than double.

There are those who say the Federal Reserve will never do that because the Federal Government can't pay.  Oh yes they will do that, not because they want to but because they have to.  If they don't then prices continue to spiral higher, this pushes wage demands higher and forces those who cannot get said wages out of the economy which increases federal spending even more and that, if it gets out control, results in a collapse of civil society, civil war or revolution -- for REAL.

KD contends that there really no other budget sectors that can cover the cause of our problems, CMS. The result, he says, is that medical services will be cut drastically. Read it for yourself and see what you think. 

Now, while that budget mess has been metastasizing, the rich in American have been getting richer, and everyone else has been losing ground. I take it that that’s what the Great Reset is basically about—the rich are still not satisfied. Zerohedge just posted an article that points out our current situation:

Inflation Is The Kryptonite That Will End Our Decades-Long Monetary Policy Ponzi Scheme

So the elites got as rich as they are through a Ponzi scheme, and I’m suggesting that the Great Reset is more or less about keeping the Ponzi scheme going—expanded to a global scale, because that’s what Ponzi schemes require if they’re allowed to continue:

Countless times, I have reminded my readers and listeners that the inflationary “machinery of night” blankets the most regressive tax possible upon the people who can least afford it, and does so in an extraordinarily convenient way for elites, politicians, central bankers and central planners whose titles and “jobs” hinge upon nobody questioning them and/or figuring out how the system works in the first place.

Today, the fabric of our modern banking world is held together by a logical fallacy of a system, wherein central banks are afforded the asinine luxury of being able to print infinite amounts of “money”, which is then disproportionately distributed toward the ruling class, billionaires, and elites, instead of the people who need it the most.

This shows up, literally, as a widening gap between the “haves” and the “have nots” that has widened consistently since the late 1970’s.

And the author illustrates his point with a pair of charts:

However, the author says, for a number of reasons more and more people are catching on to the con, and he concludes that this time is different:

Monetary policy has worked splendidly for the elites and central planners over the last few decades and, while it has resulted in a wider gap between the lower and upper class than we’ve seen in 50 years and a country that is nearly at civil war with itself, the harrowing machinations of the monetary motor have all happened behind the curtain, under the cloak of night. This has allowed the elites and central planners to side-step responsibility for 50 years worth of gripes and misfortunes, while being able to point to the stock market to try and convince the populace that things aren’t as bad as they seem.

But this time, things are definitely as bad as they seem - and everybody understands it.

My friend George who sends me lots of Russia related material has something to say that relates to all of the above, but from a rather different angle. What he’s talking about is how world leaders are trying to come to grips with this global con game. George maintains—contra Tom Luongo, for example—that the Davos crowd is not in that great a position at this juncture of history. 

See what you think of his argument. As I understand it, George is saying that there’s a global tug-of-war going on, with Davos and DC on one side and Russia and China on the other. Complicating matters, not all of the players on each side are on entirely the same page. George starts with a passage from the speech that Xi Jinping gave to the Davos crowd. Xi, it appears, is outraged at Fed proposals to raise interest rates—a move we’ve seen described above as inevitable for reasons deeply embedded in the US political economy. George suggests that there is a connection between Xi’s speech and the demands that Putin is making on NATO—but indirectly on Davos, as well.

I pick up George where he questions Tom Luongo’s claim that Davos is on the offensive—using Covid as the opportunity to ram through the Great Reset on a global scale. There’s no doubt that that was the Davos plan, but George thinks Davos and its US allies are deluded.

Is Davos/WEF and Schwab in truth and reality in a position to seize an opportunity or do they merely have a “vision”.

Tom Luongo – see below – has a short write-up of his subscriber newsletter:

Virtual “Davos” is in full swing and Fuhrer Schwab and Chairman Xi are both angry at the Fed.

Both will sponsor the Democrats to end American control over our elections, indict their political opponents and persecute those that refuse their COVID-19 hysteria.

Tom should know better, and he will probably catch up. When Tom says Xi is furious at the Fed, he is referring to a sentence in Xi’s speech where [Xi] says 

If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it. In the context of ongoing COVID-19 response, we need to explore new drivers of economic growth, new modes of social life and new pathways for people-to-people exchange, in a bid to facilitate cross-border trade, keep industrial and supply chains secure and smooth, and promote steady and solid progress in global economic recovery.

The “U-turn” Xi refers to is the Fed’s threat to hike interests rates, ostensibly to quell inflation. From the point that Powell announced such a “turn”, I was suspicious because, like Luongo, I believe that the Fed has been manipulating the hot-money markets, separating them from money trapped in the system but basically dedicated to real investment and production. And at the previous Davos meeting, it was Putin,
not Xi, who said that Russia was open to foreign capital seeking productive use, which was an offer to use Russia and Russian companies as a “safe haven” in anticipation of a blow-out of hot-money flows, which Xi emphasized for China this time as well, so that, in sum, both Putin and Xi were and have been acting in support for drying out the hot-money. I considered discussing this at some greater length before, but the data for the US-side was indirect at best.

