Michael Hudson: The Fed’s Austerity Program to Reduce Wages

Yves here. It is striking that how over the years, the Executive branch and Congress have come more and more to defer to the Fed as the master of economic management, when the Fed’s primary role, as that of any central bank, is to provide for the safety and soundness of the financial system. That orientation has produced cognitive capture, with the central bank unduly identifying with asset holders. It is also heavily populated with monetary economists who have drunk deeply at the fount of Milton Friedman and the Chicago School of Economics.

Paul Volcker made it explicit that the Fed is in the business of crushing labor. As reported by William Greider in Secrets of the Temple, when Volcker was driving interest rates to the moon, he kept a note card in his pocket. It was a record of weekly average construction wages. Volcker wanted them to go down as proof his harsh medicine was working.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization. Originally published at his website

To Wall Street and its backers, the solution to any price inflation is to reduce wages and public social spending. The orthodox way to do this is to push the economy into recession in order to reduce hiring. Rising unemployment will oblige labor to compete for jobs that pay less and less as the economy slows.

This class-war doctrine is the prime directive of neoliberal economics. It is the tunnel vision of corporate managers and the One Percent. The Federal Reserve and IMF are its most prestigious lobbyists. Along with Janet Yellen at the Treasury, public discussion of today’s inflation is framed in a way that avoids blaming the 8.2 percent rise in consumer prices on the Biden Administration’s New Cold War sanctions on Russian oil, gas and agriculture, or on oil companies and other sectors using these sanctions as an excuse to charge monopoly prices as if America has not continued to buy Russian diesel oil, as if fracking has picked up and corn is not being turned into biofuel. There has been no disruption in supply. We are simply dealing with monopoly rent by the oil companies using the anti-Russian sanctions as an excuse that an oil shortage will soon develop for the United States and indeed for the entire world economy.

Covid’s shutdown of the U.S. and foreign economies and foreign trade also is not acknowledged as disrupting supply lines and raising shipping costs and hence import prices. The entire blame for inflation is placed on wage earners, and the response is to make them the victims of the coming austerity, as if their wages are responsible for bidding up oil prices, food prices and other prices resulting from the crisis. The reality is that they are too debt-strapped to be spendthrifts.

The Fed’s Junk Economics of What Bank Credit Is Spent On

The pretense behind the Fed’s recent increase in its discount rate by 0.75 percent on June 15 (to a paltry range of 1.50% to 1.75%) is that raising interest rates will cure inflation by deterring borrowing to spend on the basic needs that make up the Consumer Price Index and its related GDP deflator. But banks do not finance much consumption, except for credit card debt, which is now less than student loans and automobile loans.

Banks lend almost entirely to buy real estate, stocks and bonds, not goods and services. Some 80 percent of bank loans are real estate mortgages, and most of the remainder loans are collateralized by stocks and bonds. So raising interest rates will not lead wage-earners to borrow less to buy consumer goods. The main price effect of less bank credit and higher interest rates is on asset prices – deterring borrowing to buy homes, as well as for arbitragers to buy stocks and bonds.

Rolling Back Middle-Class Home Ownership

The most immediate effect of the Federal Reserve’s credit tightening will be to reduce America’s home-ownership rate. This rate has been falling since 2008, from nearly 68 percent to just 61 percent today. The decline got underway with President Obama’s eviction of nearly ten million victims of junk mortgages, mainly black and Hispanic debtors. That was the Democratic Party’s alternative to writing down fraudulent mortgage loans to realistic market prices, and reducing their carrying charges to bring them in line with market rental values. The indebted victims of this massive bank fraud were made to suffer, so that Obama’s Wall Street sponsors could keep their predatory gains and indeed, receive massive bailouts. The costs of their fraud fell on bank customers, not on the banks and their stockholders and bondholders.

The effect of discouraging new home buyers by raising interest rates lowers home ownership – the badge of being middle-class. Despite this, the United States is turning into a landlord economy. The Fed’s policy of raising interest rates will greatly increase the interest charges that prospective new home buyers will have to pay, pricing the carrying charge out of reach for many families.

