by Jean-Luc Baslé for The Saker Blog
Wall Street is forever rising. The S&P500 index rose to 3,581 on September 2nd, 2020 – the highest level it has ever reached since its creation. This makes no sense. Wall Street is a reflection of the state of the economy which is in recession since February, the worst recession since 1929. How can share prices rise when the economy is falling? To answer this question, let’s analyse the economic policy of the United States these past few years, taking Federal Reserve Chair Jerome Powell’s speech of August 27th, 2020 as our starting point. Going back in time, we see that American leaders ignored the fundamental laws of economics. We note that foreign leaders, such as the European Central Bank governors, followed the same path. We conclude that stock prices do not reach the sky, and that the United States is caught in a bind from which the only way it can extricate itself is through a dollar depreciation. This bodes ill for the American Empire. The dollar is one of its main pillars.
Jerome Powell questions the validity of quantitative easing
Depending on their editorial stand, the media understood Powell’s speech as a return to inflation, giving greater attention to unemployment. But this summary ignores the essence of the message which questions the validity of quantitative easing – a policy followed by the Federal Reserve since November 2008. This is what Powell said: “With interest rates generally running closer to their effective lower bound even in good times, the Fed has less scope to support the economy during an economic downturn by simply cutting the federal funds rate.” In short: pushed to its limit, quantitative easing loses its capacity to alter employment and inflation. Quite logically, Jerome Powell and the Federal Open Market Policy (FOMC) call for a softening of the rules governing inflation and employment: “appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time”, and “a strong labor market, particularly for many in low-and moderate-income communities”. This was understood as a return to inflation which it is not. It is an attempt to rescue quantitative easing while waiting for a return to more traditional economic policies.
By dropping surreptitiously quantitative easing, Jerome Powell is sending a message to Congress: economic policy cannot rest solely on monetary policy. Congress has at its disposal another tool: the budget. Over the past thirty years, priority has been given to monetary policy for several reasons. For conveniency reasons: monetary policy is essentially defined by one man, the Federal Reserve Chairman with the FOMC congruence. Budgetary policy, on the other hand, is defined by Congress and the President. It takes time for the two to agree, especially if Congress is split between a Democrat and a Republican majority. For efficiency reasons: changes in monetary policy are felt quite rapidly in the economy: six months to a year. It takes a lot longer (one to two years) for changes in the budget to be felt. For practicality reasons: budgetary measures imply taxation or indebtedness. Taxation is not very unpopular with the electorate, and indebtedness, if overused, leads to higher interest rates and slower economic growth. For all these reasons and the more theoretical ones set out by Milton Friedman and the monetarists, monetary policy became the policy of choice for the last thirty years, with quantitative easing being its most advanced form.
Priority being given to monetary policy with the budget playing second fiddle, the budget deficit should have come down and, with time, turned into a surplus. It did not happen. Worse, it has grown over the last twenty years to reach -4.6% in 2019. The initial figure expected for 2020 (-4.6%) will be substantially larger due to the Covid-19 virus. The $2,200 billion CARES Act approved by Congress in March to provide much needed relief to individuals, families and businesses, will translate into a much higher deficit, and a much higher level of debt.
Quantitative easing and the economy
Excessive money creation by central banks is anathema to financial markets since it is synonymous to inflation, higher interest rates, slower growth and the collapse of the stock market. It must be prohibited at all cost. Yet, that’s what quantitative easing is all about, and quantitative easing saved Wall Street and the economy after the 2008 subprime crisis. How can this be? In the fall of 2008, banks’ balance sheets were loaded with corporate bonds whose market value were well below their face value. To avoid a collapse of the market, the Federal Reserve bought the bonds, in effect replacing junk bonds with cash on banks’ balance sheets. The Fed’s bailout commitment totaled $29 trillion. In view of this amount, it is no wonder that the program worked… to Wall Street’s satisfaction. Trust returned, the economy took off, and shares regained and exceeded their previous values. All is well and good, except the Federal Reserve exceeded its mandate. Its job is to provide the liquidity the economy needs to grow and achieve full employment without generating inflation. Under normal circumstances, the banks whose equity was washed out by bad investments, due to senior management’s poor decisions, should have been allowed to fail. To avoid a collapse of the economy, the government would have bought the banks’ shares at their market value, fired the management, and re-introduced the banks on the stock market once their business was back to normal. But these were no “normal circumstances”. Neither Congress which oversees the Federal Reserve policy, nor Barack Obama who was anxious to move past the crisis, blamed the Federal Reserve for outstepping its legal framework. As for Wall Street, it had every reason to rejoice. Not only was it saved from total collapse, but within five years the market value of its stocks, as measured by the S&P500, exceeded its pre-crisis value. It has more than doubled (graph 1).
