‘The Dow fell 530 points on Wednesday as Treasury Secretary Janet Yellen’s comments that her department hadn’t discussed blanket protections for bank deposits appeared to overshadow a Fed interest rate hike and press conference, as well as the release of the central bank’s latest batch of economic projections.
‘…investors reassessed the market’s negative reaction to events late in the previous session.’
The bad news was now good news. Down was up. Left was right.
The Fed raised rates by 25 basis points (0.25%). In the morning, investors thought they saw Janet Yellen at work. But by the afternoon they were sure it was Paul Volcker, raised from the dead, and sneaking back into the Fed. The rocket turned its nose down, the Dow gave up all its AM gains…and then bounced at the end of the day.
$50 trillion in fake wealth
Which leads us to an observation: we are in a tricky transition period. Between inflation and deflation. And the next few years will probably be a lot like yesterday…confusing. The Fed will appear to fight inflation. Jerome Powell will put lifts in his shoes and do an impersonation of Paul Volcker.
But the entire elite class is deeply afraid of deflation (which would mean giving up as much as US$50 trillion in fake wealth). It will continue with its ‘stealth pivot’, stick to a tried-and-true way to protect its bubble gains…and rip off the masses with inflation.
The latest rate increase, for example, still leaves Fed monetary policy in inflationary territory, with its key rate more than a full percentage point below the level of consumer price increases.
The feds also have promised to spare bankers and their large depositors from the losses they deserve. And this month, the Fed’s balance sheet is growing again, after a year of small declines. The US$626 billion of QT (the reduction of the Fed’s asset holdings…which is deflationary) may have already been erased (by more QE to bail out the banks, which is inflationary).
Nor is the federal government showing any sign of cutting back on spending. There’s ‘monetary’ inflation. There’s also ‘fiscal’ inflation. Aside from actually ‘printing’ money, the feds boost inflation by spending money they don’t have. And we’re looking at US$1 trillion-plus deficits from here to eternity.
But sticking with the banks…
The discipline of capitalism
Why not let them fail? Bad restaurants go out of business. Bad poker players lose their money. Mismanaged banks are supposed to go bankrupt, too.
That’s the discipline of capitalism. Can committees of bureaucrats and hacks do better? Can central planners improve on the way private markets allocate capital and price assets? Can politicians with no ‘skin in the game’ make better investments than investors with their own money at risk?
If so, it’s news to us. As far as we know, the discipline of capitalism is the driving force of human progress. It rewards successes. And it rejects failures. We learn. We do more of what works and less of what doesn’t. We get richer. Everyone is better off by getting rid of bad chefs and bad bankers…even the poor who, in rich countries, enjoy central heating, TV, AC, automobiles, and hamburgers.
But the benefits of capitalism are not guaranteed. At any given time, there is always a tension — the wealth and power of the here and now…against the unknown wealth, power, technology, and knowledge of tomorrow.
The steel plough was much more effective than the wooden model. Capitalism quickly put the wooden plough makers out of business. Had the feds been on the case, however, we might still be turning the earth with oaken blades. Lobbyists for the wooden plough makers would have argued that metal ploughs would put them out of business…and destroy jobs.
Think of the whole Information Age revolution…Amazon, Apple, Microsoft, Google, Meta…if the powers-that-were had only seen how they would shift advertising revenues from existing powerful beneficiaries — The New York Times, NBC, Vanity Fair Magazine etc — and how these new media would become the major channel for indoctrinating and misleading the public…they might have gotten control of them earlier…or prevented them from ever seeing the light of day. Imagine the scene. California, 1975. A knock on the garage door:
‘Are you Steven Jobs?’
‘We’re from the FBI. Is that a personal computer you’re building?’
‘Because it is prohibited. National security. You’ll have to come with us.’
‘We can’t tell you anymore. It’s classified.’
The future is only allowed to happen at all because the elite don’t see it coming. And now the Silicon Valley companies are here, firmly entrenched…representing billions in new wealth…and part of the elite themselves. Just two companies, Microsoft and Apple, are equal in value to a fifth of US GDP.
Naturally, the politicos are eager to control them…and enlist them in their propaganda efforts.
The feds — and indeed today’s whole elite — represent the here and now. They’re the ones with ‘influence’. They write the newspaper columns. They give campaign contributions and hire lobbyists. They have the money. They have the power. Their goal is to protect it…by preventing the future from ever happening. The future, if it were allowed to happen naturally, would deflate their power and their overpriced assets. Bad banks would go broke…as they should. Speculators would lose money. And the elite, who are responsible for such monstrosities as our monetary policy, US$90 trillion of debt, the COVID Hysteria, and the War on Terror, would lose their influence and reputations.
It is in order to prevent that future that the feds subsidise, restrict, control, tax, mislead, and defraud…printing up trillions in new money in order to inflate away excess debt. The cost of their ‘mistakes’ is thus borne by ordinary households and businesses. Like a baby whose head is intentionally deformed, the future survives, but misshapen and retarded.
For The Daily Reckoning Australia