The coronavirus epidemic led to an increase in that gap that exists between real and “financial” economies, i.e., between stock quotations, bonds, and other financial instruments and the condition of real factories, plants, and services sectors, as well as ordinary consumers.
The world press, as well as Russian experts whose hearts are orientated towards Washington, argue that everything is in principle fine and the determined “locomotive of the global economy,” represented by the Federal Reserve of the United States will be able to pull the American economy out of the crisis, and then pull out of the coronavirus crisis also the economies of those countries that are “tied” to Washington in a political and financial sense. The evidence usually includes both historical arguments related to the successful overcoming of the crisis in 2008-2009, and arguments of an almost religious nature related to the belief in the omnipotence of the dollar printing machine.
Looking at the graph of indices of American stock exchanges and seeing them as a reflection of economic reality, there may be an illusion that everything is really so and the US awaits a bright (smelling of fresh green printing ink) future. This relatively good picture of the world does not take into account several nuances that cause frenzy and panic among American financiers, including billionaires able to look just beyond their own nose and the financial results for the coming quarter.
Zero interest rates are not a panacea, and printing money is not an engine of economic growth. This was well understood by the founders of the American financial system, who, at the level of laws (beginning with the Federal Reserve Act of 1913), limited the ability of the central bank to act to prevent situations in which the printing machine was used either to finance budget expenditures or to save the owners of specific companies with good political connections. The situation on US stock exchanges now, when indices are generally rising, is not a reflection of a saved economy, but a reflection of the saved shareholders of these companies, i.e., mostly those who are already among the 1% of the most wealthy in terms of income or assets.
One of the reasons why mass printing and the “injection” of fresh dollars into the financial system in 2008-2009 did not end with the collapse of the dollar financial system as a whole was that the Federal Reserve and politicians of the US said that we are not facing the “monetisation of debt” (i.e. direct financing of budget expenditures through unsecured money issuance), but a temporary measure that would not just be cancelled, but compensated: i.e., in the future, when the economy will be less difficult, the Federal Reserve will no longer buy up US government bonds, but will sell what was accumulated. Looking at the US central bank’s asset chart, it can be seen that nine years after the last crisis, Washington really tried to fulfil its promise: in 2018 and 2019, the Federal Reserve’s assets started to decline, and many believed that the “dirty trick” used in 2008-2009 worked and was fully justified.
But even with economic growth, the attempt to remove the American economy from the junkie needle of monetary stimulus ended quickly and badly: markets started to fall. Trump started demanding lower interest rates on the dollar, and in 2019, the Federal Reserve, due to problems in the bond market, was already forced to start “pumping” tens of billions of dollars a day into the financial system again, although it continued to argue that it was a temporary measure. The Federal Reserve’s assets chart shows that over the past month it “pumped” (in various ways) about two trillion dollars into American financial markets (not the economy), and it is obvious that, firstly, it is only the beginning, and secondly, it is now not a temporary, but a permanent measure with severe consequences in the future.
We have already written about one of the consequences, pointing to the reaction of the main foreign creditor of the United States, represented by China: “Due to the financial hegemony of the dollar, the world will have to assume the consequences of large-scale quantitative easing (i.e. the Federal Reserve’s purchase of US bonds printed out of thin air) by the US. As a result, serious global inflation is already on its way. Rising commodity prices will soon spread to all products around the world, leading to higher asset prices, and the impact of this increase will eventually be felt in the real economy.”
But opponents of the Federal Reserve’s actions, which is now mass buying debts (bonds) of companies, instead of accumulating reserves, paying fat bonuses to management and dividends to shareholders, as well as reimbursing the budget deficit of the federal government and (indirectly) even municipalities, are not only in Beijing, but also in the United States itself, and among the most successful players in the American financial system.
The head of the investment fund Social Capital and co-owner of NBA club Golden State Warriors Chamath Palihapitiya caused a scandal on American television, saying that shareholders and creditors of companies that did not prepare for the crisis and wasted their cushions should be punished by bankruptcy and loss of money, and the state should save only ordinary citizens.
Perhaps this position is related to the fact that the billionaire himself grew up in a family of refugees from Sri Lanka and looks at the world differently than many politicians and financial experts: “On Main Street today, people are getting wiped out. Right now, rich CEOs are not, boards that have horrible governance are not. People are,” said Palihapitiya. “What we’ve done is disproportionately prop up poor-performing CEOs and boards, and you have to wash these people out.”
If we look at the experience of the past crisis, back then (with an infinitely more modest scale of monetary injections) there has been a serious surge in social stratification and the actual impoverishment of those who earn a living not by owning assets, but by selling their own working hours.
Proponents of the American approach to solving economic problems like to point out that the massive printing of money in 2008-2009 did not cause (as expected) hyperinflation and inflation is too low in general, which means that it is possible to still print. But this is also an illusion caused mainly by simple statistical manipulation: it is enough to look at the data of the Federal Reserve itself and see that the average hourly wage indeed seemed to grow faster than “inflation”, but at the same time prices for truly important goods and services that give the possibility to rise on the social ladder – real estate, education and medicine – grew much faster.
I.e., in the name of the beautiful growth of the S&P 500 index and the rescue of 1% of the richest Americans (and rich foreign investors), all other citizens were put in a situation in which the hypothetical hamburger made from GMO soy and a subscription to a stultifying TV series became more affordable, but their own housing, medical care, and education became proportionately more expensive. Such systems do not live for a long time, especially since now the effect will be much stronger. And there is a real chance that the ongoing de-globalisation, which will deprive the US of access to cheap Chinese imports bought for freshly printed dollars, will simply finish off the US economy. And in this case, the very hyperinflation scenario, against which the very rich – who after the announcement of recent “Federal Reserve programs to save the economy” rushed to buy up not dollars, but gold bullion all over the world, creating a shortage in the market – probably insure themselves, is really being implemented.
Some American financiers fear that all of this will have terrible consequences for the American political system. For example, Howard Marx, the creator of the Oaktree Capital investment fund, wrote to investors that “the bank bailout of 2008 has been roundly cited as a case of the government putting Wall Street ahead of Main Street, and it contributed significantly to the populism that has riven American politics ever since; the recent step to rescue leveraged lenders may add further fuel to that fire.”
This prophecy by Mr. Marx is worth illustrating by historical example. As early as 2013, the British magazine “The Economist” wrote about what many historians of economics know: “It’s no coincidence that Adolf Hitler’s inexorable rise to power began in November 1923, the highpoint of Germany’s inflation”. American financiers are right when they fear the political consequences of the Federal Reserve’s actions, but they cannot stop them. Moreover, their current actions make them ask an uncomfortable question: maybe they want these consequences?
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