The Federal Reserve’s quantitative easing did not result in a depreciation of the dollar, as could have been expected. In fact, the subprime crisis strengthened its value somewhat, as it was perceived by foreign investors as a safe haven to protect their wealth in a tumultuous environment. This strength of the dollar and the relative stability of foreign exchange market is also due to the interconnexion of world’s economies. The subprime crisis first emerged in the United States but spread rapidly around the world. Faced with a potentially damaging economic crisis, world leaders of the largest twenty economies – the G20 – met in Washington DC on November 14-15, 2008, i.e. only two months after Lehman Brothers’ bankruptcy. Asian and European central banks agreed to espouse the Federal Reserve’s quantitative easing policy. Money creation around the world being essentially the same in relative terms, currencies retain their value in relation to each other, as shown by graph 2 (note: exchange rates are expressed as an index, and the value of the pound sterling and the euro have been inversed to make them comparable to the yen and yuan).
Money creation saved Wall Street without depreciating the dollar, but what about employment? The United States’ performance is excellent. The December 2019 unemployment rate is 3.5% – a rate lower than all other advanced economies with the exception of Germany and Japan. The picture is less rosy if one looks at it from a different angle: the length of time it takes to return to full employment. It took 15 months after the 1973 recession, 30 months after 1990, 46 after 2001 and 75 months after 2008, i.e. over six years (graph 3). Quantitative easing which served Wall Street so well, did little for Main Street. Of course, as noted by Jerome Powell, there are other factors to be considered besides monetary policy when studying labor issues. Nonetheless, the conclusion is inescapable: quantitative easing worked better for Wall Street than it did for Main Street.
What about inflation? Ever since Federal Reserve Chairman Paul Volcker put a brutal end to stagflation in letting the overnight rate go over 21% in June 1981, inflation has been subdued. Quantitative easing which is an inordinate increase of money in the economy should have, according to the quantity of money theory, led to inflation. It did not. The large quantity of money injected in the economy by the Federal Reserve had no impact on the price level. Graph 4 compares the velocity of money with the Consumer Price Index – the velocity (blue line) is inversed to underline its exceptional rise in the last few years. Full employment did not lead to higher prices either. Jerome Powell observes that “the historically strong labor market did not trigger a significant rise in inflation”, as the Phillips Curve would predict. He then notes that “inflation that is persistently too low can pose serious risks to the economy”. Clearly, the United States is in a peculiar situation where neither money creation nor full employment translates into higher prices, as economic theories tell us. Several hypotheses may explain this abnormality.
The fairly rapid opening up of the American market in the early 1990s, followed by the creation of the World Trade Organization in 1994, shaped a new environment in which the procurement of a given product was no longer restricted to the home country. Bilateral trade relations among advanced nations became global to include developing nations, such as China which joined the WTO in 2001. Competition among manufacturers became global, pushing prices down. Corporations offshored their production to take advantage of lower wages in developing nations. This weakened the negotiating power of trade unions who were faced with an unpalatable deal: accept lower wages or lose jobs to the Chinese. The digital revolution also played a role in bringing costs down with many firms “rightsizing” their labor force thanks to the adoption of the personal computer. Finally, Ronald Reagan’s decision to fire 11,000 air controllers in 1981 had a tremendous impact on middle income employees who realized status did not protect them anymore: they could lose their jobs as easily as manual workers could. These events put an end to what was known as cost-push inflation – an overall increase in prices due to higher labor and raw material costs.
Increased energy efficiency, as measured by the ratio of oil consumption to GDP, also helped contain inflation. The ratio doubled over the last twenty years. While a barrel of oil produced $450,000 of economic wealth in 2000, it produced $920,000 in 2019. This is why the rapid rise in oil prices over the last fifteen years had little if any impact on the state of the world economy, as opposed to shocks inflicted by the 1973 and 1979 price hikes.
In summary, inflation remained subdued due to globalization, the Reagan and digital revolutions, and energy saving. These watershed events spare the United States a rise in price levels that quantitative easing would normally have brought up. Quantitative easing is not inflation-free, it benefited from exceptional conditions. With respect to employment, the Federal Reserve’s performance is dismal when compared to previous periods. But Wall Street has every reason to be satisfied with it.
The Federal Reserve’s monetary policy in the recent past.
The decoupling of quantitative easing and inflation partially explains why Jerome Powell is distancing himself from this much vaunted but, in truth, inefficient policy. Besides the dual, yet incompatible inflation-employment objective Congress assigned to Federal Reserve, he must also watch over the largest banks’ financial health to make sure it remains strong. In fact, this was the main role the Federal Reserve Act assigned to the Federal Reserve in 1913. This duty is crucial. Economic crises often arise from a bank failure, as was the case with Lehman Bros.’ bankruptcy in September 2008. From this standpoint, Jerome Powell deserves our praise for he averted two crises in the recent past even though one may argue about the reasons they were conducted.
The first rescue took place in September 2019. Without warning, interest rates on the “repo” market shot up to 10% in mid-day on September 17th., 2019. This market is a corner stone in Wall Street’s architecture. If it fails, the whole structure crumbles. The Federal Reserve had to act promptly to calm the market down. This is what it did in injecting $41 billion into the market that very day. Interest rates plummeted. On September 18th, they had returned to their September 16th level. The cause of this ephemeral panic remains a mystery. But the fact that the Federal Reserve had to keep intervening for several months, leads one to conclude that structural causes might have been at work.
