Tag Archives: Quantitative Easing

Why the Banking System Is Breaking Up

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By Michael Hudson

Source: The Unz Review

The collapses of Silvergate and Silicon Valley Bank are like icebergs calving off from the Antarctic glacier. The financial analogy to the global warming causing this collapse of supporting shelving is the rising temperature of interest rates, which spiked last Thursday and Friday to close at 4.60 percent for the U.S. Treasury’s two-year bonds. Bank depositors meanwhile were still being paid only 0.2 percent on their deposits. That has led to a steady withdrawal of funds from banks – and a corresponding decline in commercial bank balances with the Federal Reserve.

Most media reports reflect a prayer that the bank runs will be localized, as if there is no context or environmental cause. There is general embarrassment to explain how the breakup of banks that is now gaining momentum is the result of the way that the Obama Administration bailed out the banks in 2008 with fifteen years of Quantitative Easing to re-inflate prices for packaged bank mortgages – and with them, housing prices, along with stock and bond prices.

The Fed’s $9 trillion of QE (not counted as part of the budget deficit) fueled an asset-price inflation that made trillions of dollars for holders of financial assets – the One Percent with a generous spillover effect for the remaining members of the top Ten Percent. The cost of home ownership soared by capitalizing mortgages at falling interest rates into more highly debt-leveraged property. The U.S. economy experienced the largest bond-market boom in history as interest rates fell below 1 percent. The economy polarized between the creditor positive-net-worth class and the rest of the economy – whose analogy to environmental pollution and global warming was debt pollution.

But in serving the banks and the financial ownership class, the Fed painted itself into a corner: What would happen if and when interest rates finally rose?

In Killing the Host I wrote about what seemed obvious enough. Rising interest rates cause the prices of bonds already issued to fall – along with real estate and stock prices. That is what has been happening under the Fed’s fight against “inflation,” its euphemism for opposing rising employment and wage levels. Prices are plunging for bonds, and also for the capitalized value of packaged mortgages and other securities in which banks hold their assets on their balance sheet to back their deposits.

The result threatens to push down bank assets below their deposit liabilities, wiping out their net worth – their stockholder equity. This is what was threatened in 2008. It is what occurred in a more extreme way with S&Ls and savings banks in the 1980s, leading to their demise. These “financial intermediaries” did not create credit as commercial banks can do, but lent deposits out in the form of long-term mortgages at fixed interest rates, often for 30 years. But in the wake of the Volcker spike in interest rates that inaugurated the 1980s, the overall level of interest rates remained higher than the interest rates that S&Ls and savings banks were receiving. Depositors began to withdraw their money to get higher returns elsewhere, because S&Ls and savings banks could not pay higher their depositors higher rates out of the revenue coming in from their mortgages fixed at lower rates. So even without fraud Keating-style, the mismatch between short-term liabilities and long-term interest rates ended their business plan.

The S&Ls owed money to depositors short-term, but were locked into long-term assets at falling prices. Of course, S&L mortgages were much longer-term than was the case for commercial banks. But the effect of rising interest rates has the same effect on bank assets that it has on all financial assets. Just as the QE interest-rate decline aimed to bolster the banks, its reversal today must have the opposite effect. And if banks have made bad derivatives trades, they’re in trouble.

Any bank has a problem of keeping its asset valuations higher than its deposit liabilities. When the Fed raises interest rates sharply enough to crash bond prices, the banking system’s asset structure weakens. That is the corner into which the Fed has painted the economy by QE.

The Fed recognizes this inherent problem, of course. That is why it avoided raising interest rates for so long – until the wage-earning bottom 99 Percent began to benefit by the recovery in employment. When wages began to recover, the Fed could not resist fighting the usual class war against labor. But in doing so, its policy has turned into a war against the banking system as well.

Silvergate was the first to go, but it was a special case. It had sought to ride the cryptocurrency wave by serving as a bank for various currencies. After SBF’s vast fraud was exposed, there was a run on cryptocurrencies. Investor/gamblers jumped ship. The crypto-managers had to pay by drawing down the deposits they had at Silvergate. It went under.

Silvergate’s failure destroyed the great illusion of cryptocurrency deposits. The popular impression was that crypto provided an alternative to commercial banks and “fiat currency.” But what could crypto funds invest in to back their coin purchases, if not bank deposits and government securities or private stocks and bonds? What is crypto, ultimately, if not simply a mutual fund with secrecy of ownership to protect money launderers?

Silicon Valley Bank also is in many ways a special case, given its specialized lending to IT startups. New Republic bank also has suffered a run, and it too is specialized, lending to wealthy depositors in the San Francisco and northern California area. But a bank run was being talked up last week, and financial markets were shaken up as bond prices declined when Fed Chairman Jerome Powell announced that he actually planned to raise interest rates even more than he earlier had targeted, in view of the rising employment making wage earners more uppity in their demands to at least keep up with the inflation caused by the U.S. sanctions against Russian energy and food and the actions by monopolies to raise prices “to anticipate the coming inflation.” Wages have not kept pace with the resulting high inflation rates.

It looks like Silicon Valley Bank will have to liquidate its securities at a loss. Probably it will be taken over by a larger bank, but the entire financial system is being squeezed. Reuters reported on Friday that bank reserves at the Fed were plunging. That hardly is surprising, as banks are paying about 0.2 percent on deposits, while depositors can withdraw their money to buy two-year U.S. Treasury notes yielding 3.8 or almost 4 percent. No wonder well-to-do investors are running from the banks.

The obvious question is why the Fed doesn’t simply bail out banks in SVB’s position. The answer is that the lower prices for financial assets looks like the New Normal. For banks with negative equity, how can solvency be resolved without sharply reducing interest rates to restore the 15-year Zero Interest-Rate Policy (ZIRP)?

There is an even larger elephant in the room: derivatives. Volatility increased last Thursday and Friday. The turmoil has reached vast magnitudes beyond what characterized the 2008 crash of AIG and other speculators. Today, JP Morgan Chase and other New York banks have tens of trillions of dollar valuations of derivatives – casino bets on which way interest rates, bond prices, stock prices and other measures will change.

For every winning guess, there is a loser. When trillions of dollars are bet on, some bank trader is bound to wind up with a loss that can easily wipe out the bank’s entire net equity.

There is now a flight to “cash,” to a safe haven – something even better than cash: U.S. Treasury securities. Despite the talk of Republicans refusing to raise the debt ceiling, the Treasury can always print the money to pay its bondholders. It looks like the Treasury will become the new depository of choice for those who have the financial resources. Bank deposits will fall. And with them, bank holdings of reserves at the Fed.

