Friday, January 22, 2021

How the Fed Fails

The Fed has a binary choice: preserve America's global hegemony or further enrich the billionaires. You can't have both.

The Fed will fail as a result of two dynamics: diminishing returns and the U.S. dollar's role as a global reserve currency. The Fed's reign as the godhead of financier-banker supremacy has been fun and games for the past 12 years of stock market euphoria, but that's about to change.

All those expecting the Fed to sink the USD to near-zero to "save the stock market" don't seem to realize that they're also expecting the U.S. to surrender its global hegemony, which rests entirely on the U.S. dollar. The USD is the world's dominant reserve currency--please examine the chart below. The USD dwarfs the next largest reserve currency, the euro. The Chinese yuan--due to its peg to the USD, essentially a proxy for the USD--is a tiny sliver of global reserves.

The owner of a reserve currency can create "money" out of thin air and trade it for autos, oil, semiconductors--real-world goods that were not created out of thin air. All these real-world goods required tremendous investment and significant costs to be produced and transported.

No wonder trading something for nothing--a remarkably good deal--is termed an exorbitant privilege.

It is not an exaggeration to say that the ability to create "money" out of thin air and trade it for real-world goods is the foundation of America's global power. If the Fed prints USD to near-infinity and the USD loses value relative other reserve currencies, the U.S. loses its exorbitant privilege of trading "money" created out of thin air for real-world goods.

So everyone expecting the Fed to "print" the USD to zero is claiming the Fed is consciously choosing to lay waste to the foundation of American power--just to boost Big Tech Robber Barons and zombie global stock markets.

Recall that the Fed is not the Empire, it is the handmaiden of the Empire. The Fed's dual mandate-- for PR purposes, stable employment and prices--is actually balancing the conflicting demands of a global and domestic currency--Triffin's Paradox writ large.

The inherent problem with a reserve currency is that it must meet global economic needs and domestic needs, and these are intrinsically in conflict. America's billionaires and pension funds want the US stock market to loft higher on the back of a declining USD, but that diminishes the global purchasing power of the USD--a trend spiraling down to economic ruin.

The Fed's balancing act has run out of runway. It's either destroy American hegemony by crushing the USD or secure hegemony and let the stock market function as a "market" rather than as a device to further enrich the top .01%. (Recall that "nearly half of the new income generated since the global financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens. The richest three Americans collectively have more wealth than the poorest 160 million Americans." The Dangerously Diminishing Returns on Monetary and Fiscal Stimulus)

As for diminishing returns: consider what the Fed "bought" by handing $1 trillion to financiers, banks and billionaires in 2008-09 and what it "bought" with $3 trillion last March. The Fed's balance sheet shot up from $925 billion on 9/9/08 to $2.08 trillion on 9/9/09-- an injection of $1.16 trillion to "save" the global financial system (and the U.S. stock and debt markets) from complete meltdown.

The Fed continued goosing markets higher, adding another $1 trillion by 2013 (balance sheet $2.96 trillion). So the Fed "bought" a five-year rally in global risk assets--a rally that sent wealth and income inequality into orbit--for a mere $2 trillion.

Last year the Fed had to print over $3 trillion in three months to "save the markets" from a reckoning with reality. Take a quick look at the chart below. Notice how the Fed's "saves" are tracking a near-parabolic curve. So will the next "save" require $5 trillion, or will it be $7 trillion? And what are the consequences for such insanity on the U.S. dollar's global hegemony?

So the Fed has a binary choice: preserve America's global hegemony or further enrich the billionaires. You can't have both. Hegemony requires a currency that's increasing its value relative to other currencies, not plummeting to near-zero.

If the Fed chooses to further enrich the billionaires and top .01%, then the skyrocketing wealth-income inequality will unravel the domestic social and political orders. There is no way that will be a "win" for the Fed, as the resulting backlash against the Fed's stripmining the nation to enrich the top .01% will have consequences for the Fed as well as the nation.

So the Fed will fail. If it spews endless trillions to further enrich the billionaires it will destroy the exorbitant privilege of the reserve currency and the global hegemony that privilege enables. If it preserves global dollar hegemony by not spewing endless trillions, global stock and debt markets will experience the equivalent of a financial tsunami, earthquake and hurricane hitting all at the same time.

It's either/or--there is no win-win. Choose wisely, Fed.





If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

My new book is available! A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet 20% and 15% discounts (Kindle $7, print $17, audiobook now available $17.46)

Read excerpts of the book for free (PDF).

The Story Behind the Book and the Introduction.



Recent Podcasts:

Salon #35: The problem is that nobody knows what "Kuleana" means (58 minutes)


My COVID-19 Pandemic Posts


My recent books:

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 (Kindle), $10 (print), ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).



Become a $1/month patron of my work via patreon.com.




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, John K. ($10/month), for your outrageously generous pledge to this site -- I am greatly honored by your steadfast support and readership.

 

Thank you, Tom D. ($5/month), for your splendidly generous pledge to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act


This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Do Not Sell My Personal Information


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP