The “Black Monday” of August 5 and the sell off in the stock markets that had already started from Japan and the carry trade transactions (arbitrage in currencies with different nominal interest rates) was followed by a rain of appeals from Wall Street actors to the Federal Reserve to lower interest rates and not wait until September.
Why did this happen?
If we “read” the movements of Warren Buffet, who got rid of 50% of Apple’s shares and maintains in his portfolio a monstrous.. liquidity of $277 billion, we will understand – like many in the markets – three facts.
- First, stock valuations have formed a big “bubble” so a correction should be expected… until there is a lot of blood in the markets.
- Secondly, the cyclical data show the economy entering recession and consequently there is no room for many ideas.
- Third, rising geopolitical risks have created a difficult situation in supply chains that are vulnerable to sudden events (such as the Houthi presence in the Sea of Aden which has multiplied freight costs), but also compounded the difficulties by now perpetuating inflationary pressures (from energy goods to food).
In view of the above, Wall Street is calling on the Federal Reserve to print dollars to continue the race in stocks but also to benefit from the gains in the debt market. It becomes clear that in order to extract speculative profits e.g. from Big Tech are calling on the central bank to print dollars and continue monetizing debt.
The oversupply of dollars and What is the colpo grosso with debt monetization
Since 2009,
- the money supply (TMS index) has now increased by more than 185% – meaning the machines that print dollars have caught fire.
- The M2 index has increased by 145% over the same period
- Of the current $18.8 trillion money supply, $4.6 trillion—or 24%—has been created since January 2020.
- More than $12 trillion of the current money supply has been printed.
- In other words, almost 2/3 of the total existing money supply has been created in just the last thirteen years.
With these kinds of amounts, the recent 10% reduction in the money supply is a small size in the huge mountain of freshly printed money.
The US economy has continued to experience a money oversupply for the past several years, which is partly why despite so many months of negative money supply growth, overall employment has stagnated without significant pressures on it.
For example, full-time employment growth has turned negative, while the total number of people employed has been flat since late 2023. Additionally, the CPI remains well above the 2% target rate and ignores mainstream economists’ forecasts for significant de-escalation.
Greater money supply
As economic indicators continue to weaken, we should expect to hear an army of “tips” for inflationary monetary policy to accelerate money supply growth. For example,
- Last week’s “weak” jobs data led to numerous calls from Wall Street executives for more hawkish policy from the Federal Reserve.
- On Monday (5/8), economist and long-time Wall Street “expert” Jeremy Siegel was almost hysterical as he called for the Fed to hold an emergency meeting and cut the key interest rate by 150 basis points over the next two months.
- This can only be described as ‘panic’.
- A host of mainstream economists also said Friday (9/8) that the Fed should have started cutting interest rates months ago.
- Even a brief downward movement in the markets requires an aggressive monetary policy easing in response, Wall Street gurus think.
- In other words, Greenspan’s politics remain as central as ever in the minds of Wall Street’s “elite.”
- Now, of course, the Greenspan legacy has been replaced by Bernanke’s, Yellen’s, and now Powell’s.
- Even with the total money supply swelling and hovering around 19 trillion, people like Jeremy Siegel argue that the Fed is being “hawkish”.
It is always a good time for the banking class to push for more easy money in order to keep asset prices at the levels that keep the “1%” rich – since much of the wealth came not from productive processes or long-term investment practice but from speculation. The Fed and the federal government need lower interest rates.
However, one of the reasons the banking class never tires of easy money is that the richest have many ways to deal with rising inflation.
As long as the prices of real estate, stocks and other asset classes continue to rise faster than the prices of food and other basic goods, then inflation is not a real problem for the wealthiest.
For those without huge stockpiles of assets, however, inflation can be acceptably devastating.
So the only real limitation to easy money is the fact that public opinion will turn against the economic and political establishment when inflation fueled by central bank printed “easy money” accelerates for ordinary people. Regimes fear high levels of inflation because they lead to political instability.
One way central banks fight price inflation is to allow interest rates to rise, but that means public discontent with rising prices must compete with incessant calls for lower rates coming from Wall Street.
Central banks can’t just keep Wall Street happy. The central bank is also expected to help the government issue debt and participate in deficit public spending.
Central banks’ main tool for providing this assistance involves keeping interest rates on government debt low.
How do central banks do this?
By buying up government debt, thereby artificially boosting demand for it and pushing interest rates down. The problem is that buying back government debt usually and necessarily involves the creation of new money, thus putting upward pressure on inflation.
Given all these pressures from easy money interests, it is rather paradoxical that money supply growth did not turn positive earlier than it did and that the central bank was not more aggressive in pushing growth rates faster.
What the Fed is doing now is best described as a “wait and hope” strategy. The Fed refuses to allow interest rates to rise, but is still slow to cut rates further.
While the Fed has certainly responded to requests from Wall Street historically, its biggest concern right now is probably the need to lower interest rates on government debt. It appears that the Fed is holding the key rate steady just hoping that something will happen to lower yields on government debt without the Fed having to print more money to buy more bonds and risk another politically damaging spike in inflation.
However, “hope” is not a strategy, and the likely outcome is that the Fed will err on the side of keeping interest rates low so the regime can borrow more money.
This will mean more inflation and the simple fact that those who do not have assets dependent on the markets will gradually become impoverished.