So far, the stock market has resisted following the plunge in bond prices. My guess is that we will now see the Great Unwinding of the great Fictitious Capital boom of 2008-2015. So the chickens are coming hope to roost – with the “chicken” being, perhaps, the elephantine overhang of derivatives fueled by the post-2008 loosening of financial regulation and risk analysis.

Global Planned Financial Tsunami Has Just Begun

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By F. William Engdahl

Source: Global Research

Since the creation of the US Federal Reserve over a century ago, every major financial market collapse has been deliberately triggered for political motives by the central bank. The situation is no different today, as clearly the US Fed is acting with its interest rate weapon to crash what is the greatest speculative financial bubble in human history, a bubble it created. Global crash events always begin on the periphery, such as with the 1931 Austrian Creditanstalt or the Lehman Bros. failure in September 2008. The June 15 decision by the Fed to impose the largest single rate hike in almost 30 years as financial markets are already in a meltdown, now guarantees a global depression and worse.

The extent of the “cheap credit” bubble that the Fed, the ECB and Bank of Japan have engineered with buying up of bonds and maintaining unprecedented near-zero or even negative interest rates for now 14 years, is beyond imagination. Financial media cover it over with daily nonsense reporting , while the world economy is being readied, not for so-called “stagflation” or recession. What is coming now in the coming months, barring a dramatic policy reversal, is the worst economic depression in history to date. Thank you, globalization and Davos.

Globalization

The political pressures behind globalization and the creation of the World Trade Organization out of the Bretton Woods GATT trade rules with the 1994 Marrakesh Agreement, ensured that the advanced industrial manufacturing of the West, most especially the USA, could flee offshore, “outsource” to create production in extreme low wage countries. No country offered more benefit in the late 1990s than China. China joined WHO in 2001 and from then on the capital flows into China manufacture from the West have been staggering. So too has been the buildup of China dollar debt. Now that global world financial structure based on record debt is all beginning to come apart.

When Washington deliberately allowed the September 2008 Lehman Bros financial collapse, the Chinese leadership responded with panic and commissioned unprecedented credit to local governments to build infrastructure. Some of it was partly useful, such as a network of high-speed railways. Some of it was plainly wasteful, such as construction of empty “ghost cities.” For the rest of the world, the unprecedented China demand for construction steel, coal, oil, copper and such was welcome, as fears of a global depression receded. But the actions by the US Fed and ECB after 2008, and of their respective governments, did nothing to address the systemic financial abuse of the world’s major private banks on Wall Street and Europe , as well as Hong Kong.

The August 1971 Nixon decision to decouple the US dollar, the world reserve currency, from gold, opened the floodgates to global money flows. Ever more permissive laws favoring uncontrolled financial speculation in the US and abroad were imposed at every turn, from Clinton’s repeal of Glass-Steagall at the behest of Wall Street in November 1999. That allowed creation of mega-banks so large that the government declared them “too big to fail.” That was a hoax, but the population believed it and bailed them out with hundreds of billions in taxpayer money.

Since the crisis of 2008 the Fed and other major global central banks have created unprecedented credit, so-called “helicopter money,” to bailout the major financial institutions. The health of the real economy was not a goal. In the case of the Fed, Bank of Japan, ECB and Bank of England, a combined $25 trillion was injected into the banking system via “quantitative easing” purchase of bonds, as well as dodgy assets like mortgage-backed securities over the past 14 years.

Quantitative madness

Here is where it began to go really bad. The largest Wall Street banks such as JP MorganChase, Wells Fargo, Citigroup or in London HSBC or Barclays, lent billions to their major corporate clients. The borrowers in turn used the liquidity, not to invest in new manufacturing or mining technology, but rather to inflate the value of their company stocks, so-called stock buy-backs, termed “maximizing shareholder value.”

BlackRock, Fidelity, banks and other investors loved the free ride. From the onset of Fed easing in 2008 to July 2020, some $5 trillions had been invested in such stock buybacks, creating the greatest stock market rally in history. Everything became financialized in the process. Corporations paid out $3.8 trillion in dividends in the period from 2010 to 2019. Companies like Tesla which had never earned a profit, became more valuable than Ford and GM combined. Cryptocurrencies such as Bitcoin reached market cap valuation over $1 trillion by late 2021. With Fed money flowing freely, banks and investment funds invested in high-risk, high profit areas like junk bonds or emerging market debt in places like Turkey, Indonesia or, yes, China.

The post-2008 era of Quantitative Easing and zero Fed interest rates led to absurd US Government debt expansion. Since January 2020 the Fed, Bank of England, European Central Bank and Bank of Japan have injected a combined $9 trillion in near zero rate credit into the world banking system. Since a Fed policy change in September 2019, it enabled Washington to increase public debt by a staggering $10 trillion in less than 3 years. Then the Fed again covertly bailed out Wall Street by buying $120 billion per month of US Treasury bonds and Mortgage-Backed Securities creating a huge bond bubble.

A reckless Biden Administration began doling out trillions in so-called stimulus money to combat needless lockdowns of the economy. US Federal debt went from a manageable 35% of GDP in 1980 to more than 129% of GDP today. Only the Fed Quantitative Easing, buying of trillions of US government and mortgage debt and the near zero rates made that possible. Now the Fed has begun to unwind that and withdraw liquidity from the economy with QT or tightening, plus rate hikes. This is deliberate. It is not about a stumbling Fed mis-judging inflation.

Energy drives the collapse

Sadly, the Fed and other central bankers lie. Raising interest rates is not to cure inflation. It is to force a global reset in control over the world’s assets, it’s wealth, whether real estate, farmland, commodity production, industry, even water. The Fed knows very well that Inflation is only beginning to rip across the global economy. What is unique is that now Green Energy mandates across the industrial world are driving this inflation crisis for the first time, something deliberately ignored by Washington or Brussels or Berlin.

The global shortages of fertilizers, soaring prices of natural gas, and grain supply losses from global draught or exploding costs of fertilizers and fuel or the war in Ukraine, guarantee that, at latest this September-October harvest time, we will undergo a global additional food and energy price explosion. Those shortages all are a result of deliberate policies.

Moreover, far worse inflation is certain, due to the pathological insistence of the world’s leading industrial economies led by the Biden Administration’s anti-hydrocarbon agenda. That agenda is typified by the astonishing nonsense of the US Energy Secretary stating, “buy E-autos instead” as the answer to exploding gasoline prices.