This incident was the prelude of a much worse crisis which was averted thanks to the combined effort of the Federal Reserve and Congress. On February 19, the S&P500 reached a new high: 3,386, then dropped abruptly reaching its lowest level in the year: 2,237 on March 23, i.e. a 30% fall in 36 days. This time, the Federal Reserve was slower in reacting. It’s only on March 11th, nearly a month after the stock market began to tumble, that it began injecting liquidity into the economy, propping up the stock market (graph 5). On March 13th, two Congressmen from the Democratic Party offered to help people who lost their job due to the pandemic. It took the form of The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act for short, which was unanimously approved by the Senate on March 25th and signed by Donald Trump on the 27th. It took only 15 days to ratify a law granting $2,200 billion, or about 10% of the gross domestic product – the largest amount ever approved in the history of the United States – to dodge an economic crisis in the making. Considering that by March 11, only 37 people had died from the virus while the S&P500 had already lost 19% of its value, one may question the politicians’ motivation. Was it the Covid-19 or was it Wall Street which led them to act decisively? Generous as it is to the unemployed, the CARES Act is equally generous to corporations which already benefited from the Federal Reserve’s action. Wall Street resumed its rise.
May the stock market rise to the sky? One is tempted to believe it when considering its performance. Could investors be the victim of an “irrational exuberance”? Not so, say some analysts who attribute the market rise to the “big tech” corporations (Google, Amazon, Facebook, Apple, Microsoft), also known under the acronym GAFAM. They account for about 20% of the market value and they are pooling up the market. But, excluding them from the S&P500 would mean excluding them – as well as other outperformers such as Tesla, Netflix, Nvidia, or Salesforce – from the American gross domestic product. One cannot dissect the market according to one’s view. The market is a reflection of the economy at large: the more profitable the corporations, the higher the value of their shares. Right? Wrong. Over the last few years, the stock market is disconnected from the economy. Net income has been flat since 2017 while share values gained 43% (graph 6). This makes no sense. The market is acting irrationally. It’s a matter of time before it corrects itself.
Returning to orthodoxy
In the 50’s and 60’s, the American government was a paragon of virtue. The budget was in quasi-equilibrium. There was little debt, no inflation, and the workforce was fully employed. Things have changed since then. The deficit is rising, the debt is growing ever-larger, and employment is not what it is purported to be. In the trio it makes up with the Federal Reserve and Wall Street, the federal government is the most important element for it defines the economic policy.
This brings us back to Jerome Powell’s speech. A lesser importance granted to monetary policy, as he posits, means a great one given to budgetary policy, assuming of course that the government has the latitude necessary to do so. This is not the case. The deficit is on a downward slope ever since the late 1960s, with the exception of a four-year gap from 1999 till 2002. The federal debt rose from 40% of GDP in the early 1980s to 107% in December 2019. The combined Federal Reserve/CARES Act rescue package pushed it up to 137% as of June 30th – a level higher than at the end of World War II (119%). Giving a greater role to budgetary policy means either higher taxes or more debt, or both. Taxes have never been very popular with the electorate, and the federal debt reached a level beyond which the United States’ credit rating may fall and the value of the dollar may drop. Authorities are caught between a rock and a hard place: monetary policy lost its effectiveness at a time the budget deficit should be reined in.
With 29.7 million unemployed (including the 13.6 million “gig” workers with no insurance coverage), the situation could quickly become worrisome, politically and socially. Aware of the danger, members of Congress had hoped to prolong the CARES Act for the unemployed, but electoral rivalry with the upcoming presidential election quickly set in and any attempt to maintain some of the benefits of the CARES Act were doomed to failure. On August 8th, Donald Trump signed an Executive Order granting $300 a week to unemployed people – humanitarian and electoral reasons no doubt explain his decision. The Center for Control Disease and Prevention declared a moratorium forbidding tenant evictions until the end of the year, bringing some relief to the most vulnerable families. Praiseworthy as the decision might be, it carries a risk: bankruptcy for real estate owners who, deprived from rental revenues, may not be able to reimburse their bank loans. In turn, this may weaken the banks’ financial health and be the cause of a crisis.
The situation is becoming inextricable. The on-going deterioration of the economy increases the budget deficit and the public debt beyond reasonable levels while monetary policy has lost its effectiveness. The government’s two main levers to direct the country’s economic policy have become ineffectual. Due to the presidential election, no new measures are likely to be implemented between now and February or March – a time lapse during which the economy is likely to deteriorate further.
