The Fed's Tragicomedy
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In theaters now. Two plays. Two endings. Both pathetic.
In one, the Republicans and Democrats pretend to battle it out over the federal budget. To bring you fully into the picture, the feds owe $31 trillion…give or take a trillion. They can’t pay it. And if interest rates are headed into ‘normal’ territory (2% or 3% above inflation), they can’t keep up with the interest payments. At 7% interest, the entire federal debt would cost more than $2 trillion per year in debt service. The feds don’t have that kind of money.
Last week brought ‘good’ news from the economy. Jobs are apparently plentiful. And that’s ‘bad’ news for investors, because it means the Fed has to keep nudging interest rates upward. Otherwise, workers might actually get a raise…driving up prices for everything.
So higher rates are coming down the pike. And now, if the federal government borrows more money, it drives up interest rates even more, brings on recession, depresses federal tax receipts and makes the deficits even bigger.
But one way or another, the federal government must finance its spending. Apart from borrowing, the only other choices are to cut spending…or ‘print’ the money. These are the subjects of the two dramas now on the big stage.
Same Old Script
The curtain goes up on the first one as the newly Republican House of Representatives brings out a cannon: the debt ceiling. They say they are going to fire it if spending…some spending…on projects they don’t care for…is not cut.
And so, the dramatis personae are in place. The battle begins. Alvaro Vargas Llosa explains what happens next:
Here we go again. Treasury Secretary Janet Yellen warns that the federal government’s borrowing limit has been reached. Even with Treasury taking “extraordinary measures,” the government’s ability to meet payments will be exhausted in a few months.
Leaders of the Republican-controlled House of Representatives say the House won’t vote to raise the debt ceiling, which would allow further borrowing, without spending cuts. But the White House and Democratic leaders reject that proposition.
Soon the bond markets will be roiled. Fear mongers will raise the alarm that the United States will default on its bond obligations and will no longer be able to make Social Security and Medicare payments.
The White House will bet that the standoff hurts the opposition, which it will, and then a deal will be reached that, in essence, involves the GOP-led House caving in while the White House and the Democrats agree to meaningless budget reductions (in reality, reductions in planned increases, not real cuts) that, if they ever materialize, will change little in the grand scheme of things.
All this as the U.S. balance sheet continues its descent into banana republic unviability.
We’ve been here before. Nothing indicates that the current fight between the Republican House and the Democratic White House over the debt ceiling won’t follow a similar script.
Mock Showdown
Of course, it will follow the same script. The debt ceiling threatened to block federal spending 78 times in the last 63 years. And each time, the politicos voted to raise it. If there is one thing Republicans and Democrats agree on, it’s this: nothing can be allowed to interfere with the money machine. And the real role – for members of both parties – is the same…to keep the machine well-oiled and well fueled, taking money from the public – via taxing, borrowing, or inflation – and transferring it to the groups favored by the elite.
While the politicians are preparing a mock showdown over the budget, the Fed is putting on a spectacle of its own. It’s pretending to ‘hold the line’…firmly and resolutely promising to fight inflation until inflation has no fight left in it. Two percent is the limit. No more. No less. (Where that comes from, who knows?) And the Fed will continue to raise interest rates, perhaps only by ‘baby steps,’ until inflation bows down, bends its neck and offers its sword to the Federal Open Market Committee.
That at least, is the official script. Mr. Powell, et al, are supposed to keep up the fight until he can announce a ‘mission accomplished.’
But here again…the show is a fake. The outcome is a foregone conclusion. The Powell Fed – like the McCarthy House – will cave as soon as it faces a worthy enemy. The script may call for it to stick to its post, like the 300 Spartans. But in 1988…2000…2007…2020 – every time the Fed has faced a real enemy…a stock crash, recession, even a germ – it cut rates sharply, dropped its weapons, fled the field and claimed not only victory, but moral ascendance.
Disgraced Again
At the end of the ‘90s, Alan Greenspan, Robert Rubin and Larry Summers graced the cover of TIME magazine as the Committee to Save the World. What did they do to earn such fame and glory? They made more credit (and debt) available to troubled borrowers.
Then, following the mortgage finance crisis on Wall Street, Ben Bernanke did the same thing. He cut short the correction by making more credit available. He then had the cheek to claim he had not been routed in panic. He said he had the “Courage to Act.”
Most recently, the Fed could have fought a last-ditch battle in 2020, forcing the feds to come to terms with their own over-spending. The politicians gave away trillions in stimmies, PPP loans, and other boondoggles. Where did they get the money? From the Fed. Instead of holding the line, the Fed disgraced itself once again. It shamelessly turned tail...and ran through the bushes where the rabbits couldn’t go, ‘printing’ an unprecedented $4.5 trillion.
Will either of today’s performances turn out differently? Under real pressure both Congress and the Fed will do what they are paid to do; they will keep the money coming to themselves…and the elite who support them.
PS: The really big show is the one no one wants to see. It’s the clash between the elite and the public. But it’s the one that is going to end in catastrophe.
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