As the United States has become more debt-ridden, more than 50 percent of the value of U.S. real estate already is held by mortgage bankers. Homeowners’ equity – what they own net of their mortgage debt – has fallen even faster than home ownership rates have declined.

Real estate is being transferred from “poor” hands to those of wealthy landlord corporations. Private capital companies – the funds of the One Percent – are going to pick up the pieces to turn homes into rental properties. Higher interest rates will not affect their cost of buying this housing, because they buy for all cash to make profits (actually, real estate rents) as landlords. In another decade the nation’s home ownership rate may fall toward 50 percent, turning the United States into a landlord economy instead of the promised middle-class home ownership economy.

The Coming Economic Austerity (Indeed, Debt-Burdened Depression)

While home ownership rates plunged for the population at large, the Fed’s “Quantitative Easing” increased its subsidy of Wall Street’s financial securities from $1 trillion to $8.2 trillion – of which the largest gain has been in packaged home mortgages. This has kept housing prices from falling and becoming more affordable for home buyers. But the Fed’s support of asset prices saved many insolvent banks – the very largest ones – from going under. Sheila Bair of the FDIC singled out Citigroup, along with Countrywide, Bank of America and the other usual suspects. The working population is not considered to be too big to fail. Its political weight is small by comparison to that of Wall Street banks.

Lowering the discount rate to only about 0.1 percent enabled the banking system to make a bonanza of gains by making mortgage loans at around 3.50 percent. So despite the stock market’s plunge of over 20 percent from nearly 36000 to under 30,000 on June 17, America’s wealthiest One Percent, and indeed the top 10 Percent, have vastly increased their wealth. But most Americans have not benefitted from this run up in asset prices, because most stocks and bonds are owned by only the wealthiest layer of the population. For most American families, corporations and government at all levels, the financial boom since 2008 has entailed growing debt. Many families face insolvency as Federal Reserve policy aims to create unemployment. Now that the Covid moratorium on the evictions of renters behind in their payments is expiring, the ranks of the homeless are rising.

The Biden Administration is trying to blame today’s inflation and related distortions on Putin, even using the term “Putin inflation.” The mainstream media follow suit in not explaining to their audience that blocking Russian energy and food exports will cause a food and energy crisis for many countries this summer and autumn. And indeed, beyond: Biden’s military and State Department officers warn that the fight against Russia is just the first step in their war against China’s non-neoliberal economy, and may last twenty years.

That is a long depression. But as Madeline Albright would say, they think that the price is “worth it.” Biden’s cabinet depicts this New Cold War as a fight of the “democratic” United States privatizing economic planning in the hands of the largest banks “too big to fail” and other members of the neo-rentier class, in opposition to “autocratic” China and even Russia treating banking and money creation as a public utility to finance tangible economic growth, not financialization.

There is no evidence that America’s neoliberal New Cold War can restore the nation’s former industrial and related economic power. The economy cannot recover as long as it leaves today’s debt overhead in place. Debt service, housing costs, privatized medical care, student debt and a decaying infrastructure have made the U.S. economy uncompetitive. There is no way to restore its economic viability without reversing these neoliberal policies. But there is little “reality economics” at hand to provide an alternative to the class war inherent in neoliberalism’s belief that the economy and living standards can prosper by purely financial means, by debt leveraging and corporate monopoly rent extraction while the United States has made its manufacturing uncompetitive – seemingly irreversibly.

The Rentier Class Has Sought to Make America’s Neoliberal Privatization and Financialization Irreversible

It has succeeded to such a degree that there is no party or economic constituency promoting such recovery. Yet the Democratic Party leadership, subjecting the economy to an IMF-style austerity plan, will make this November’s midterm elections unique. For the past half century, the Fed’s role has been to provide easy money to give the ruling party at least the illusion of prosperity to deter voters from electing the opposition party. But this time the Biden Administration are running on a program of financial austerity.
The Party’s identity politics address almost every identity except that of wage-earners and debtors. That does not look like a platform that can succeed. But as the ghost of Margaret Thatcher no doubt is telling them: “There Is No Alternative.”