To prevent such an unwelcome development, Ms. Loretta Master, president of the Federal Reserve Bank of Cleveland suggested on September 23rd to credit every American’s bank account with “digital dollar” directly from the Federal Reserve. Her proposal was well received. Market analyst Wolf Richter calculates that a $3 trillion transfer would translate into a $28000 sum for a household of two adults. This would prop up consumer spending and pull the American economy out of recession. But it would also create inflation and depreciate the dollar. A digital dollar is a dollar. Ms. Master’s proposal is another form of money creation. The total of the Federal Reserve’s balance sheet which amounted to 40% of the gross domestic product in the 1960s, rose to 100% in December 2012. It now stands at 125%. Is the United States on its way to repeating the Wehrmacht Republic’s mistakes of the 1920s? What will happen to the dollar, if the Federal Reserve pursues its money creation policy? And what will happen to the United States’ credit rating?
Icarus’s wax is melting
Whatever measures are eventually agreed upon the public debt will rise. Who will finance it? About 70% of it is presently financed by the American public, federal agencies and the Federal Reserve. The remaining 30% is financed by foreigners. The percentage is dropping. In the summer of 2012, foreign investors held 34% of the public debt. The trend is likely to continue if we use gold prices. Gold is a yardstick of investors’ confidence. For several years, worried investors have been exchanging their dollar-denominated U.S. Treasury holdings for gold, pushing up its price. Graph 7 is most interesting in that it shows the investors’ change of mood. Following the 2008 subprime crisis, they put their financial assets into dollar and gold. Today, they are moving out of the dollar into gold. This is not a good sign for the dollar.
Meanwhile, the stock market is fumbling. After reaching its highest value ever on September 2nd (3,581), it is falling. Share values, like Icarus, do not rise to the sky. If the stock market fall continues which is most likely due to the state of the economy, the American recession will translate into a world recession, since the U.S. economy accounts for 15% of the world economy. In turn, the world recession will aggravate the American recession in a vicious circle analogous of the Great Depression. This could mean the demise of the American Empire.
Jean-Luc Baslé is a former Citigroup (New York) Vice President, Columbia University graduate, Princeton University graduate, 20 years in the United States, author of “The International Monetary System: Challenges and Perspectives” (1982), “L’euro survivra-t-il ?” (2016).
- National Bureau of Economic Research. ↑
- “New Economic Challenges and the Fed’s Monetary Policy Review”, Jerome H. Powell – August 27, 2020. ↑
- $29,000,000,000,000: a detailed look at the Fed’s bailout by funding facility and recipient. James Felkerson, Dec. 2001. ↑
- Stagflation is an unusual combination of inflation and recession (unemployment). ↑
- The velocity of money is the ratio of money to the gross domestic product. ↑
- Higher level of employment leads to higher wages and higher inflation. ↑
- In the 1960s, U.S. imports amounted to 5% of gross domestic product. They averaged 16.5% in the last decade. ↑
- Gross domestic product ↑
- A repurchase agreement “repo” is a short-term secured loan: one party (usually a financial institution) sells securities to another and agrees to repurchase them within a short period of time. ↑
- This was due to the “peace dividend”. ↑
The financial collapse of the US would help ensure a more peaceful planet. The really good effect would be Israel’s loss of US financial altruism.
Maybe not more peaceful. But more sane. Also, the blood of the Color Revolutions will dry up. But… that is day dreaming. They will come up with something!
Analysts have for years been warning about the financial collapse of the US, due to it’s enormous domestic and foreign debt, as well as due to the fact that the dollar is printed backed by nothing, the US military excluded. However, will the US elite accept a peaceful collapse, or will they take the US to a wider war (an old trick), all in the hope of starting a war economy and avoiding a collapse ? We shall see.
The latter, of course. The war economy’s actually been with us since at least 9/11 in earnest, but of course it can always be ramped up further. The collapse is still inevitable sometime down the road, but my money’s on a full digital conversion thereafter, with a one time conversion rate, which will of course be rigged in favor of current insiders and power brokers. Those unfortunate enough not to have bank accounts prior will likely be stiffed altogether. All digital being the ultimate control device for any unruly deviants among us.
Wall Street is a reflection of the state of the economy…
No doubt the greatest lie that Wall Street ever perpetrated. Wall Street is always a reflection of the state of current financial speculation, no more, no less. To the average Joe it’s totally irrelevant, other than as an excuse for wealthy capitalists to destroy their jobs and livelihoods.
So the banks that failed in 2008 … through their own fraudulent fault … got bailed out with $29TRILLION.
But the American people who are failing today because of the virus … through NO fault of their own … get $2.2TRILLION?????
“The largest amount ever approved in the history of the United States…”
What’s wrong with this picture?????
PS: I realise the “…largest mount ever approved…” was because it came from a different avenue,but still, why not use the same avenue that bailed out the banks … what am I missing here????? (Sarcasm)
Helluva racket, ain’t it? All a product of the Federal Reserve Bank cartel. Essentially the origin of the 1913 coup of the US and the genesis of today’s globalist banking system.
It has not gone into the real economy only the neoliberal world of the 1 to 5%
Dear Jean-Luc. Thank you for your insights.
Can you or someone please answer this question?
The possible answer in deep resilience of US financial system stability may be as follows.
