The Fed's Cut And Run Strategy
By Jeff Berg
19 September, 2007
Countercurrents.orgMost of the quotes in this piece are taken from an article by Mike Whitney, 'U.S. Banks Brace for Storm Surge'. htp://www.counterpunch.org/whitney09182007.html Whitney has for the last few years been very much ahead of the curve in recognizing and clearly delineating the forces at work in the U.S. and global economy. I highly suggest you read his most recent piece as it does a very good job of explaining the dilemma now facing the Federal Reserve and the U.S. economy.
The reason I've cut and pasted these particular quotes is because they very nicely illustrate the "Cut & Run" strategy many are thinking the U.S. Federal Reserve will use to try and side-step the current crisis.“Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring." (Whitney)
It is true to say that the recent crisis was very much sparked by the subprime mortgage meltdown and the resulting popping of the U.S. housing bubble. However there are deeper factors at play in the wider ripples being created by the value of CDO's and CLO's dropping like a stone and it is these factors that will have to be addressed for any real solutions to be enacted. If this is not done the international crisis in confidence and liquidity that we are seeing now will seem like the good ole days as compared to the great unraveling that will occur if our financial elites refuse to address the fundamental realities we are facing. These factors start with but are of course not confined to the $3 billion a week Iraq war, America's $800 billion current account deficit and $9 Trillion debt. But back to the Fed's fandango with the devil for now.
Step 1) Inject massive amounts of liquidity into the system, a process which in fact is already well started. To gain a sense of the severity of the problem consider the fact that more money has been pumped into the financial system as a result of the subprime mortgage meltdown than was pumped in as a result of 9/11.Step 2) Cut rates. This will serve two purposes. It will increase liquidity and further crash the dollar. This in turn will increase inflation and so help the U.S. government to skate their way out of an even more substantial portion of its foreign debt than it has already managed. This tactic is what bank analyst Hugh Brown told me "Every democracy tries when faced with unsustainable debt." Again this process is already well underway. The U.S. has been the poorest performing major currency in the world for the last five years and this trend is not about to end soon. As to the really occurring inflation rate it is certainly in double digits already.
“The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6 per cent in the most recent quarter.” (WSJ) "That’s 18.4 per cent a year, and yet Bernanke is still considering cutting interest rates and further fuelling inflation.” (Whitney)"Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result." (The International Herald Tribune)
And yes this reckless abandon will end in very substantial paper losses even among the U.S. "haves and have mores" but I don't see this alienating much of the real base, the top 1 percent. Firstly because they have been making out so fabulously well under the Bush/Greenspan plan that to them so far at least this is little more than the kind of correction the market inevitably makes anyway. While we are on the topic of Greenspan it's more than a bit silly of Alan G. at this point to try and get out from under his part in this debacle but I guess once you’re in your 80's all you've got left to fight for is your "legacy". Nonetheless memoir or no memoir it is very hard to see history being anything but savage with either of these conspirators. History is written by the winners after all and these guys have managed to gamble and lose the New American Century in just six years.
Another reason the top 1% are unlikely to rebel is that they own and control so many of America's real assets. Yes these assets will be difficult to sell for a time but they will hold real value regardless of the vagaries of the monetary system and the U.S. dollar.
The “have mores” also understand that from their perspective this is very much the least disadvantageous of all the evils remaining out of the very limited range of choices left to the Fed. There is also the not inconsiderable fact that those who harbour nefarious longer range ambitions will see in this the opportunity to finally well and truly break the back and value of U.S. labour. How?A) Lots of working Americans are about to get tossed out of their homes. Home foreclosures have doubled as compared to last year and as devastating as the effects have so far been the real damage in the subprime mortgage meltdown has yet to be felt. The majority of these mortgages have yet to reset from the low introductory “teaser” rate to the contractually agreed upon much higher rate; the mechanism that triggered this mess in the first place.
B) Americans are maxed out credit wise. The average American has about $9,000 in credit card debt. With the crash in the housing market American workers have lost their ATM of last resort. In addition consumer spending now accounts for about 70% of the U.S. economy and the housing market for most of the growth. With the latter of these two components in free fall the first is sure to join it and with it will come significant job losses. Which will of course toss more people on to the street and so on.