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53 comments

  1. John Emerson

    Raising unemployment to curb inflation hits the black community first and hardest (last hired, first fired). What that means is that when times are good, unemployment is low, and some blacks start being able to get ahead a little, the Fed will see it as a problem and raise interest rates to stop it. It’s like they’re some indicator Employee Zero, a black man, and as soon as he gets a job the Fed steps into action.

    I wish I’d clipped them, but I long ago saw two articles in the same newspaper, one telling how employers were so hard up for workers that they were sending buses into Milwaukee’s black community to pick them up and take them to work, and the other saying that the Fed was worried and was getting ready to take steps to end inflation.

    People, if I ever can get up off of this old hard killin’ floor,
    Lord, I’ll never get down this low no more.

    — Skip James, Hard Times Killing Floor

    The Fed is the killing floor,

    https://emersonj.wordpress.com/the-federal-reserves-killing-floor/

    Reply
    1. Mikel

      Changing demographics (more people of color than ever) has made the metric more like: As soon as Employee Zero, especially a black man, can leave his job for a higher paying one or quit his job and look for a higher paying one – The Fed steps into action.

      Reply
  2. Rodger Malcolm Mitchell

    Raising interest rates to prevent a depression is like applying leeches to prevent anemia.

    Inflation is not caused by low interest rates. Inflation never has been caused by too much government spending. Inflation ALWAYS is caused by shortages of key goods and services, most notably oil, but also food, shipping, lumber, computer chips, labor, etc.

    Inflation actually can be cured by ADDITIONAL federal spending to acquire and distribute the scarce goods and services.

    There is nothing the Fed can do to cure the shortages. That is Congress’s job. The Fed doesn’t have the tools. But Congress is Trump-paralyzed, so a depression is inevitable.

    Reply
    1. Susan the other

      This economic mess belongs to Congress from start to finish. Congress is the reason the Fed is limited to keeping the banks (artificially) solvent. It’s a classic prescription: first stimulate the housing industry to get us all up off the mat, then freak-out and pretend that the economy is overstimulated and raise interest rates, ostensibly to slow the inflation of an overheated economy – but in reality, raising interest rates simply protects asset prices and maintains a “strong dollar” so they can continue to financialize – and all at the expense of an actual, functioning economy. We can’t even rely on the military and all its misadventures anymore – that whole scam is also another casualty of financialization, leaving the country utterly bankrupt. Congress doesn’t want any changes to their way of doing business because Congres itself is vested and corrupt. It’s a tragedy. Compare the way our government dithers and fudges and outright lies its way through our hard times to Putin’s speech (2 days ago Links) at St. Petersburg’s International Economic Forum. Putin was thorough and detailed and believable. His solutions to the Russian economy were logical and doable. Or sounded that way. Whereas we have Brandon stumbling forward with nonsensical gibberish backed by questionable antiquated military power. And somehow our country’s “leaders” think that they can tweak interest rates, make the dollar a good deal for foreign investors, and keep doing the same old crap – financialization. Until the entire world is polluted and starving? Great plan.

      Reply
    2. Oh

      A big reason for inflation is GREED. Sellers see the opportunity to raise prices and make more money. Consumers have FOMO and buy more and stock up. This in turn increases prices and it gets sellers to raise prices more.

      Credit card interest rate were not lowered when the Fed lowered rates and therefore raising rate will not have any effect in curbing demand of everday goods. It kust helped the rentiers buy up more properties and raise real estate prices. Paul Vocker was dancing to the tune of the banksters when he raised interest rates.

      It’s time to get rid of the Fed.

      Reply
  3. Objective Ace

    >Higher interest rates will not affect their cost of buying this housing, because they buy for all cash to make profits (actually, real estate rents) as landlords

    This is not true. Corporate landlords issue bonds just like any other type of company. While not to the degree as an individual borrowing 80-99 percent of the cost of the house, the cost of borrowing still influences their ability to purchase houses

    Reply
    1. jsn

      In brownstone Brooklyn there are 3 or 4 hedge funds I know of buying up brownstones for cash. Once they have them, I have now what they do with them for further financial engineering, but guys with polo shirts are definitely writing seven and eight figure checks to embalm these neighborhoods for god knows who.