Imagine, the Congress decided to give CARE check of digital $50000 to each account of 200 millions Americans. This means printing of 10 trillions. Assume there is $100 trillions of cash circulating in the World. This CARE checks will add only 10% to the value. Will prices rise? Not much.
Because these who rise the prices will loose.
(Assume Samsung will rise prices. But Apple will not.
Will Apple loose? No. Because the dollars will be still in demand. There is no alternative to them.
So Samsung will lose the competition. So Samsung cannot raise the price.)
There is no inflation to follow.
(Of course the will be fluctuations, but we look for the major picture.)
Note, the enriched Americans can do anything with these dollars. And they will suck a lot of the
goods and material from other countries. (As US always does in decades.)
Based on this logic what if to print to each second American a million?
This will be equivalent to throwing to the market $100 trillion.
That means devaluation dollar twice. That could be a disaster, but again not that much as at Weimar Republic. 200% is not that bad. And really, again there is no alternative and would not be 200% inflation. The World will still use the dollar with prices raised below the twice in magnitude.
So, before real troubles happen, the financial system has a very long way to go.
The stability is even more strong if to take in account inflation of 200%. This will do as well as
when Weimar Republic products flooded British market. The revival of US deindustrialized economy
will be as good as for 30th Germany.
The excess liquidity is available to only a small group of bank clients. There will be a merger and acquisition spree the world has never seen before in search of monopoly rents.
The COVID crisis will kill small and medium businesses, leaving room for larger corporations to grow by buying up cheap assets (mostly from failed black and colored businesses which are most vulnerable). There seems to be a tinge of racism in the coming bankruptcy tsunami.
For example, in the building materials market we have seen the merger of Holcim and Lafarge which at first glance appear to be in competitive markets but are not. Cement plants have local monopolies about 150 km around each plant. This form of business will be the first to push up their prices as they have pricing power. Their energy costs have collapsed with coal (essential for making cement), greatly boosting profit margins.
War or the threat of war leads to the building of many fortified structures which is great for concrete suppliers.
shows the one day stock price move was 1.77% vs 1.05% for the materials sector – with a one year rate of return of 1.8%.
The company has a sustainability officer, Magali Anderson since October, 2019. It almost makes me feel good.
This is the company (successor to Lafarge) that helped the Islamic State by supplying six million tons of cement and concrete for building underground bunkers in Syria. That is more than twice the largest dam in Africa (Lesotho).
The company is headquartered in Jonas, Switzerland where the treasury payments are managed (the Syrian cement plant needed about one trainload of coal to be imported per month as a minimum). Those payments in a centralized multinational treasury operation would have to be approved in Jonas, Switzerland.
You will notice these kind of “situations” arrive in companies that will soon be taken over. The old name is then “disappeared” and in a few years time almost everyone will have forgotten the scandal. What a coincidence.
The only reason the executives of Holcim are not in front of a judge is due to Swiss government collusion.
There are winners in the current situation. Crises are also opportunities for many.
“Crises are also opportunities for many.”
Yes … especially for those who engineer the crises.
The same happened when Dow took over duPont. All duPon’ts, and possibly Dow’s legacy Union Carbide (Bhopal) environmental liabilities were turned over to Chemours. There is a refinery 12mi south from me that was, and probably still is, a huge emitter of sulfur dioxide and particulates. It refines dirty Saudi crude, and now tar sands oil. It is constantly changing names: Star, Texaco Star, Aramco, Valero. I think it was originally Getty. That’s how these guys roll.
First clear picture of the US economy in a long time. Thank you. Unfortunately, these facts paint a dim future not only for the US, but for the world.
Is the United States on its way to repeating the Wehrmacht Republic’s mistakes of the 1920s?
in the 1920s, it would be the Reichswehr Republic, which wouldn’t even be that far from the truth…
I think the author meant “Weimar”.
The German military “Reichswehr” was baptised into “Wehrmacht” by Hitler. (after Weimar Republic had disappeared).
The new Belt and Road Initiative is the world’s best hope for breaking the lock that the banksters have on the world’s economy and continued US dollar tyranny. The biggest problem, the Anglo-Zionist Empire has nukes, lots of them. They will not go quietly into that dark night.
I prefer looking at the ‘big picture’ first. It is better for keeping things simple and identifying the biggest drain on the finances of a nation. This is what ordinary people have to do when they get into money trouble. They identify where the money is going and what is necessary or expendable.
There should be no argument that the largest, unnecessary expenditure of the U.S. is found in their efforts to expand and maintain the empire. Military spending! Over 800 foreign bases all over the planet. Never-ending wars, killing millions, and destroying countries. I suspect that the true cost of these misadventures is not known but is tens of trillions more than what shows on the books of the Pentagon and Department of State. Could you imagine the good which could be accomplished if that money and effort was spent building, not destroying? Helping not killing?
Oh yes, the military-industrial complex that General Eisenhower warned of has to be fed. These are private enterprises. If they wish to survive they can become multi-use companies. Instead of inventing and creating machines that kill and destroy efficiently, they can invent and create machines that build and help society. Or they can go out of business.
