The
Fed's Cut And Run Strategy
By Jeff Berg
19 September, 2007
Countercurrents.org
Most
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.ca
WHITNEY’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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