      With Joe B following MBS like Theon chasing Ramsey B from the dungeon, maybe once the neutering’s done, it’ll be the Saudis. Brooklyn has good water.

      Reply
      1. jsn

        “I have now what they do with them”

        I have no idea what they do with them…

        Fat fingered the posting button.

        Reply
  4. Mikel

    “Banks lend almost entirely to buy real estate, stocks and bonds, not goods and services. Some 80 percent of bank loans are real estate mortgages, and most of the remainder loans are collateralized by stocks and bonds…”

    There are plenty of real estate loans collateralized by stocks and bonds too. (I think this is one of the reasons why this crash is being slow walked).

    Bubbles like the current one attract more retail traders. The old “when the shoe shine boy starts talking about stocks, it’s time to get out” is still followed by the more privileged class.

    And remember all the crying that a measley $1200 or child tax credits would keep people from working? They didn’t like the average $2000 Robinhood account balance either and started looking sideways at the bump in the most modest 401k holdings.

    Lots of older people felt comfortable retiring because of bubble.
    The Fed wants to slow that down too.

    Also noting that the first shot across the bow with layoffs has been in the “tech” sector. Thinking there is a desire to get wages down in that area too.

    The retail and other small businesses are complaining about not enough workers, but now there is not going to be the same demand. They needed more workers because of demand. Now borrowing will be more expensive for all businesses.
    Prices are going to be slow to come down…but bigger, deeper pocketed monolopies that have more cash on hand? They are going to have more sales!

    And private equity flush with cash from getting out before the bubble burst is already getting ready to scoop up distressed businesses.

    But here’s the thing: it is not going to ultimately work out for the elites this time.
    The geopolitical events come to mind and something I haven’t exactly put my finger on…
    Something about this game is feeling more played out than ever.

    Reply
    1. Charger01

      I reckon its due to the perception that the material conditions are getting worse, people are recognizing that they’re not doing better than they were 10 to 20 years ago.

      Reply
      1. Mikel

        Indeed. The rug pulls (jerking away any sense of financial security or building it) are coming more frequently now and for larger numbers of people.
        A kind of social amnesia doesn’t have time to take hold.

        They can’t rewrite the history books fast enough, but still, really pay attention to what the kiddies are being taught in schools.

        Reply
    2. Jeremy Grimm

      After the 2008 finance crash, I thought things had played out. After the Corona flu hit employment and the markets, I thought things had played out. I have been waiting for a correction to real estate prices since the mid 1990s. I have given up on thinking about the stock market as a market. I had hoped the u.s. government might begin to at least notice climate change with more than lip service and increases in the defense budget. But now, as ever more incomprehensible events and actions devolve, I fear I have held on to my small hopes for too long. I fear I have procrastinated moving and seeking refuge for too long. Time is running out as my options diminish. Something about this game is definitely feeling more played out than ever, and like you I cannot put my finger on why things feel so different now. It is not that material conditions are plainly worsening, that was plain enough at the Millennium. And although I hoped for eventual improvement, I have never been terribly optimistic though I did become briefly optimistic after Obama was first elected — very briefly optimistic.

      I have inchoate feelings of the end of an era. The Power Elite is cashing out their chips and clearing the table after cleaning out the last chumps who came to play against the House. They are setting up a higher stakes game behind the locked door upstairs, where small players cannot afford the ante. The Populace, most of which could not buy even one chip, had grown unimportant to them some time ago. And while the Power Elite is busy preparing for their high stakes game — manifold whirlwinds — Climate Chaos, Overpopulation, Resource Exhaustion — grow as they approach from manifold directions, pressing down on a shoddy built and unmaintained foundation that is beginning to crack and lean, threatening the Collapse of all.

      Reply
      1. Telee

        Even Hudson is not optimistic about the future in the US. In several interviews, when asked what can be done, he says ” I really don’t see what can be done without a dramatic change in the political system and our constitution to allow such changes.” Something that has almost no possibility of happening.