And I’m afraid that is where the simple part ends.
Craig, couldn’t agree with you more. What a waste the US military is on so many levels. European colonialism became cutthroat capitalism, raping and pillaging the world of its resources and killing untold millions of innocents. Thankfully, the world is finally waking up. The new Belt and Road Initiative is a good example of this reawakening. China and over 70 other nations are realizing that the Anglo-Zionist Empire’s day is over and have joined together in a mutually beneficial “new world order” based on cooperation rather than domination. It can’t happen soon enough.
I don’t know why financial analysts never look onto the balance sheets of banks.
Quantative easing is not a swap of low-performing (junk) bonds for cash. The FED doesn’t have large cash amounts – coins being an asset and notes being a liability for the central bank. If you look what happened to the FED’s balance sheet is that it created a huge amount of central bank reserves out of thin air (not cash!), i.e. an overall enlargement of the balance sheet: asset side got pumped up with MBS and liability side fuelled with central bank reserves. That’s a major difference!
Shadow stats shows even the fake U-3 not getting to 5% until 1998, and a real guestimate, the ShadowStats figure getting to around 10% probably around late-2000. After 1990, if not 1982, or even 1973 for that matter, we never did get anywhere near full employment. If anything by 1998 we were already in a Great Recession, a Great Depression by 2003, and a Greater Depression within a few years after 2008. I am taking into account not just the depths of troughs but the widths that easily make up for shallower depths. Energy consumption has been stuck at around 100 quads (quadrillion BTUs) since 2000 at least. What the U.S. is obviously facing is not a mere approximately 54 year K-wave or 80 year social crisis, but more like a collapse that happens every several centuries supposedly. Since the official Scaliger-Petavius chronology looks suspect from what I’ve recently been hearing, I’m not sure what to think, other than what is happening is an order greater than those cycles at least.
It might help matters if economic statistics as published by the US (and UK) government departments – such as the Bureau of Labor Statistics – should not be taken at face value. The figures for unemployment, growth and inflation are clearly manipulated for political reasons. Yet time and again these bogus figures are trotted out by various economists and politicians as though they were a true record of what was going on. As a corrective it might be useful to compare the ‘official’ statistics to those published by John Williams, ‘Shadow Government Statistics’.
There was an amusing little episode in the UK during the Thatcher ascendency when the unemployment figures were massively understated by the National Audit Office. Unemployment was falling during a recession, this seemed a very unlikely story. However, one of Margaret’s senior ministers, Sir Ian Gilmour, broke the silence with a brilliant and sarcastic little quip. Namely. ”Now that we” – the Tory government – ”have reduced the unemployment figures, perhaps we could make a start on reducing unemployment”! Gilmour was subsequently fired.
I’m a total ignoramus about finances :-)
I have a couple of questions, if they are in place at all.
I only know that America must have military bases all over the world in order to be able to maintain the “arms” of its economy. I just don’t believe that a nation’s economy on a global scale can function without some military protection. Second, the EU has wiped out national currencies with monetary union and the Euro. What can happen if the US creates a monetary union with part of South America and Canada? Shouldn’t a new currency be created? If $ remained, it would mean the erasure of all nations and their characteristics as independent states. The new currency would be a fair compromise where all countries in the monetary union would retain their national and state-building characteristics. Even the USA. I guess the debtors would be in a very awkward position because of the return of a new value that would surely bury the $ that would become worthless. Is there such a possibility? I don’t understand why $ must exist forever? Well, he is an intangible value based on nothing. $ is not even mentioned in the holy books.
The US has no need to create a monetary union with countries of south America because those countries currencies are already “pegged” to the Dollar, meaning they denominate their value in accordance with the Dollar reserve holdings of given country, & whatever the IMF & World Bank agree in terms of loan extensions, & roll overs etc. The Euro is a different scenario, this is Germany re-producing US hegemony locally by locking in member countries into a currency that it controls, via its influence over the ECB (European Central Bank). The author of the piece says globalization is what has enable the US Dollar issuance by the Fed to avoid inflation, but what does that mean? Basically, the US Dollar, as a global currency, is being carried by the weight of all the economies of the world. This is why inflation never follows a large-scale Fed issuance of Dollars, essentially global demand for the US Dollar is keeping it afloat. Ultimately, in a hugely complex system, it is actually that simple. Hence why more powerful countries are actively “de-Dollarizing”, but this will not crash the Dollar, there are only two things that can crash the Dollar, a global strike on the Dollar or a massive scale issuance by the Fed that goes beyond what global Dollar demand & holdings can support. The Fed will never do this, they calculate strictly what they can afford to issue, in terms of QE, & always make sure that it stays short of any potential inflationary effect, & a hike is also unlikely because the global economy is Dollar based. The key factor is the amount of trade that is conducted in USD, that is the essence of the essence, whilst the Dollar accounts for more that two third of global trade, it will not crash. The Dollar would begin to become unstable in the event that its usage declines to cover half of world trade. Off books drug money is used to cover a lot of the more toxic aspects of global finance, there are always ways & means the Fed can deflect a Dollar collapse for as long as so much global trade is conducted in Dollars. It is simple, demand for the Dollar keeps it afloat, & thus subsidizes the US economy, a drop in demand for the Dollar is what would cause its eventual collapse. A third possibility is that the US itself ceases to exist as a result of internal strife, that is a possibility, & it is being predicted, but it is impossible to say how likely that is, no one knows. Some believe that there are “elite” plans to dissolve the US a means of clearing the balance sheet & starting from scratch, may be such a plot exists, but I wouldn’t know how certain that is either.