Next George turns to an article by Peter Schiff -- Peter Schiff: Has Fed Talk Pricked The Mother Of All Bubbles?

The article leads with this:

It appears talk of looser monetary policy has pricked the bubble. Peter Schiff talked about it in a recent podcast.

“We’ve seen a significant rotation out of the overpriced, high-risk momentum stocks that enjoyed the benefit of the bubble. They are now collapsing – not because the Fed has actually tightened monetary policy, but just because it talked about it.

“That’s all it took to prick the mother of all bubbles. But as the air is coming out, that air is flowing into the ‘value’ sector of the global markets, which have been overlooked for the entirety of the move up as people were using those stocks as a source of funds, selling value dividend-paying stocks to free up the capital in order to invest in the momentum stocks.”

Did you notice the contradiction? – The article says that talk of looser money pricked the bubble; Peter Schiff says it was talk of tighter monetary policy (interest rate hikes, reining in QE) that pricked the bubble. Well, which is it? – Answer: It is both, except that looser money policy is not and was not just talk. QE, both in the US and in Europe, home of the ECB and Davos, gave the finance officers of real companies the chance to become bankers, financialize everything in sight while diluting and even annihilating the “value sector”. Low capital investments, subsidized boondoggles, shedding of qualified workforce, etc.

The squeeze on the “value sector” was visible and tangible for a long time. Trump – most people do not understand this – handed out massive tax reductions to the working class/middle class, but also to “Wall Street”. The “socialists” thought half of the plan was great and denounced Trump for the other half, not realizing that the money the working class/middle class received via tax breaks could only be spent once, and really only once if well-paying jobs did not provide the income that could then benefit from the tax cuts in the future. “Wall Street” began to separate the wheat from the chaff: a lot of the unearned money was used for stock buy-backs, which was the management of “non-value sector” companies cashing out on financialization for their personal benefit, but inflation devours even their actual net booty. The other “Wall Street” used the money to bring production back home because, as Dave Goldman has shown, the cheap labor, low cost regulations calculation that previously favored China, no longer holds. Unbeknownst to the unwashed, Trump and Xi were leaning on the same lever to get that effect. China’s economy has no use any longer for wage-dumping, not when the next “leap” is toward a vastly multiplied middle class.

On a global scale, that is not enough, however, to dry out the hot-money flows, so, regardless of when the speeches were made, both Russia and China joined the game to dry out the hot money and offer havens for real investment and real returns on investment. As I pointed out, Putin spoke about it openly last year, Xi this year. These speeches did not represent “visions”, they were public announcements of a
policy commitment already put into action. So, yeah, a “Great Reset”, but nothing like what Schwab dreams about in his “vision”.

The upshot is that the “value sector” has recognized Davos and the “Great Reset” for the financialization fraud that it is. Davos offers them no “vision” for the future, it only offers the continuation and consolidation under greater centralized control – with fewer big participants, naturally -- of 20 years + of failed financialization policy.

Slowly but surely, and at an accelerated rate, people are beginning to understand something about what is happening. – DWN (Deutsche Wirtschaftsnachrichten, German Economic News) has an article, behind pay-wall, but the title is sufficient: “The Fed is lying to the whole world”. The “lie” is that the Fed is going to hike interest rates, which, as DWN correctly notes, would immediately trigger a global debt implosion. So the Fed cannot raise rates, but Powell says he will. Quite right, and what did Xi say?

If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it.

Same thing, and also correct. Ah, but there is a big difference even when DWN and Xi say the same thing. Xi and Powell are actually both prodding the panic run out of hot money! DWN is only giving us an analysis, but if the US (as seems to be the case) is willing to go to war over Ukraine, even while the Ukrainians and Zelensky say there is no danger of a Russian invasion, then the US would also not shy away from unleashing a global debt implosion, right? Ah, but what is the effect of the war-propaganda?

Stock markets tank globally, bitcoin loses $1 trillion in a single day, the Europeans have not only a gas crisis, they have a crisis of spot-market hot money, hedge fund  speculation which makes governments look utterly powerless, and they are. And Covid bureaucracies are chasing that train rushing through the station at 180 mph, trying to paint it with their latest narrative innovations. (Karl Lauterbach, German Health Minister, doesn’t have enough booster stuff on stock, so he proudly announced he had solved the problem by buying up the booster-vaccine material the Rumanians now don’t need.

Let’s not forget the basic point Peter Schiff made: there is a run out of the bubble just because the Fed, i.e., Powell, talked about a tighter monetary policy, so bubble-money has to liquidate. Bubble-money does not think. The Fed did nothing but talk, it postponed actual action on interest rates, ... and I believe that the genius behind Powell is Steve Mnuchin. Trump is silent, spending millions on a new super-duper
golf course in Florida. Why not?, his entire team is well-employed.

The question in my mind is, supposing that George is right about interest rates, where does that leave the domestic US economy—the one we live in? I’m not an economist.