The Federal Reserve’s Policy Mistake?
Far from its being a ‘policy error’, according to spoiled financial market commentators, the Federal Reserve has good reasons for raising interest rates and undermining the ECB.
In the USA the Consumer Price Index came in at 6.8% year on year. November price inflation was reported as being 0.8%, which equates to roughly 10% per annum. And that is relying on the heavily doctored official measurements. These kinds of numbers are as bad as those that led to the Volker rescue of the paper US Dollar at the end of the 1970s.
Unsurprisingly the Federal Reserve (‘the Fed’, the US Central Bank equivalent of our Bank of England and the EU’s European Central Bank (ECB)), is talking about raising interest rates.
Equally unsurprisingly a whole load of self-interested complaining has been going on about how the Fed is making a policy mistake. The moaners aver that even meagre interest rate rises will cause a correction in the stock market and perhaps an economic recession, which could well be the case.
The talk from Wall Street banks (Goldman Sachs) is of seven rate hikes in 2022. Typically, each Fed interest rate hike is 0.25% - also known as 25 ‘basis points’ – but they can be 0.5%. Short term dollar interest rates may therefore get to around 3%, up from basically nothing.
It may well be that the Fed must do much, much more. At the end of the seventies and early eighties dollar inflation took off in a similar way after Nixon broke the Bretton Woods Gold Exchange Standard link to the dollar in 1971. Paul Volker, the then Fed chairman, drove the world economy into deep recession by pushing interest rates up.
In Britain the recession was blamed on Thatcher, with a fine disregard for the wider world picture and Britain’s limited importance in it. Volker put interest rates up to around 15%, not 3%. The result? A severe slump and a big fall in financial markets. But inflation was squeezed out. Volker laid the foundations for forty years of a dominant paper US Dollar standard. That is now coming to an end and the Fed’s choice may well be whether or not to repeat Volker’s decisive action. That would somewhat prolong the life of the teetering dollar standard. The alternative would be for the Fed to prevaricate and throw away its credibility by failing to act now to uphold the value of the dollar.
In the Austrian School of Economics (i.e. the free-market libertarian) view we are probably now in a ‘crack-up boom’ phase where people start to dump government FIAT currency and debt denominated in it. This is an inevitable phase in boom-bust cycles. And the business cycle is the inevitable result of money creation by governments and banks. It is nothing to do with ‘capitalism’ – not that we have had capitalism for generations.
The crack-up boom begins when people fear that their money is about to lose value. Investment shifts from paper debt into claims on tangible assets such as shares, property (in stable jurisdictions, so perhaps not in Europe), sounder foreign currencies, eventually gold, and nowadays crypto. People just generally spend and spend to buy things which are going to be out of reach later on as prices take off in terms of debased FIAT ‘paper’ money.
The result of a crack-up boom is an economy with comparatively low unemployment and a pleasant veneer of prosperity and normalcy. However, it cannot last. One of two things will happen, as Mises explains in ‘Human Action’. One, money creation is brought to an abrupt halt by the political system and there is a slump during which mispriced assets fall in value and unviable activities are closed down. Given how long money printing has been going on, all my life really, any reassertion of reality would really be very painful.
Or, two, the money printing continues. The feared fall in the value of the currency really materializes in the form of rapid price inflation. Economic activity is disrupted and falls away. There will then, eventually, be the same reset in asset prices (in real, inflation-adjusted terms that is) and the same elimination of accumulated malinvestment in misguided, unviable private and public sector activities.
This may be the moment when the Fed and the ECB get to decide whether they will protect the value of their currencies, the US Dollar and the Euro, by pushing up interest rates and reining in money creation. The ECB is in a much weaker position because the finances of EU member states are so much weaker. Its balance sheet is stuffed with potentially worthless sovereign debt as capital flees the over-taxed and over-regulated, and now locked down, EU. It is quite possible that even a modest rise in US dollar interest rates will cause a crash in European debt markets, a Euro crisis and then a political crisis in the EU.
It’s also quite possible that the Federal Reserve wants that to happen, and would weather a severe stock market correction to get it done. Especially if it thinks that the damage will be much worse in European rather than US stock markets, and it can escape most of the blame.