Similarly, the European Union has decided to phase out Russian oil and gas with no viable substitute as its leading economy, Germany, moves to shut its last nuclear reactor and close more coal plants. Germany and other EU economies as a result will see power blackouts this winter and natural gas prices will continue to soar. In the second week of June in Germany gas prices rose another 60% alone. Both the Green-controlled German government and the Green Agenda “Fit for 55” by the EU Commission continue to push unreliable and costly wind and solar at the expense of far cheaper and reliable hydrocarbons, insuring an unprecedented energy-led inflation.

Fed has pulled the plug

With the 0.75% Fed rate hike, largest in almost 30 years, and promise of more to come, the US central bank has now guaranteed a collapse of not merely the US debt bubble, but also much of the post-2008 global debt of $303 trillion. Rising interest rates after almost 15 years mean collapsing bond values. Bonds, not stocks, are the heart of the global financial system.

US mortgage rates have now doubled in just 5 months to above 6%, and home sales were already plunging before the latest rate hike. US corporations took on record debt owing to the years of ultra-low rates. Some 70% of that debt is rated just above “junk” status. That corporate non-financial debt totaled $9 trillion in 2006. Today it exceeds $18 trillion. Now a large number of those marginal companies will not be able to rollover the old debt with new, and bankruptcies will follow in coming months. The cosmetics giant Revlon just declared bankruptcy.

The highly-speculative, unregulated Crypto market, led by Bitcoin, is collapsing as investors realize there is no bailout there. Last November the Crypto world had a $3 trillion valuation. Today it is less than half, and with more collapse underway. Even before the latest Fed rate hike the stock value of the US megabanks had lost some $300 billion. Now with stock market further panic selling guaranteed as a global economic collapse grows, those banks are pre-programmed for a new severe bank crisis over the coming months.

As US economist Doug Noland recently noted, “Today, there’s a massive “periphery” loaded with “subprime” junk bonds, leveraged loans, buy-now-pay-later, auto, credit card, housing, and solar securitizations, franchise loans, private Credit, crypto Credit, DeFi, and on and on. A massive infrastructure has evolved over this long cycle to spur consumption for tens of millions, while financing thousands of uneconomic enterprises. The “periphery” has become systemic like never before. And things have started to Break.”

The Federal Government will now find its interest cost of carrying a record $30 trillion in Federal debt far more costly. Unlike the 1930s Great Depression when Federal debt was near nothing, today the Government, especially since the Biden budget measures, is at the limits. The US is becoming a Third World economy. If the Fed no longer buys trillions of US debt, who will? China? Japan? Not likely.

Deleveraging the bubble

With the Fed now imposing a Quantitative Tightening, withdrawing tens of billions in bonds and other assets monthly, as well as raising key interest rates, financial markets have begun a deleveraging. It will likely be jerky, as key players like BlackRock and Fidelity seek to control the meltdown for their purposes. But the direction is clear.

By late last year investors had borrowed almost $1 trillion in margin debt to buy stocks. That was in a rising market. Now the opposite holds, and margin borrowers are forced to give more collateral or sell their stocks to avoid default. That feeds the coming meltdown. With collapse of both stocks and bonds in coming months, go the private retirement savings of tens of millions of Americans in programs like 401-k. Credit card auto loans and other consumer debt in the USA has ballooned in the past decade to a record $4.3 trillion at end of 2021. Now interest rates on that debt, especially credit card, will jump from an already high 16%. Defaults on those credit loans will skyrocket.

Outside the US what we will see now, as the Swiss National Bank, Bank of England and even ECB are forced to follow the Fed raising rates, is the global snowballing of defaults, bankruptcies, amid a soaring inflation which the central bank interest rates have no power to control. About 27% of global nonfinancial corporate debt is held by Chinese companies, estimated at $23 trillion. Another $32 trillion corporate debt is held by US and EU companies. Now China is in the midst of its worst economic crisis since 30 years and little sign of recovery. With the USA, China’s largest customer, going into an economic depression, China’s crisis can only worsen. That will not be good for the world economy.

Italy, with a national debt of $3.2 trillion, has a debt-to-GDP of 150%. Only ECB negative interest rates have kept that from exploding in a new banking crisis. Now that explosion is pre-programmed despite soothing words from Lagarde of the ECB. Japan, with a 260% debt level is the worst of all industrial nations, and is in a trap of zero rates with more than $7.5 trillion public debt. The yen is now falling seriously, and destabilizing all of Asia.

The heart of the world financial system, contrary to popular belief, is not stock markets. It is bond markets—government, corporate and agency bonds. This bond market has been losing value as inflation has soared and interest rates have risen since 2021 in the USA and EU. Globally this comprises some $250 trillion in asset value a sum that, with every fed interest rise , loses more value. The last time we had such a major reverse in bond values was forty years ago in the Paul Volcker era with 20% interest rates to “squeeze out inflation.”

As bond prices fall, the value of bank capital falls. The most exposed to such a loss of value are major French banks along with Deutsche Bank in the EU, along with the largest Japanese banks. US banks like JP MorganChase are believed to be only slightly less exposed to a major bond crash. Much of their risk is hidden in off-balance sheet derivatives and such. However, unlike in 2008, today central banks can’t rerun another decade of zero interest rates and QE. This time, as insiders like ex-Bank of England head Mark Carney noted three years ago, the crisis will be used to force the world to accept a new Central Bank Digital Currency, a world where all money will be centrally issued and controlled. This is also what Davos WEF people mean by their Great Reset. It will not be good. A Global Planned Financial Tsunami Has Just Begun.

The War in Ukraine Marks the End of the American Century. “What’s Left is a Steaming Pile of Dollar Denominated Debt”

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By Mike Whitney

Source: Global Research

“The ferocity of the confrontation in Ukraine shows that we’re talking about much more than the fate of the regime in Kiev. The architecture of the entire world order is at stake.” Sergei Naryshkin, Director of Russia’s Foreign Intelligence.

***

Here’s your ‘reserve currency’ thought for the day: Every US dollar is a check written on an account that is overdrawn by 30 trillion dollars.

It’s true. The “full faith and credit” of the US Treasury is largely a myth held together by an institutional framework that rests on a foundation of pure sand. In fact, the USD is not worth the paper it is printed on; it is an IOU flailing in an ocean of red ink.

The only thing keeping the USD from vanishing into the ether, is the trust of credulous people who continue to accept it as legal tender.

But why do people remain confident in the dollar when its flaws are known to all? After all, America’s $30 trillion National Debt is hardly a secret, nor is the additional $9 trillion that’s piled up on the Fed’s balance sheet. That is a stealth debt of which the American people are completely unaware, but they are responsible for all the same.

In order to answer that question, we need to look at how the system actually works and how the dollar is propped up by the numerous institutions that were created following WW2. These institutions provide an environment for conducting history’s longest and most flagrant swindle, the exchange of high-ticket manufactured goods, raw materials and hard-labor for slips of green paper with dead presidents on them.

