It seems no longer controversial to say that we are in the midst of a World War. In a military sense, the hot front is in Ukraine--although a new military front could soon open up as NATO seeks to create a crisis with Serbia. The economic and monetary front features Russia and China leading the effort to create alternatives to King Dollar as the international reserve currency. The sanctions war, which the collective West had hoped would lay waste to such efforts, has backfired decisively against the collective West. The result is that major non-Western nations which had formerly been closely linked to the West's financial regime are being progressively peeled away by the emerging Eurasian bloc. India and Saudi Arabia are prime, and important, examples of this process.
We have in the past devoted a fair amount of space to discussing what I have termed Tom Luongo's "Theory of Everything". This refers to the domestic monetary front, the interpretation of what The Fed, under Jay Powell, is up to with both it's restructuring of bank relations--the shift from LIBOR to SOFR as well as with Powell's aggressive regime of interest rate hikes. I say "domestic", but obviously the Fed's actions are having significant impacts on global economics and monetary relations. Luongo's view, as we have documented it, is that the Fed's interest rate hikes--supposedly a fight against inflation--is in fact a two pronged offensive: First, an effort to break the offshore dollar market, which is the basis for Davos' influence, and second to enforce fiscal discipline on the US federal government. More on that below.
The mainstream narrative is that, for inexplicable reasons, Powell is simply making a terrible mistake with the continuing interest rate hikes. Simply on a theoretical level raising interest rates cannot end inflation without inflicting disastrous harm on the economy--how can Powell be so foolish? The problem with this narrative is that it implicitly presumes that Powell is stubbornly obtuse in pushing his policy single-handedly against the consensus of financial wisdom. The idea that Powell is simply bucking obvious truth in the face of waves of well informed advice seems to me to be implausible. This lends force to the alternatives to this narrative that have been addressed in the last few days by Ellen Brown:
What Does the Fed’s Jerome Powell Have Up His Sleeve?
[What Is] The Real Goal of Fed Policy: Breaking Inflation, the Middle Class or the Bubble Economy?
Brown begins by presenting the mainstream narrative, based on the notion that Powell is simply mistaken--and stubbornly so:
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 –
Not the supply side--the supply of goods.
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.
Brown proceeds to explain that, of course, the Fed's rate hikes to also have an effect on the supply side, in a blunt instrument sort of way. Shrinking the money supply through interest rate hikes will also shrink the economy, causing demand and thus production of goods to shrink. And that has been happening:
Demand has indeed been shrinking ...
It is not just activity in shopping malls and factories that has taken a hit. The housing market has fallen sharply, ...
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.
That means major cuts will be needed to some federal programs.
Brown addresses the alternative interpretations of what Powell is up to under the heading "Breaking the Fed Put". What this means is basically this:
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.
The problem with the "Fed Put" is that it tilts the playing field of the economy toward "financialization"--more on this below. To explain this alternative interpretation Brown presents the views of a number of commenters, all of which we have discussed in the past:
Former British diplomat and EU foreign policy advisor Alastair Crooke suggests that the Fed’s goal is something else [than simply fighting inflation]:
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.
... 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.
Now, above, we saw DiMartino-Booth talking about putting an end to the rule of speculators. Here is Brown explaining this in a big picture way, citing another economist whose views we’ve discussed in the past:
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.
Brown then takes note of Luongo’s views, although she postpones a discussion of them for another day. However, she points out what should be apparent. The principles behind Luongo’s Theory of Everything and the more restricted views of DiMartino-Booth are essentially the same—something that Luongo himself has repeatedly observed.
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.
DiMartino-Booth is in favor of putting a stop to all this:
If Jay Powell breaks the Fed put and takes away the unfair ability of private capital to rape and pillage the system, he will have finally addressed income inequality in America.
However, she worries that the Fed is walking a policy tightrope:
… [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.
There’s lots more in the article, which gets into a fair amount of detail that I’ve avoided. However, this post provides an opportunity to address concerns that I’ve seen in comments here as well as elsewhere, but have been too occupied with other matters to get into—the Fed experiment with a CBDC. Brown again cites an observer that we’re all familiar with:
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.
Crawford is, of course, espousing an idea that has strong similarities to Luongo’s theory, so it may be well to give Luongo the last word:
And this, too:
Everywhere we turn these days it seems we keep running into pedos. Also:
Biden invites anti-police nonbinary drag queen to White House: 'F--- the police'
https://twitter.com/P_McCulloughMD is also back at Twitter.
https://rwmalonemd.substack.com/ is back on Twitter.