Here inevitably we come to the thorny topic of the EU/WEF/Davos Crowd’s Great Reset. The gist of the Great Reset scheme is to implement police states under the pretence of a public health emergency in order to force an authoritarian system of universal surveillance, and control on people via 100% vaccination and take up of vaccine passports.
The scheme is to introduce Central Bank Digital Currencies (CBDCs) limiting what you are allowed to buy, rolling up the banking sector into the central banks, and putting everyone on a meagre universal basic income. Then and only then is it supposedly safe for governments to default on their debt and obligations, especially unaffordable pensions obligations.
You don’t need to buy this ‘conspiracy theory’ to see that this program is the way things have been going, and the way many deep state interests and their corrupt corporate allies would like things to go. They want a future where ‘you will own nothing and you will be happy’ as the WEF website helpfully reminds us. I don’t think the elites plan on owning nothing, or handing back the precarious power over us that they are steadily accumulating.
What you can also see is that this globalist scheme is failing everywhere, except once again in ‘Festung Europa’ (the WWII Nazi ‘Fortress Europe’). Basically ‘the Davos Crowd’ has consolidated control via Covid-19 tyranny in the EU, but so far has only had partial success in the US.
The jury is still out in England where Boris is the incompetent and unprincipled leader of the beleaguered ‘not-Davos or ‘not-EU’ faction. He has messed up the Covid ‘plandemic’ emergency. He has managed to throw away a splendid pro-Brexit election. Britain is unfortunately becoming vulnerable to the Pro-Davos/’Remainer’ establishment’s revenge.
The US arm of Davos controls the Federal Government for now but not all of its legal system (the Biden vaccine mandates have been thrown out by US courts). It faces push-back from many states, most notably Texas and Florida, which are becoming significantly secessionist.
It also faces pushback from Wall Street. It does not want to be rolled up into someone else’s globalist central bank. Wall Street owns its own central bank already. The Federal Reserve belongs to it, not to the federal government. There is a viable interpretation that Wall Street and the Federal Reserve and some politicians in Washington are acting to defeat Davos’s acolytes on Capitol Hill. They got the Fed’s chairman, Jerome Powell, reappointed. They stopped the Democrats’ ‘Build Back Better’ legislation designed to cripple America as a competitor for international capital flows.
Powell had a very public spat months ago with Christine Lagarde, the French head of the ECB, in which he said that dollar monetary policy would not be put at the service of Davos’s climate crisis fixation. Since then, Powell has been draining dollars from Europe by offering a mere 0.05% positive return on his ‘Reverse Repo’ facility. More than a trillion dollars have been taken out of Eurodollar markets. The message on climate change was just reinforced recently by Putin at the UN, after Davos’s opponents put the kybosh on COP26.
Davos’s US arm is also losing ground ahead of an apparently inevitable Democrat drubbing in the mid-term US polls. US corporates are hastily dumping their shiny new vaccine mandates. Failing some engineered crisis in the Ukraine or Iran turning into war, the WEF retreat has begun. Powell is now free to assert US Dollar primacy against the EU and the ECB. There may be an opportunity to achieve an EU break-up via a Euro and Sovereign Debt crisis. That would end the Great Reset and bring the Covid-19 Euro-tyranny to an end.
The ECB cannot risk a sovereign debt crisis and a further slump (for which Brussels would rightly be blamed) by ending its money printing. However, the Federal Reserve can risk causing a recession because the population will blame the Davos controlled Biden administration which is, for better or worse, the sitting Federal government.
So may be this isn’t really a policy mistake by the Federal Reserve.
I attach a link below to a one hour live-stream by Tom Luongo of ‘Gold Goats n’ Guns’. It may be something for a car journey. This is Tom’s weekly therapy hour. Like all livestreams it is broken up by the presenter reading and responding to questions appearing in the chat.
The talk veers from one subject to another. The language is pretty salty. But then the last two years have been quite difficult for all of us who are in favour of human flourishing rather than toadying to an ever-bigger state apparatus, so I ask your indulgence. I have tried to give some background above to help listeners understand his shorthand discussion of the Federal Reserve’s position, and other matters.
The live-stream still has an incomparably greater information density than the propaganda that passes for MSM news. Where else would you find the groundbreaking Russia and India deal, or the intriguing tidbit that Putin has invited President Bolsonaro of Brazil to Moscow?