One can only marvel at the genius of the elites who concocted this scam and then imposed it wholesale on the masses without a peep of protest. Of course, the system is accompanied by various enforcement mechanisms that swiftly remove anyone who tries to either break free from the dollar or, God help us, create an alternate system altogether. (Saddam Hussein and Muammar Qaddafi come to mind.) But the fact is– aside from the institutional framework and the ruthless extermination of dollar opponents– there’s no reason why humanity should remain yoked to a currency that is buried beneath a mountain of debt and whose real value is virtually unknowable.

It wasn’t always like this. There was a time when the dollar was the strongest currency in the world and deserved its spot at the top of the heap. Following WW1, the US was “the owner of the majority of the world’s gold” which was why an international delegation “decided that the world’s currencies would no longer be linked to gold but could be pegged to the U.S. dollar, “because the greenback was, itself, linked to gold.” Here’s more from an article at Investopedia:

“The arrangement came to be known as the Bretton Woods Agreement. It established the authority of central banks, which would maintain fixed exchange rates between their currencies and the dollar. In turn, the United States would redeem U.S. dollars for gold on demand….

The U.S dollar was officially crowned the world’s reserve currency and was backed by the world’s largest gold reserves thanks to the Bretton Woods Agreement. Instead of gold reserves, other countries accumulated reserves of U.S. dollars. Needing a place to store their dollars, countries began buying U.S. Treasury securities, which they considered to be a safe store of money.

The demand for Treasury securities, coupled with the deficit spending needed to finance the Vietnam War and the Great Society domestic programs, caused the United States to flood the market with paper money….

The demand for gold was such that President Richard Nixon was forced to intervene and de-link the dollar from gold, which led to the floating exchange rates that exist today. Although there have been periods of stagflation, which is defined as high inflation and high unemployment, the U.S. dollar has remained the world’s reserve currency.” (“How the U.S. Dollar Became the World’s Reserve Currency”, Investopedia)

But now the gold is gone and what’s left is a steaming pile of debt. So, how on earth has the dollar managed to preserve its status as the world’s preeminent currency?

Proponents of the dollar system, will tell you it has something to do with “the size and strength of the U.S. economy and the dominance of the U.S. financial markets.” But that’s nonsense.

The truth is, reserve currency status has nothing to do with “the size and strength” of America’s post-industrial, service-oriented, bubble-driven, third-world-sh**hole economy. Nor does it have anything to do with the alleged safety of US Treasuries” which– next to the dollar– is the biggest Ponzi flim-flam of all time.

The real reason the dollar has remained the world’s premier currency is because of the cartelization of Central Banking.

The Western Central Banks are a de facto monopoly run by a small cabal of inter-breeding bottom-feeders who coordinate and collude on monetary policy in order to preserve their maniacal death-grip on the financial markets and the global economy. It’s a Monetary Mafia and– as George Carlin famously said: “You and I are not in it. You and I are not in the big club.” Bottom line: It is the relentless manipulation of interest rates, forward guidance and Quantitative Easing (QE) that has kept the dollar in its lofty but undeserved spot.

But all that is about to change due entirely to Biden’s reckless foreign policy which is forcing critical players in the global economy to create their own rival system. This is a real tragedy for the West that has enjoyed a century of nonstop wealth extraction from the developing world.

Now– due to the economic sanctions on Russia– an entirely new order is emerging in which the dollar will be substituted for national currencies (processed through an independent financial settlement system) in bilateral trade deals until– later this year– Russia launches an exchange-traded commodities-backed currency that will be used by trading partners in Asia and Africa.

Washington’s theft of Russia’s foreign reserves in April turbo-charged the current process which was further accelerated by banning of Russia from foreign markets. In short, US economic sanctions and boycotts have expanded the non-dollar zone by many orders of magnitude and forced the creation of a new monetary order.

How dumb is that? For decades the US has been running a scam in which it exchanges its fishwrap currency for things of genuine value. (oil, manufactured goods and labor) But now the Biden troupe has scrapped that system altogether and divided the world into warring camps.

But, why?

To punish Russia, is that it?

Yes, that’s it.

But, if that’s the case, then shouldn’t we try to figure out whether the sanctions actually work or not before we recklessly change the system?

Too late for that. The war on Russia has begun and the early results are already pouring in. Just look at the way we’ve destroyed Russia’s currency, the ruble. It’s shocking! Here’s the scoop from an article at CBS:

“The Russian ruble is the best-performing currency in the world this year….

Two months after the ruble’s value fell to less than a U.S. penny amid the swiftest, toughest economic sanctions in modern history, Russia’s currency has mounted a stunning turnaround. The ruble has jumped 40% against the dollar since January.

Normally, a country facing international sanctions and a major military conflict would see investors fleeing and a steady outflow of capital, causing its currency to drop….

The ruble’s resiliency means that Russia is partly insulated from the punishing economic penalties imposed by Western nations after its invasion of Ukraine…” (“Russia’s ruble is the strongest currency in the world this year“, CBS News)

Huh? You mean the attack on the ruble didn’t work after all?

Sure looks that way. But that doesn’t mean the sanctions are a failure. Oh, no. Just at look at the effect they’ve had on Russian commodities. Export receipts are way-down, right? Here’s more from CBS:

“Commodity prices are currently sky-high, and even though there is a drop in the volume of Russian exports due to embargoes and sanctioning, the increase in commodity prices more than compensates for these drops,” said Tatiana Orlova, lead emerging markets economist at Oxford Economics.

Russia is pulling in nearly $20 billion a month from energy exports. Since the end of March, many foreign buyers have complied with a demand to pay for energy in rubles, pushing up the currency’s value.” (“Russia’s ruble is the strongest currency in the world this year“, CBS News)

You’re kidding me? You mean the ruble is surging and Putin is raking in more dough on commodities than ever before?

Yep, and it’s the same deal with Russia’s trade surplus. Take a look at this excerpt from an article in The Economist:

“Russia’s exports… have held up surprisingly well, including those directed to the West. Sanctions permit the sale of oil and gas to most of the world to continue uninterrupted. And a spike in energy prices has boosted revenues further.

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months. The IIF reckons that in 2022 the current-account surplus, which includes trade and some financial flows, could come in at $250bn (15% of last year’s GDP), more than double the $120bn recorded in 2021. That sanctions have boosted Russia’s trade surplus, and thus helped finance the war, is disappointing, says Mr Vistesen. Ms Ribakova reckons that the efficacy of financial sanctions may have reached its limits. A decision to tighten trade sanctions must come next.