        Reply
      2. flora

        In the US, the political/financial power of labor and labor unions was offshored to cripple labor and increase Wall Street’s political/financial power and decrease labor’s political/financial power. Both the Dem and the GOP estabs are responsible for knee-capping US labor’s political power beginning in the early 1990’s. Labor is ‘deplorable’ to the Dem estab. Wall Street pays better. Neoliberal economics.

        Reply
        1. flora

          adding: the Dem estab turning against Labor started with the Carter admin in the late 1970’s. There were then still enough old New Deal Dems in Congress and in the voting public to prevent the worst from happening then. That took another 12-15 years.

          Reply
        2. John Emerson

          “In the US, the political/financial power of labor and labor unions was offshored to cripple labor”.

          By now a huge proportion of the American labor force (i.e. workers for American companies, workers producing products consumed in the US) are illegal aliens or workers in foreign countries who have no political rights in the US and often not in their home countries either.

          Reply
      3. Mikel

        Lots of weirdness. The Fed’s interest rate tweaks are STILL at historical lows in the grand scheme of things and so much hair is on fire. It’s a system broken as well as corrupt.

        Reply
      4. Mike

        I feel the same as you. To play off your elite cashing out their chips…I think the people who are on the bandwagon concerned about the WEF great reset being a conspiracy to consolidate power sometimes are missing a key point. The elites aren’t simply pursuing a great reset because its the natural consolidation of power, they are pursuing it because they have to. They know about the future consequences of climate change, war, limiting resources, over population, etc. It’s an opportunity in the sense of knowing the real macro forces coming our way, not some unrealistic expectation that we are going to have 2.3% GDP growth going into perpetuity and that the world can share the West’s standard of living. Is it not clear that the West cannot even maintain its standard of living? Our governments (especially the US) are clearly not planning for the future, so the elite are in filling a void, though probably to their benefit and not ours.

        Reply
  5. Tom Stone

    This explains why it is so urgent to pass “Red Flag” gun laws at the Federal level.
    There are a lot of potential domestic violent extremists who could be misled by Fake News into questioning the goodness of Capitalism and Globalisation.
    Some of them are actually beginning to criticise the Government!
    Which is surely a sign of mental illness…

    Reply
    1. flora

      an aside: You will be “pleased” to know Kamala is picking up the “ministry of truth” * baton.

      Big Sister II: Kamala Harris leads latest Biden ‘disinformation’ team

      The Biden administration on Thursday created a new internet policy task force — this one led by Vice President Kamala Harris — with goals including “developing programs and policies” to protect “political figures” and journalists from “disinformation,” “abuse” and “harassment.”

      * https://nypost.com/2022/06/16/kamala-harris-leads-latest-biden-disinformation-team/

      No conflict of interest there. What could go wrong?

      Reply
      1. Mildred Montana

        The fact that Kamala has been appointed the latest arbiter of Truth is 𝘱𝘳𝘪𝘮𝘢 𝘧𝘢𝘤𝘪𝘦 evidence that she is a fool and should be disqualified from holding public office anywhere and anytime.

        And that ain’t disinformation. She is, really, actually, truthfully, a fool.

        Reply
      2. Yves Smith Post author

        The legal standard for defamation for public figures is WAY lower than for us dull normals. Prominent people are supposed to understand that a certain amount of abuse is the cost of a high profile.

        And good luck with yet another go at having this be an official initiative. This is just asking for the mother of all First Amendment suits.

        Reply
    2. John Emerson

      “This explains why it is so urgent to pass “Red Flag” gun laws at the Federal level. There are a lot of potential domestic violent extremists who could be misled by Fake News into questioning the goodness of Capitalism and Globalisation. Some of them are actually beginning to criticise the Government!”

      So far the people picking up the gun are mostly fascists. Their own fantasies of revolution are pretty stagy and unrealistic, but it’s even more unrealistic to hope that they are going to fight against big business or big finance. Trump put out some of that rhetoric in 2016, but he was out and out lying and had no interest in doing anything serious about finance, etc.

      Reply
  6. flora

    Great post! Thank you. Prof. Hudson’s second para says directly what I’ve been trying to sort out in my mind. He describes it in a nutshell, as the saying goes.