Inflation as main street knows is higher on staples then is reflected in “official” inflation figures.
Pouring money into a stock market overvalues stocks that can never return that money in anything equivalent to a human lifetime….so why invest in the stocks?
Its the old shell and pea trick with joe public ending up with the empty shell.
If the Western economies don’t pull the rug from under the stock market then we have zombie economy…but wait isn’t all our retirement futures tied up in the market???
The income of 90% of Americans fell sharply in the last 40 years, and vice versa, that of the affluent 1% rose quite sharply. So where is the great mystery, why the money printing does not cause inflation on the butter market, but on the paper market only? Only this latter is not called inflation, though, but conjuncture; highly welcome for the ‘investors’.
The enormous generated credit does not reach the 90%, they are not credit worthy for a long time already. It does reach the speculators gambling on the stock and other casino games, like derivatives. So with the stock income falling sharply, stock rises sharply, but where is the mystery knowing about the QE, a money and credit deluge into this highly ‘financiallised’ so called economy? Which is simply another name for robbing the public blind thru money printing and then gambling with their money. It is not used for anything productive, it only redistributes wealth from poor to the rich, without giving any value in return to the society and economy.
So, where is the big mystery?
Nailed it! Welcome to the new casino economy.
“On September 18th, they had returned to their September 16th level. The cause of this ephemeral panic remains a mystery. But the fact that the Federal Reserve had to keep intervening for several months, leads one to conclude that structural causes might have been at work.”
If banks do not want to lend to each other, that can only mean insiders know that some banks are rotten to the core. The Fed had to inject trillions last years to temporarily save the Wall Street banking system, which might have triggered the Covid stuff as the only way to get the banking system out of the bad debt trap.
An excellent video here about the soon coming stock market crash by Neil McCoy Ward…
Being familiar with trends, velocity, frequency, and direction,
have you happened to notice the trend in America of supporting
agendas with the following characteristics:
2.) Corrupt and based on complete lies
9.) Appeal to emotion and emotionally charged but entirely without substance.
Those characteristics are the unifying thread behind all American policies ranging from domestic, foreign, economic, environmental, health, science, education, etc. Also take into consideration that those charcteristics are increasing in intensity frequency, and direction.
America cannot survive on those terms.
Denying it is fatal.
Correlate it to driving towards an enormous brick wall at increasing speeds, we have almost no time left to reverse course. The wall, is not going to get out of the way. Consider the wall to be reality.
Time is of the essence. Time is almost up. Use it wisely and reverse course or die. Continuing on the current trajectory is guaranteed death and destruction.
Good of the author to bring to attention the September 2019 banking crisis (when the “repo” market froze) that went completely unreported in the mainstream media.
Covid stimulus money is not reaching the real economy because the banks are now using it to pad their balance sheets and speculate for their own gain on the stock market. (Hence the idea came about of bypassing the banks and crediting the bank accounts of the citizens directly.)
The stock market has now become a reservoir of inflation and completely disconnected from the real economy.
The financial system is showing worrying signs of systemic instability (note also the Comex default in March 2020) We seem to be on 6 month intervals of significant financial events , and we’re overdue for the next one. Sept 2019…March 2020… ??
Maybe there will be a financial Nov surprise timed with the US presidential election?
Jean-Luc Basle states “Unemployment in the US was 3-5% in December 2019” This is a fictitious number produced by the US Bureau of Labor Statistics. Ir was really closer to 20%.
They arrive at the fake number by re-classifying the long term unemployed, who are not receiving benefits as “not in the labor force” along with retirees that now number 100.67 million up from 95.69 million in September 2019.
Approximately 60 million receive social security retirement and disability benefits that leaves approximately 40 million people unaccounted for.
In early 1981 the economy was already slowing down, but when Volcker raised the interbank lending rate to 21% in June 1981, it killed it stone dead.(I cashed in my metals trading inventory at close to the top of the market and put the proceeds on deposit at 20% for a month at a time, adding the interest to the principal, every month.)
And what does Jean-Luc mean when he writes that the Federal Reserve injected money into the economy ? They did not such thing, since businesses were paying down their credit lines as fast as the could, while refusing to borrow at over 21% . And none went to consumers, who represent 70% of the US economy
Loretta Masters is recommending having the Federal Reserve wire transfer money directly to every American. However, they are not legally empowered to do this, and more to the point they have no electronic means of doing so currently at their disposal.