But such measures could take time to take effect. Even if the EU enacts its proposal to ban Russian oil, the embargo would be phased in so slowly that the bloc’s oil imports from Russia would fall by just 19% this year, says Liam Peach of Capital Economics, a consultancy. The full impact of these sanctions would be felt only at the start of 2023—by which point Mr Putin will have amassed billions to fund his war.” ( “Russia is on track for a record trade surplus”, The Economist)

Let me get this straight: The sanctions are actually hurting the US and helping Russia, so the experts think we should impose more sanctions? Is that it?

Precisely. Now that we have shot ourselves in the foot, the experts think it would be wise to shoot the other one too.

Am I the only one who is struck by the insanity of this policy? Check out this clip from an article at RT:

“Russia could earn a record $100 billion from gas sales to European countries in 2022 due to the sharp rise in energy prices, French newspaper Les Echos reported this week, citing Citibank analysts.

According to the paper, the projected income from gas sales will be almost twice as much as last year. The analysis does not take into account profits from the sale of other Russian commodities, such as oil, coal, and other minerals.

Les Echos reports that, despite sanctions and warnings of a sweeping embargo on Russian energy, the 27 EU countries continue to send roughly $200 million per day to Gazprom.”(“Russian gas revenues projected to hit new highs”, RT)

So the revenues from gas and oil sales are literally flooding Moscow’s coffers like never before. Meanwhile, energy prices in the EU and America have skyrocketed to 40-year highs.

Can you see how counterproductive this policy is?

The EU is sinking into recession, supply lines have been severely disrupted, food shortages are steadily emerging, and gas and oil prices are through-the-roof. By every objective standard, the sanctions have not only failed, but backfired spectacularly. Can’t the Biden people see the damage they’re doing? Are they completely divorced from reality?

Imagine if the Ukrainians use Biden’s new artillery battery (HIMARS) to shell cities in Russia? Then what?

Then Putin takes off the gloves and shuts off the flow of hydrocarbons to Europe immediately. That’s what’s going to happen if Washington continues to escalate. You can bet on it. If Russia’s “Special Military Operation” suddenly becomes a war, the lights across Europe will go dark, homes will begin to freeze, factories will go silent, and the continent will slide headlong into a protracted and painful depression.

Does anyone in Washington think about these things or are they all so drunk on their own press clippings they’ve completely lost touch with reality?

Here’s more from an article at RT:

“Even as the collective West continues to insist – against all observable reality – that the conflict in Ukraine is going well for Kiev, major media outlets are becoming increasingly uneasy with the situation on the economic front. More and more observers are admitting that the embargoes imposed by the US and its allies aren’t crushing the Russian economy, as originally intended, but rather their own.…

“Russia is winning the economic war,” the Guardian’s economics editor Larry Elliott declared on Thursday. “It is now three months since the west launched its economic war against Russia, and it is not going according to plan. On the contrary, things are going very badly indeed,” he wrote…

In a May 30 essay, Guardian columnist Simon Jenkins also said that the embargo had failed…

As Jenkins points out, the sanctions have actually raised the price of Russian exports such as oil and grain – thus enriching, rather than impoverishing, Moscow while leaving Europeans short of gas and Africans running out of food.” (“As sanctions fail to work and Russia’s advance continues, Western media changes its tune on Ukraine”, RT)

Did you catch that part about “Russia winning the economic war”? What do you think that means in practical terms?

Does it mean that Washington’s failed attempt to maintain its global hegemony by “weakening” Russia is actually putting enormous strains on the Transatlantic Alliance and NATO that will trigger a re-calibration of relations leading to a defiant rejection of the “rules-based system.”

Is that what it means? Is Europe going to split with Washington and leave America to sink beneath its $30 trillion ocean of red ink?

Yes, that’s exactly what it means.

Uncle Sam’s 30 Year Bender

Proponents of Washington’s proxy-war have no idea of the magnitude of their mistake or how much damage they are inflicting on their own country. The Ukraine debacle is the culmination of 30 years of bloody interventions that have brought us to a tipping point where the nation’s fortunes are about to take a dramatic turn-for-the-worse. As the dollar-zone shrinks, standards of living will plunge, unemployment will soar, and the economy will go into a downward-death spiral.

Washington has greatly underestimated its vulnerability to catastrophic geopolitical blowback that is about to bring the New American Century to a swift and excruciating end.

A wise leader would do everything in his power to pull us back from the brink.

Wall Street, Banks, and Angry Citizens

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The Inequality Gap on a Planet Growing More Extreme

By Nomi Prins

Source: TomDispatch.com

As we head into 2019, leaving the chaos of this year behind, a major question remains unanswered when it comes to the state of Main Street, not just here but across the planet. If the global economy really is booming, as many politicians claim, why are leaders and their parties around the world continuing to get booted out of office in such a sweeping fashion?

One obvious answer: the post-Great Recession economic “recovery” was largely reserved for the few who could participate in the rising financial markets of those years, not the majority who continued to work longer hours, sometimes at multiple jobs, to stay afloat. In other words, the good times have left out so many people, like those struggling to keep even a few hundred dollars in their bank accounts to cover an emergency or the 80% of American workers who live paycheck to paycheck.

In today’s global economy, financial security is increasingly the property of the 1%. No surprise, then, that, as a sense of economic instability continued to grow over the past decade, angst turned to anger, a transition that — from the U.S. to the Philippines, Hungary to Brazil, Poland to Mexico — has provoked a plethora of voter upheavals. In the process, a 1930s-style brew of rising nationalism and blaming the “other” — whether that other was an immigrant, a religious group, a country, or the rest of the world — emerged.

This phenomenon offered a series of Trumpian figures, including of course The Donald himself, an opening to ride a wave of “populism” to the heights of the political system. That the backgrounds and records of none of them — whether you’re talking about Donald Trump, Viktor Orbán, Rodrigo Duterte, or Jair Bolsonaro (among others) — reflected the daily concerns of the “common people,” as the classic definition of populism might have it, hardly mattered. Even a billionaire could, it turned out, exploit economic insecurity effectively and use it to rise to ultimate power.

Ironically, as that American master at evoking the fears of apprentices everywhere showed, to assume the highest office in the land was only to begin a process of creating yet more fear and insecurity. Trump’s trade wars, for instance, have typically infused the world with increased anxiety and distrust toward the U.S., even as they thwarted the ability of domestic business leaders and ordinary people to plan for the future. Meanwhile, just under the surface of the reputed good times, the damage to that future only intensified. In other words, the groundwork has already been laid for what could be a frightening transformation, both domestically and globally.