    Reply
    1. Telee

      Yep, Hudson hits the nail on the head once again. His last interview posted in NC was well worth the read as well. Hudson is one of those rare individuals who expands one’s conception of reality. I’ve learned so much from him in the last few years.

      Reply
    1. John Wright

      I know you post this comment, frequently, in response to many Hudson articles.

      In my view, Michael Hudson is a reasonable man who has been marginalized by the MSM.

      Not a God in my view, but always worth a read, as Gods usually have real power ascribed to them.

      Reply
  7. Colonel Smithers

    Thank you, Yves.

    Your introductory paragraph applies to the UK, too.

    The post’s title is evidenced by the governor of the Bank of England calling for pay restraint.

    Unfortunately, it’s not just cognitive capture. The recruitment of personnel to serve on the monetary and financial policy committees at the Bank of England and, no doubt some of its peers, bakes this in. Look at how Rishi Sunak’s former manager at Goldman Sachs and Thelemis became a member of the Bank of England’s financial policy committee (and is now chairman of the Royal Opera and BBC). No economist has emerged from the labour movement to sit on the Bank of England’s committees.

    What is mystifying is how the left could not and does not see this happening and, therefore, does not engage. What’s stopping trade unionists from setting up shadow committees like Ernst & Young and City AM have and pontificating on air?

    Reply
    1. flora

      Thank you Colonel.

      an aside, to your last para: As noted here at NC, much of the currently described left seems more interested in fighting each other to win the ‘Virtuous 1st prize’ than in organizing to fight their economic opponents, including fighting with sharp elbows. I wonder how many on the left think economics is difficult, requires some work to understand, whereas feel-good, social club leftism is easy. My 2 cents.

      (Understanding basic economics isn’t that hard, imo. )

      Reply
      1. Colonel Smithers

        Thank you and well said, Flora.

        Even when insider sympathisers offer to help, including prep for media events and dirt on the opposition, they are not interested.

        I pine for a socialist Lee Atwater.

        Reply
  8. Alan Roxdale

    Real estate is being transferred from “poor” hands to those of wealthy landlord corporations. Private capital companies – the funds of the One Percent – are going to pick up the pieces to turn homes into rental properties.

    In and of itself (as will certainly be argued) this wouldn’t be so bad if people could simply build or buy alternative accommodation. Or there was enough accommodation to keep rents low. But that is not going to happen. In keeping with neoliberal modus operandi, it is certain that banks and sundry will lobby for laws, regulations, checks, and bureaucracy to restrict the general supply of homes so as to keep rents exorbitantly high.

    The corruption will continue until a new politics is formed.

    Reply
  9. Dave in Austin

    Michael Hudson says: “The most immediate effect of the Federal Reserve’s credit tightening will be to reduce America’s home-ownership rate. This rate has been falling since 2008, from nearly 68 percent to just 61 percent today. The decline got underway with President Obama’s eviction of nearly ten million victims of junk mortgages, mainly black and Hispanic debtors. That was the Democratic Party’s alternative to writing down fraudulent mortgage loans to realistic market prices, and reducing their carrying charges to bring them in line with market rental values.”

    So according to Mr. Hudson, for the past 14 years during the era of loose credit and low interest the home ownership rate has been falling. But now tightening credit will reduce home ownership. Credit, for better or worse, is only a small part of the problem.

    The 10 million “victims of junk mortgages” were people who participated in loan applications that were false. Both the mortgage originator and the buyer told lies and the federal government pretended not to notice because the laudable goal was to increase minority home ownership and get people on “the property escalator”. But the false paperwork allowed sellers to sell homes to marginal prospects at unrealistically elevated prices. When prices tumbled and the values were marked down, many buyers were underwater. So buyers who had either lost jobs or wanted to move abandoned the property backed by these non-recourse notes.

    The call to write down the mortgages to “realistic” values is a call to transfer the loss to the federal government. It was much more feasible to leave the owners of Fannie and Freddie stock (including me) to hold the bag.