C) After a good stretch of increased liquidity, low rates and galloping inflation, this crisis in liquidity will end as such things invariably do, with a collapse in prices and economic activity.
D) The ensuing prolonged poverty, desperation and misery will ensure a very compliant and "grateful" workforce for many years to come.
There is very little to cheer about in this news I know but what can I tell you? Unless there is a very sudden and very genuine conversion by Bush-Cheney and gang to the kind of genuine market discipline that would entail letting their reckless friends take the free market medicine they are so quick to advocate for others, as well as a massive helping hand by the federal government to help the little guys and girls keep their houses, it is what the facts are telling us.
"Bernanke should not even be contemplating a rate cut. The market needs more discipline not less. And workers need a stable dollar." (Whitney)“What about the American worker whose wages have stagnated for the last six years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing. Inflation is just a hidden tax progressively eroding his standard of living.” (Whitney)
ERGO WE KNOW WHAT HE’LL OPT FOR DO WE NOT?
NB. There is of course the possibility that the people that are making the most sense of this mess have nonetheless misread the very complicated forces at play and the Fed and central banks will once again pull a rabbit out of their butt and we'll lurch on like this for another couple of years.
If not.
Hang on boys and girls because things are about to get very bumpy and my home country of Canada is not about to be exempted. After all our economic pundits like to say: "If the U.S. economy sneezes Canada gets a cold." So what happens then when the U.S. gets double pneumonia?
One final caveat. If the Feds act like I expect many of the worst difficulties could remain mostly disguised for at least the next six months and maybe as much as a year especially if the weather is very kind to us. The reason I mention the weather is not so that we can switch the subject to a nice - neutral more pleasant topic. Even that escape is denied us these days. It is instead because a warm winter and cool summer and no CAT 4 or 5 hurricanes in the Gulf of Mexico will greatly moderate energy prices as compared to the opposite scenario. In a recent discussion with Canadian geoscientist David Hughes he hypothesized that if a Katrina like hurricane were to smash into U.S. natural gas rigs in the Gulf prices would likely instantly double. Add to this the projection by Canadian journalist Gwynne Dyer and Canadian food security specialist Wayne Roberts that the era of cheap food has ended and one can see the multiple stresses that America's credit challenged population is facing.
If however everything goes according to the Fed's cut, run and pray dreams the plus side will be that this delay may be long enough to give those who see what’s coming a little more room for maneuver. But it will do so at the cost of two very unfortunate things.
1) It will make Bush and Cheney's getaway all but complete. I.e. The worst of the economic effects will not take place until the next President takes over. Which is of course the very strongest reason why the Fed's "consequences be damned" strategy is the most likely scenario to unfold.
2) It will make the financial shit storm our "betters" have led us into all that nastier when it finally lands.
As to claque of neocons and their financial elite helpers that devised this Plan B smash and grab operation when their dreams of Empire turned to dust in the sands of Arabia, they will have managed to get clean out of Dodge even as they stick the next administration with the war, the crash and the debt. Then, safely ensconced at AEI or some other propaganda factory, they will plot their rewriting of history rearguard action.
There they will posture and bluster and lie and keep it up until the day they die claiming all the while that like Alan G. none of this was their fault, and who could have foresaw it anyway, and in any case if only we’d stayed the course in Iraq a little while longer all would have been well, and isn't this the best of all possible worlds anyway?
At this point all I can think to say is to quote Keith Olbermann: “Good night and good luck.”http://www.truthout.org/docs_2006/091407A.shtml
(link to Keith Olbermann’s “The Promotion of Failure in the Bush Administration”
Jeff Berg
www.postcarbontoronto.org
www.pledgeTOgreen.caWHITNEY’S FINAL WORD:
"Bernanke can either be a statesman or he can take the cowards route and buy some time by flooding the system with liquidity, stimulating more destructive consumerism, and condemning the nation to an avoidable cycle of double-digit inflation."
MY FINAL WORD:And I say again: Does this not tell us what course will be chosen?
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