That Old Financial Crisis

To understand how we got here, let’s take a step back. Only a decade ago, the world experienced a genuine global financial crisis, a meltdown of the first order. Economic growth ended; shrinking economies threatened to collapse; countless jobs were cut; homes were foreclosed upon and lives wrecked. For regular people, access to credit suddenly disappeared. No wonder fears rose. No wonder for so many a brighter tomorrow ceased to exist.

The details of just why the Great Recession happened have since been glossed over by time and partisan spin. This September, when the 10th anniversary of the collapse of the global financial services firm Lehman Brothers came around, major business news channels considered whether the world might be at risk of another such crisis. However, coverage of such fears, like so many other topics, was quickly tossed aside in favor of paying yet more attention to Donald Trump’s latest tweets, complaints, insults, and lies. Why? Because such a crisis was so 2008 in a year in which, it was claimed, we were enjoying a first class economic high and edging toward the longest bull-market in Wall Street history. When it came to “boom versus gloom,” boom won hands down.

None of that changed one thing, though: most people still feel left behind both in the U.S. and globally. Thanks to the massive accumulation of wealth by a 1% skilled at gaming the system, the roots of a crisis that didn’t end with the end of the Great Recession have spread across the planet, while the dividing line between the “have-nots” and the “have-a-lots” only sharpened and widened.

Though the media hasn’t been paying much attention to the resulting inequality, the statistics (when you see them) on that ever-widening wealth gap are mind-boggling. According to Inequality.org, for instance, those with at least $30 million in wealth globally had the fastest growth rate of any group between 2016 and 2017. The size of that club rose by 25.5% during those years, to 174,800 members. Or if you really want to grasp what’s been happening, consider that, between 2009 and 2017, the number of billionaires whose combined wealth was greater than that of the world’s poorest 50% fell from 380 to just eight. And by the way, despite claims by the president that every other country is screwing America, the U.S. leads the pack when it comes to the growth of inequality. As Inequality.org notes, it has “much greater shares of national wealth and income going to the richest 1% than any other country.”

That, in part, is due to an institution many in the U.S. normally pay little attention to: the U.S. central bank, the Federal Reserve. It helped spark that increase in wealth disparity domestically and globally by adopting a post-crisis monetary policy in which electronically fabricated money (via a program called quantitative easing, or QE) was offered to banks and corporations at significantly cheaper rates than to ordinary Americans.

Pumped into financial markets, that money sent stock prices soaring, which naturally ballooned the wealth of the small percentage of the population that actually owned stocks. According to economist Stephen Roach, considering the Fed’s Survey of Consumer Finances, “It is hardly a stretch to conclude that QE exacerbated America’s already severe income disparities.”

Wall Street, Central Banks, and Everyday People

What has since taken place around the world seems right out of the 1930s. At that time, as the world was emerging from the Great Depression, a sense of broad economic security was slow to return. Instead, fascism and other forms of nationalism only gained steam as people turned on the usual cast of politicians, on other countries, and on each other. (If that sounds faintly Trumpian to you, it should.)

In our post-2008 era, people have witnessed trillions of dollars flowing into bank bailouts and other financial subsidies, not just from governments but from the world’s major central banks. Theoretically, private banks, as a result, would have more money and pay less interest to get it. They would then lend that money to Main Street. Businesses, big and small, would tap into those funds and, in turn, produce real economic growth through expansion, hiring sprees, and wage increases. People would then have more dollars in their pockets and, feeling more financially secure, would spend that money driving the economy to new heights — and all, of course, would then be well.

That fairy tale was pitched around the globe. In fact, cheap money also pushed debt to epic levels, while the share prices of banks rose, as did those of all sorts of other firms, to record-shattering heights.

Even in the U.S., however, where a magnificent recovery was supposed to have been in place for years, actual economic growth simply didn’t materialize at the levels promised. At 2% per year, the average growth of the American gross domestic product over the past decade, for instance, has been half the average of 4% before the 2008 crisis. Similar numbers were repeated throughout the developed world and most emerging markets. In the meantime, total global debt hit $247 trillion in the first quarter of 2018. As the Institute of International Finance found, countries were, on average, borrowing about three dollars for every dollar of goods or services created.

Global Consequences

What the Fed (along with central banks from Europe to Japan) ignited, in fact, was a disproportionate rise in the stock and bond markets with the money they created. That capital sought higher and faster returns than could be achieved in crucial infrastructure or social strengthening projects like building roads, high-speed railways, hospitals, or schools.

What followed was anything but fair. As former Federal Reserve Chair Janet Yellen noted four years ago, “It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority.” And, of course, continuing to pour money into the highest levels of the private banking system was anything but a formula for walking that back.

Instead, as more citizens fell behind, a sense of disenfranchisement and bitterness with existing governments only grew. In the U.S., that meant Donald Trump. In the United Kingdom, similar discontent was reflected in the June 2016 Brexit vote to leave the European Union (EU), which those who felt economically squeezed to death clearly meant as a slap at both the establishment domestically and EU leaders abroad.

Since then, multiple governments in the European Union, too, have shifted toward the populist right. In Germany, recent elections swung both right and left just six years after, in July 2012, European Central Bank (ECB) head Mario Draghi exuded optimism over the ability of such banks to protect the financial system, the Euro, and generally hold things together.

Like the Fed in the U.S., the ECB went on to manufacture money, adding another $3 trillion to its books that would be deployed to buy bonds from favored countries and companies. That artificial stimulus, too, only increased inequality within and between countries in Europe. Meanwhile, Brexit negotiations remain ruinously divisive, threatening to rip Great Britain apart.

Nor was such a story the captive of the North Atlantic. In Brazil, where left-wing president Dilma Rouseff was ousted from power in 2016, her successor Michel Temer oversaw plummeting economic growth and escalating unemployment. That, in turn, led to the election of that country’s own Donald Trump, nationalistic far-right candidate Jair Bolsonaro who won a striking 55.2% of the vote against a backdrop of popular discontent. In true Trumpian style, he is disposed against both the very idea of climate change and multilateral trade agreements.

In Mexico, dissatisfied voters similarly rejected the political known, but by swinging left for the first time in 70 years. New president Andrés Manuel López Obrador, popularly known by his initials AMLO, promised to put the needs of ordinary Mexicans first. However, he has the U.S. — and the whims of Donald Trump and his “great wall” — to contend with, which could hamper those efforts.

As AMLO took office on December 1st, the G20 summit of world leaders was unfolding in Argentina. There, amid a glittering backdrop of power and influence, the trade war between the U.S. and the world’s rising superpower, China, came even more clearly into focus. While its president, Xi Jinping, having fully consolidated power amid a wave of Chinese nationalism, could become his country’s longest serving leader, he faces an international landscape that would have amazed and befuddled Mao Zedong.