    My own personal solution to the problem of first-time home buyers, especially young couples, is to allow young workers to set aside a percent of their income (10-15%) in tax free accounts that can only be used for the down-payment on a home.

    One big flaw today is that developers can get cheap construction loans for apartment buildings but not condo developments. This is a result of long-term financing coming from insurance companies building portfolios and overseas flight money wanting a safe home in the US. These factors mean developers I know can get low cost development financing when the ultimate owner is an insurance company but not when the ultimate owner is a condo buyer two years down the road because an economic downturn or interest rate hike may halt condo sales and lead to a foreclosure. For most young people in urban areas today, condos should be the first step on the property ladder. But almost no condos are being build. My home town Austin, TX is a prime example of this trend.

    Reply
    1. eg

      Your characterization of the fraudulent loan origination process is incorrect. You need to make yourself aware of Bill Black’s scholarship on the matter.

      Reply
  10. Dftbs

    I’ve read that some market participants seem to think that with 125bps of hikes so far this year we can start looking at inflation in the rear view. I think the “market” and the Fed underestimate the current predicament.

    There are myriad causes for inflation, but in all instances inflation is a manifestation of political choices. That is, even technical explanations such as “supply chains” or quantitative easing, neglect that it was political choices that shifted supply chains overseas or that allow central banks to monetize debt.

    Our current crisis is the sum of successive generations of bad political choices. These culminated in the Ukraine war which, if covid was the system burning down this conflict is gasoline on the fire. And yes, while pandemics happen and Russia invaded Ukraine, our response to both were our political choices.

    In that vein, the only choice left to the Fed is to destroy massive amounts of American consumption power. The problem is that the central bank and the “markets” think this is simply a market crisis. That raising rates and retarding wage growth will bring things back to normal. They are missing the scale of the problem.

    There is a belief that once Russia wins, they will re-engage with Western markets. This couldn’t be further from the truth. Similarly, it’s more likely that a geopolitical crisis will shutter our access to Chinese productivity and production.

    The USD, as a currency that denominates consumptive power will find itself adrift in a world where due to political conflict it can’t buy much. There is some solace in the dollar being able to squeeze out its vassal currencies, Euro, Yen, Cad and Aud. Take your European vacations while you can. But this is only a relative measure against other consumption power currencies.

    IMO in order to salvage any aspect of the Dollar order, the Fed is going to have to hike rates beyond the current market expectation of terminal rates (approx 3%). They will also need to defend dollar assets and debt maintenance. I think we’ll find the Fed hiking rates and maintaining the size of its balance sheet, maybe even growing it through more QE.

    And yes, the American people are going to suffer. It will be another segment of Americans now thrown in the sacrificial pyre, the equivalent petit bourgeois of our age. First they will be squeezed out of liquidity and have to sell assets on the cheap. Then they will see those assets become unattainable as those institutions with direct access to central bank credit will scoop them up. The Dollar is a currency that denotes consumptive power and the only thing left for it to consume is Americans themselves.

    Reply
    1. Jeremy Grimm

      When I first read your usage “consumptive power” I read “consumptive” in the old usage of the word — as in the disease of dying poets. I know that is not the meaning you were using, but then I could not help wondering, what sort of poetry does the u.s. government power work.

      Reply
  11. ndk

    I agree save for one thing: the coming austerity is going to hit the Federal Government, which may try to squeeze blood diamonds out of the charcoal that is left of the middle class.

    The federal deficit is nowhere near where it was in the Volcker era. It’s measured in trillions regardless of stock or flows. It is arguably the biggest constraint on the Fed right now and it will be the first wheel to fall off in an overextended tightening cycle. We would selectively strategically default if we were smart.

    Raising interest rates will increase debt service costs for the Treasury dramatically, particularly given how short its average issue duration is. We totally should have “borrowed” from Austria’s borrowing and issued our own 100 year zero-coupon bonds.

    With enough pressure and high enough temperatures, making stars out of the middle class might just work. However, I’m wagering Treasury goes supernova or the economy goes hairy black hole first, and more probably the latter.