What really needs to happen is to have the US Treasury take back the exclusive right to create all US money debt free, and spend it where most needed to fund a universal basic income, and to finance infrastructure. Inflation could be easily controlled by having the IRS tax money back out of existence as necessary. After all 98% of all money is just a series of data entries on computers.
Taking this approach to its logical conclusion, all state sales and income taxes could be abolished, and instead have the US Treasury fund the 51 states debt free on a per capita basis.
The unemployment rate mentioned in the text is the U3 number or “Insured Unemployed” – this is the statistic mentioned by the media. U6 is a better statistic, even though it still understates the true unemployment level. The Covid-19 created a new category of unemployed insurance: the “Pandemic Unemployment Insurance” (see DoL News Release). This statistic is rarely, if ever mentioned in the media.
The Fed’s balance sheet totaled $733 billion in 2002 or 6.7% of GDP. In 2019, it totaled $4,166 billion, or 19.4% of GDP. M2 is another indication of how much money the Fed injected into the economy.
“On Aug. 13, a top official confirmed that the U.S. Federal Reserve is preparing for a digital currency.” (see “Programmable Digital Currencies Are Coming – Here’s What That Means”). Reportedly, China created a digital yuan, and the BIS is also studying this alternative.
Thank you for your reply.
All major currencies are now 98% digital, created on computers with a keystroke.
The difference is that China’s government owned central bank creates their domestic currency, the yuan free of debt that is used to create prosperity, but the privately owned US central bank and its member banks that create all US money as compound interest bearing debt, so that: no debts = no money. It is debt that is crippling the US economy, apart from the stock market, while China’s general economy continues to grow.
The result of these different monetary systems is that the US Treasury is now $26 trillion in debt to the private sector, and China is now the world’s largest creditor nation with $2.3 trillion in foreign exchange reserves.
Attributed 1865 quote from the bank of England: “If this mischievous financial policy, which has its origin in North America, shall become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt.” And this is just what China is doing and why it is in the US gunsights.
If the Covid crisis has shown us anything, it has demonstrated that economics as we know it ceased to exist. Trillions of $$$ were conjured up out of thin air at a whim. There is no longer a true balance sheet, no accounting, or anything else of that sort. And thus there will be no reckoning. Events will keep on going down the same path as they currently are until Mother Nature reaches her limits, (and those limits will be reached in the not too far distant future, but that is another subject.) It is as if some Caesars just dole out “purchasing credits” to whomever they please. Some folk get plenty, and others not a dime. And those who do not get a dole, have to then go out begging, or working. Most industries no longer exist for the purposes of making products that people need, but rather make products, or pretend to make products, for the purposes of acquiring money. The stock market is going up because we here in the U.S. are literally swimming in money, and there is nowhere else to put it. (Too bad the minions don’t get some of it.) The reason prices on many commodities are not going up even though there is a money oversupply is because there is an even greater oversupply of products. (Of course, prices on the few things that people really do need, like food, are going up.) Unlike in the ’50 and ’60s when industrialization was coming of age, in today’s world there really is no longer a reason for the mass populace to work, or at least not so much. Housing and roads have been built, products have been produced, and those products that still need to be produced are now made by machines. The essential economic problem we face today, is how to distribute money to a populace that has no true reason to work; i.e. how does an economy prosper, when industries need to be scaling back, and there is no need for jobs? How does one create a dole for the masses? I suppose the $1200 for staying home because of Covid is a start. Far sighted economists have been talking about “helicopter money.” At one time return on bank accounts having good interest rates served as a form of dole for people who knew how to save, but the today’s economy is too shot for that.
Savings actually shrink the economy, since they remove money from circulation. It is beneficial to the saver, but deleterious to the general economy. This is known as the Savings Paradox.
The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand, and thus a decrease in gross output, which will in turn lower total saving.
In an environment where there is an overstock of goods, one wants production, and thus the economy to shrink so as to draw down the excess of goods. Likewise, in an environment where there is excess monetary liquidity, one wants people to save in order to draw down the excess liquidity. Problem is those who haven’t saved, and are on no dole, i.e. those don’t have sufficient cash available to them are caught in a bind. That is the real economic paradox.
‘Wall Street is a reflection of the state of the economy which is in recession since February, the worst recession since 1929’
Actually, that is not correct. It is perfectly possible in theory for many of the S&P 100 companies to be doing very well despite overall recession in the USA. It depends on whether their prospects are tied more intimately to US economic conditions as opposed to global ones.
More realistically, with automated bot trading now the norm, the value of stock markets is tied solely to short-term trading algorithms and absolutely nothing to do with 10 year P+L forecasts.
I said a decade ago that Stock Markets had lost their raison d’etre, in that they were there to provide liquidity for companies and ease of exit for investors. When that became overtaken by opportunities for speculative trading, then they became casinos not an alternative to banks.
The thing that should be far more intimately tied to the prospects of the US economy is the value of the dollar.
Even then, with market rigging endemic in the US since 1971, that is not a very precise correlation.