Though Trump declared his meeting with Xi a success because the two sides agreed on a 90-day tariff truce, his prompt appointment of an anti-Chinese hardliner, Robert Lighthizer, to head negotiations, a tweet in which he referred to himself in superhero fashion as a “Tariff Man,” and news that the U.S. had requested that Canada arrest and extradite an executive of a key Chinese tech company, caused the Dow to take its fourth largest plunge in history and then fluctuate wildly as economic fears of a future “Great Something” rose. More uncertainty and distrust were the true product of that meeting.

In fact, we are now in a world whose key leaders, especially the president of the United States, remain willfully oblivious to its long-term problems, putting policies like deregulation, fake nationalist solutions, and profits for the already grotesquely wealthy ahead of the future lives of the mass of citizens. Consider the yellow-vest protests that have broken out in France, where protestors identifying with left and right political parties are calling for the resignation of neoliberal French President Emmanuel Macron. Many of them, from financially starved provincial towns, are angry that their purchasing power has dropped so low they can barely make ends meet.

Ultimately, what transcends geography and geopolitics is an underlying level of economic discontent sparked by twenty-first-century economics and a resulting Grand Canyon-sized global inequality gap that is still widening. Whether the protests go left or right, what continues to lie at the heart of the matter is the way failed policies and stop-gap measures put in place around the world are no longer working, not when it comes to the non-1% anyway. People from Washington to Paris, London to Beijing, increasingly grasp that their economic circumstances are not getting better and are not likely to in any presently imaginable future, given those now in power.

A Dangerous Recipe

The financial crisis of 2008 initially fostered a policy of bailing out banks with cheap money that went not into Main Street economies but into markets enriching the few. As a result, large numbers of people increasingly felt that they were being left behind and so turned against their leaders and sometimes each other as well.

This situation was then exploited by a set of self-appointed politicians of the people, including a billionaire TV personality who capitalized on an increasingly widespread fear of a future at risk. Their promises of economic prosperity were wrapped in populist platitudes, normally (but not always) of a right-wing sort. Lost in this shift away from previously dominant political parties and the systems that went with them was a true form of populism, which would genuinely put the needs of the majority of people over the elite few, build real things including infrastructure, foster organic wealth distribution, and stabilize economies above financial markets.

In the meantime, what we have is, of course, a recipe for an increasingly unstable and vicious world.

A Stock Market Primer, in Six Easy Steps

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By William Kaufman

Source: CounterPunch

What is the stock market?

1) It’s not real economic activity—it’s a form of mass hysteria or mass psychosis.

2) Stock prices reflect a mass-hysteria impression of the worth of a piece of paper you hold—a stock certificate. The worth of that piece of paper is sometimes tethered to some economic reality of some corporation—at least partially—but sometimes not. Often a stock price bears little relation to the economic health of a company, as illustrated in the wildly gyrating stock price-to-earnings ratios through the decades. Hence the stock price is often a matter of caprice, covert manipulation, and/or unfathomable crowd psychology, not necessarily real economic “health” or productivity.

If, say, you are fortunate enough to own a stock that has doubled or tripled in price, this does not mean that you have accrued new wealth—that stock valuation is meaningless as long as you still own the piece of paper (the stock certificate); you realize that wealth only by selling the stock. And if you do cash out—sell the piece of paper—to someone else, you are transferring to another person the hazard of seeing that valuation drop or evaporate—an opportune fobbing off of risk to someone else, a transfer of cash to you, but no real creation of wealth—just the passing on of a piece of paper in exchange for currency. Eventually, down the road, your gain will be someone else’s loss when the music stops playing and the last holder of the piece of paper finds there is no chair for him to land on—the stock market as Ponzi scheme.

If everyone or most people decide to sell their pieces of paper—to take their profits—all at once, then the stock prices tumble, so the idea that everyone can cash out and realize this imaginary wealth equally and universally is a mirage: if everyone tried to access it at once, it would evaporate. Hence the common notion that rising stock prices indicate a general increase in wealth or national prosperity is delusional. A stock crash does not erase billions or trillions in “wealth” overnight, as we are commonly told. There was never any “wealth” there to begin with, in the sense that a stock price rationally or measurably reflects the worth of tangible goods or services; that price is just a mass fever dream, a collective, chaotic, bidding war about the worth of pieces of paper.

3) The stock market is a swindle.

Much of the movement of these equities markets originates in the decisions of large funds or high-speed traders who have access to esoteric information, advanced algorithms, or trading networks from which Joe Trader, playing the market at home on his laptop, is excluded. Hence Joe Trader inevitably gets screwed. The author Michael Lewis draws the veil from this complicated high-tech rigging in a 2014 interview with CBS’s 60 Minutes:

Steve Kroft: What’s the headline here?

Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism is rigged.

Steve Kroft: By whom?

Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.

Steve Kroft: Who are the victims?

Michael Lewis: Everybody who has an investment in the stock market. . . .

Steve Kroft: And this is all being done by computers?

Michael Lewis: All being done by computers. It’s too fast to be done by humans. Humans have been completely removed from the marketplace. “Fast” is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it. . . . The insiders are able to move faster than you. They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.

Steve Kroft: What do you mean front run?

Michael Lewis: Means they’re able to identify your desire to, to buy shares in Microsoft and buy ‘em in front of you and sell ‘em back to you at a higher price. It all happens in infinitesimally small periods of time. There’s speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it’s enough for them to identify what you’re gonna do and do it before you do it at your expense.

4) The MSM commentators on the markets are all industry touts.

Their unvarying counsel, under all circumstances, is this: Get into the market. Get in if you’re not in already. Stay in if you’re already in. A plunge is a buying opportunity. A surge is a buying opportunity. A buying opportunity is that which puts a commission in their pockets. A mass exit from the stock market is the end of their livelihood. I don’t know the Latin term for the logical fallacy at work here, but I think the English translation is something like this: bullshit being slung by greedy con artists. These are people with no more conscience or expertise than the barking guy with the Australian accent on the three a.m. informercial raving about a miracle degreaser or stain remover.

5) This market, more than most, is a big fat bubble, ready to pop.