    Reply
  12. TomDority

    Was it Yellen who said we are in a wage and inflation spiral ?
    Point being that, that nothing-burger statement says nothing about whether wage and inflation are related, whether wages are spiraling down or if wage buying power is spiraling down, whether inflation is affecting wages or wages are forcing inflation. Of course, the media picks up on, and the economists pick-up on the actually meaningless double-speak of Yellen to push through their BS theories that have no physical basis in fact. To what end? to raise interests rates to quell the alleged demand that is raising inflation.
    So to believe the reason to believe wages or demand is causing inflation — one has to believe that Americans are eating to much and are living indoors to much.
    I choose to be a bit skeptical and believe that the Baby food manufacturer was to interested in stock buy backs and control of market instead of core manufacturing and maintenance to produce a safe product which resulted in infant deaths (money is more important to them than life itself)
    Maybe you will call me paranoid – but given how computer power and advancement has brought us some good advancements in science medicine and engineering – the far greater use is devoted for nefarious and deleterious reason. In a sense, one could conclude that the deployment (a system to increase profits through lower percentage gone over to supply chain costs) of Artificial Intelligence throughout the supply chains has created a de-facto (un)(semi-un)(wink-wink nudge nudge)knowingly entered into an unlawful market-allocation scheme that effectively restricts distribution, limits supplies and raises costs. Of course the bad guy is not a real person – just artificial. As far as I can tell – the legal system is woefully unprepared for things like AI legal system used to bounce around to escape legal liability for illegal acts – I do not think the legal system has any laws against AI performing law without a license.

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  13. bulfinch

    Isn’t it more probable that rising interest rates will necessitate lower asking prices by sellers? I’m already seeing things totter in some of the sand states. Also — aren’t most REITs who “pay cash” still technically using borrowed money to make their all-cash acquisitions?

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    1. Tim

      Yes, since higher rates make borrowing by the corporate landlords less attractive, real buyers will have to step in, but only at a denominator their monthly payment limits can afford.

      It’s been a while since I’ve heard the Fed’s second mandate (“Maintaining full employment”) mentioned. Of course full employment doesn’t actually mean full employment.

      Raising interest rates won’t fix the reversing of globalization (outsourcing) and de-Unionization that was a tail wind for lowering wages for the last 30 years either. I think Inflation will drop pretty quickly to about 6 percent if the War ends and 4-5% once they put the economy into a recession, but it will get real sticky there.

      The Fed will start squirming with the reality of being boxed in with stagflation at that point. The next 4 years of the Fed will have serious historical consequences. Looking at historical plots of real rates we already see this is the most behind the curve the fed has ever been except for WWII. It’s why they are being so hawkish and may have the fortitude to destroy the economy to try to save it.

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  14. Michael Hudson

    Quite right. In practice, the Fed’s mandate is to maintain sufficient unemployment to see that wages don’t rise more than minimally. (Yves’s citation of Volcker.) It’s aim is to inflate asset prices, not wages.

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  15. Glen

    American elites have a choice to make:

    Repair country and make a attempt to win “Cold War 2”.

    Or

    Further crushing of the middle and working class (and just so it is clear, unless you have over $10M in liquid assets, you are middle class).

    Reality is smacking the American elites in the face with regard to Russia/China and the multipolar world. They will have to fall back to what they do best – wrecking their own country.

    Reply
    1. Altandmain

      I’d argue the repair country part is mutually exclusive from trying to win another cold war.

      Wars are expensive and mean a diversion of the limited amount of resources that could be invested in the nation.

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  16. TexasG

    I do not understand why there is such attention to foreign policy issues, but the Fed does not work well, but they are trying to stabilize inflation and prevent the stock market from collapsing. And this is important for the financial stability of the country.

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  17. RockStar

    I agree with you, you can of course discuss the topic of the new Cold War and the multipolarity of the world, but it seems to me that the debt burden of the population and the stability of the stock market are more important for us, because this is the easiest investment tool for people. When I need to take a loan, I can turn to services like this https://fitmymoney.com/borrow-money-app/ because the encouragement procedure is simpler than in a bank and competent consultants can explain the repayment scheme. In my opinion, if you use loans correctly and have a balance in investing, then you will not be worried about world shocks.

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