When George Orwell (real name Eric Blair) wrote of Newspeak, he was lamenting the politicization of language, which meant the severing of tacit knowledge in the pursuit of the goals of the governing class. Having lived under the jackboot of fascists and communists, Orwell understood how tyrannical despotic leadership works. Words no longer embodied a real connection to the world, but instead became social instruments fortifying those who command the heights of power. Witnessing Jerome Powell, the US Federal Reserve chairman, talk of “mid-cycle adjustment” was an Orwell moment for me. It is clear that US dollar shortages are wreaking havoc on the American financial system. In fact, the US financial economy today resembles the panic of 2008.
As of this writing, the Fed is in active, accelerated intervention. It wants to keep interest rates (the cost of money) low. To achieve this, it seeks to pump tens of billions of dollars a day into the financial system. The reason for the casual outlook among the chatter-class is simple. Today’s backdrop of trillion-dollar market cap companies and extremely low unemployment fortify those whose safe positions remain underwritten by the Fed. By any means, the US financial economy is tottering. Wednesday’s repo agreements surpassed the 2008 crisis.
By any means, the US financial economy is tottering. Wednesday’s repo agreements surpassed the 2008 crisis
What started as a temporary fix in late September regarding the target overnight rate has jumped to skyrocketing levels resembling panic. The Fed spoke of temporary liquidity shortages when, in fact, we’re witnessing the drying-up of short-term credit. The kind of credit that keeps the financial plumbing running. This is no short-term crisis, we’re looking at a permanent need for the Fed to support the entire US financial economy with injections of cash. The $75 billion of initial intervention dried up. It now requires a daily dose of $120 billion. Can anyone surmise why a stable economic system needs this level of support? Chairman Powell spoke of funding issues, but this isn’t a temporary problem; its a structural one. What started out as a policy of regression toward normalization is now a rout. This isn’t a slow walk toward policy reversion from incessant rate hikes. What we’re looking at is expansion and interest rate cuts to stem a collapse of confidence in short-term credit instruments. The most dangerous component is that the Fed isn’t commanding anymore, its chasing events. The Fed is forced into policy actions that betray a startling lack of confidence in its abilities.
In sum: the entire US financial market has permanently evolved into a vast subsidized machine that benefits debt instruments and multinational companies hooked-in to government subsidies. Does this remind you of a particular Asian country?
For those willing to criticize other political economies, the US looks fine, but only on the surface. We don’t have sustained earnings growth, nor do we have bright new initiatives demonstrating a confidence in new product developments and radical IPOs. We’ve got a churning of debt to sustain government only. And the chatter-class wonders why the US is postured toward populism? What the working stiff knows is that the dollar is destroyed and with it, the once outstanding confidence and efficacy that underwrote American institutions.
What team Fed is doing is extending the business cycle. But don’t get fooled by this accelerating intervention. For it presages the death of both the dominant political class and its dream of a neoliberal world.