Submitted by Michael Every of Rabobank
“Central banks carry out a nation's monetary policy and control its money supply, often mandated with maintaining low inflation and steady GDP growth. On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.” Investopedia
Really? That’s how it works, is it? At this point anyone who can’t see our real economic/financial market paradigm is either foolish, ignorant, or wilfully blind. The Fed has just admitted wages can’t rise except by making very rich people very much richer for a long, long time; then, finally, they might start to go up - perhaps. Moreover, the Fed has demonstrated yet again that it not only ignores asset bubbles --it will “never hold back support for the economy even if asset prices are too high”-- but that it wants those bubbles. How can this end well?
Look at the uneven distribution of stock holdings. Gallup states that as of 4 June 2020, 55% of the US owns some stock: 66% of those aged 50-64 and 32% of those 18-29; 58% of men and 52% of women; 64% of whites, 42% of blacks, and 28% of Hispanics; 85% of post-graduates and 33% of those with no college education. It is far from genuine equality of ownership by any means. But what Gallup does not say, and Goldman Sachs does, is that as of February this year 50% of the US stock market was owned by the top 1% of society.
Could we please have the intellectual honesty just to admit the system as it exists today functions to give more money to ultra-rich people? This is no longer a ‘free market system’. Water does not find its own level. It is channelled through canals cut by an establishment, and some fields are watered very well and others left arid. This is not ‘capitalism’ as anyone teaches or models it, where money is made from productively investing in making things. It is speculative financial-capitalism, where money is made by watching money being made by central banks, which is then channelled into the stock of firms who often don’t make things. Given the homilies that central banks are now coming out with about inequality, one could even say it is even oligarchy excreting noblesse oblige. Yet perhaps it is even worse: central banks saying “Let them eat stocks.”
For those who roll out the cliché: “Well, the central-bank toolkit only allows X, Y, or Z – what can they do?” consider that these toolkits seem to expand on a weekly basis – but never in a direction that means wages will go up ahead of assets. Never. All the feverish innovation goes into new channels to get house prices up, or stocks, or sovereign or junk bonds (some of which are the same thing).
Yes, Powell did say more needs to be done on the fiscal side. What we did NOT get was a clear message aimed at the public, who would then demand it of their government: “Spend more on infrastructure, and/or national security supply-chain on-shoring, and/or social programs to narrow inequality: we will buy all the bonds needed to pay for it.” You know, “Whatever it takes” – but this time for the many and not the few. It was more of a “Whatever” as the Fed described a bleak future US economic landscape where many millions of jobs may never come back…and the response is still to channel more money to the rich via asset bubbles.
Meanwhile, and far from unrelated, in Seattle six city blocks have been seized by protestors. As the Seattle Times notes “Welcome to the CHAZ, the newly named Capitol Hill Autonomous Zone, where most everything was free Tuesday. Free snacks at the No-Cop Co-op. Free gas masks from some guy’s sedan. Free speech at the speaker’s circle, where anyone could say their piece. A free documentary movie — Ava DuVernay’s “13th” — showing after dark. A Free Capitol Hill, according to no shortage of spray paint on building facades.” When the rich get everything free, why shouldn’t everyone else? It’s a good question. Some people aren’t waiting for MMT from on high – they are trying to get it moving themselves.
Except that in a microcosm of this populist backlash itself --and recalling that free markets and capitalism were designed to deal with allocating finite resources and things not being free-- a plaintive tweet went out last night: “ALERTA#2: the homeless people we invited took away all the food at the Capitol Hill Autonomous Zone. We need more food to keep the area operational. Please if possible bring vegan meat substitutes, fruits, oats, soy products, etc. – anything to help us eat.” The response to which on Twitter included: “Gotta say I’m impressed, it usually takes Marxists at least 3-4 months to achieve starvation.” The Fed’s free-money-policy-without-any-MMT will take a bit longer.
If you want to believe that the Fed is not aware of its own complicity in all this then one has to assume we are watching a man struggling to eat soup with a fork. It’s embarrassing, messy, stupid, and ridiculous. Except in this case the man gets paid billions of dollars for as long as it takes him not to eat the soup. Try to remember that.
I feel sorry for those who have to try to give a traditional vanilla write-up of what the Fed is doing; it’s hard to do so and maintain self-respect. One day this will all come crashing down in epic ruin and people will have to look at themselves in the mirror, or tell their kids what they did when this was all going on: “I described the hand movements of an idiot being paid a fortune to eat soup with a fork - at a time when many others desperately needed to eat.” A life well lived.
Yet for those who do have to play along with the charade: the Fed is on hold until end-2022 at least; will do USD120bn a month of QE split 80bn-40bn between Treasuries and MBS; and there is as yet no hint of negative rates or yield curve control. Stocks actually edged down slightly in response: buy the rumour, sell the sad fact, perhaps. Bond yields edged lower. And so did USD, which one can certainly sympathize with….until all the other central banks have to go the same route, of course.