This bubble is a cloistered biosphere of Teslas and beach houses, of con artists, kleptocrats, and financial sorcerers. It is rigorously insulated from the dolorous real economy inhabited by the 99 percent: declining living standards; stagnant real hourly wages; lousy service-industry jobs; debilitating consumer and student debt peonage; soaring medical insurance premiums and deductibles that render many people’s swiss-cheese policies unusable; crumbling cities and infrastructure; climate disasters of biblical proportions; and toxic food, water, and air. This stock-market bubble has been artificially inflated by historically low interest rates (so the suckers have to go into the market to get a return on their money) and Fed “quantitative easing,” a technocratic euphemism for a novel form of welfare for the one percent that has left untold trillions of “liquidity” sloshing around among the financial elites with which to play Monopoly with one another and pad their net worth by buying back shares of their own companies to inflate stock prices. Moreover, this bubble is even more perilous and tenuous than previous ones because the “air” inside is being pumped by unprecedented levels of consumer and institutional debt that will cause a deafening “pop” when some of the key players start to lose their shirts, and suddenly all the Peters start calling in the debts of all the Pauls who can’t pay.

6) The end game is near. We can console ourselves that these latest innovations in financial prestidigitation and fraud are stretched about as far as they can go. The financial elites are out of three-card monte scams to suck the wealth out of the economy. The heroic productivist heyday of capitalism, celebrated by Marx himself, is over in this country—no more driven visionary builders of railroads, factories, skyscrapers, and highways to a better tomorrow: just endless financial skullduggery and hoarding at the top, and for the rest of us the cold comforts of cell phones, smart televisions, and the endless streams of plastic consumer junk circulating through Amazon and Walmart. What Baudrillard called “the mirror of production” is a prison for the planet earth and every species on it. All that is left for the bipartisan predator class of the United States is scavenging: massive tax breaks for the rich today and tomorrow, perhaps, no more Medicare, no more Social Security, no more public schools—if they have their way, and they probably will. Pop goes the stock market, the illusion of prosperity, the whole unsustainable carbon-poison “economy,” and pop goes the planet and the human race. But look at it this way: it’s a buying opportunity.

Financial turmoil and increasing risks of a severe worldwide economic recession in 2016-17

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By Rodrigue Tremblay

Source: Dissident Voice

“May you live in interesting times.”—Popular curse, purported to be a translation of a traditional Chinese curse

“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand—a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress.”—Ben S. Bernanke (1953- ), on November 21, 2002

“I’m about to repeat what I said at this time last year and the year before . . . Sooner or later a crash is coming and it may be terrific. The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed. Wise are those investors who now get out of debt.”—Roger Babson (1875-1967), on September 5, 1929

The onset of 2016 has been most chaotic for global financial markets with, so far, a severe stock market correction. As a matter of fact, the first month of 2016 has witnessed the most severe drop in financial stocks ever, with the MSCI All-Country World Stock Index, which measures major developed and emerging stock markets, dropping more than 20 percent, as compared to early 2015. For sure, there will be oversold rallies in the coming weeks and months, but one can expect more trouble ahead.

Many commentators are saying that the epicentre of this unfolding financial and economic crisis is in China, with the Shanghai Composite Index beginning to plummet at the beginning of the year. In my view, reality is more complex and even though China’s financial and economic problems are contributing to the collapse in commodity prices, the epicenter of the crisis is still in Washington D.C.

That is because the current unfolding crisis is essentially a continuation of the 2007-08 financial crisis which has been temporarily suspended and pushed into the future by the U.S. central bank, the Fed, with its aggressive and unorthodox monetary policy of multiple rounds of quantitative easing (QE), i.e., buying huge quantities of financial assets from commercial mega-banks and other institutions, including mortgage-backed securities, with newly created money. As a consequence, the Fed’s balance sheet went from a little more than one trillion dollars in 2008 to some four and a half trillion dollars when the quantitative easing program was ended in October 2014. Other central banks have followed the Fed example, especially the central bank of Japan and the European central bank, which also adopted quantitative easing policies in monetizing large amounts of financial assets.

Why did the Bernanke Fed adopt such an aggressive monetary policy in 2008? Essentially for three reasons: First, the lame-duck Bush administration in 2008 was clueless about what to do with the financial crisis that had started with the de facto failure of Bear Stearns in the spring of 2008 and of Merrill Lynch in early September 2008, culminating on September 15, 2008, with the failure of the large global investment bank of Lehman Brothers. So the U.S. central bank felt that it had to step in. In fact, it financed the merger of the two first failed mega-banks with the JPMorgan Chase bank and the Bank of America respectively. (For different reasons, it did not intervene in the same way when the Lehman Brothers bank failed.)

Secondly, bankers who have a huge influence in the way the Fed is managed did not want the U.S. government to nationalize the American mega-banks in financial difficulties, as it had done in 1989 when the George H.W. Bush administration established the government-owned Resolution Trust Corporation (RTC) to take over some 747 insolvent savings and loans thrift banks.

Thirdly, the Bernanke Fed was very worried that the 2007-08 banking crisis would lead to a Japanese-style deflation that would wreak havoc with an overleveraged economy. The hope was to avoid a devastating debt-deflation economic depression like the one suffered in the 1930s.

By injecting so much liquidity in the system, the Bernanke Fed created a gigantic financial bubble in stocks and bonds, even though the real economy has grown at a somewhat languishing 2 percent growth rate. Stock prices went into the stratosphere while interest rates fell as bond prices rose. Last December 16, the Fed announced officially that it will no longer blow into the financial balloons and that it was raising short-term interest rates for the first time since the financial crisis, setting the target range for the federal funds rate to between 1/4 to 1/2 percent. This was a signal that the financial party was over. And what’s more, this means that the stock market and the bond market will once again go in different directions, as a reflection of the state of the real economy, no matter what the Fed does.

Since 2008, the U.S. Fed has painted itself into a financial corner from which I personally felt it would be difficult to extricate itself. Indeed, it would be extremely difficult to correct the financial bubbles it has created—as an unintended consequence of salvaging the mega-banks in creating trillions of free money—without damaging the real economy of production and employment. If global stock markets collapse and if price deflation accelerates, making it more difficult to service the debt of consumers, corporations, and government alike, a repeat on a larger scale of what has happened in Japan over the last twenty-five years can be feared. This, at the very least, could lead to a global economic recession in 2016-17. If we go back in history, it could also be a repeat of the 1937-38 crash and recession, eight years after the crash and financial crisis of 1929-32.

One thing can be made clear: The creation of the Fed in 1913, as a semi-public American central bank, has not prevented the occurrence of financial crises. It has, however, been a boon to large banks because it has served as an instrument to socialize their losses.

Stay tuned.

 

Dr. Rodrigue Tremblay is an international economist and author, whose last two books are The Code for Global Ethics, Prometheus Books, 2010; and The New American Empire, Infinity Publishing, 2003. He can be reached at: rodrigue.tremblay@yahoo.com.