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How The Fed Fails

Charles Hugh Smith
January 25th, 2021
Of Two Minds Blog
Comments (3)

This article was originally published by Charles Hugh Smith at Of Two Minds Blog. 

The Fed has a binary choice: preserve America’s global hegemony or further enrich the billionaires. You can’t have both.

The Fed will fail as a result of two dynamics: diminishing returns and the U.S. dollar’s role as a global reserve currency. The Fed’s reign as the godhead of financier-banker supremacy has been fun and games for the past 12 years of stock market euphoria, but that’s about to change.

All those expecting the Fed to sink the USD to near-zero to “save the stock market” don’t seem to realize that they’re also expecting the U.S. to surrender its global hegemony, which rests entirely on the U.S. dollar. The USD is the world’s dominant reserve currency–please examine the chart below. The USD dwarfs the next largest reserve currency, the euro. The Chinese yuan–due to its peg to the USD, essentially a proxy for the USD–is a tiny sliver of global reserves.

The owner of a reserve currency can create “money” out of thin air and trade it for autos, oil, semiconductors–real-world goods that were not created out of thin air. All these real-world goods required tremendous investment and significant costs to be produced and transported.

No wonder trading something for nothing–a remarkably good deal–is termed an exorbitant privilege.

It is not an exaggeration to say that the ability to create “money” out of thin air and trade it for real-world goods is the foundation of America’s global power. If the Fed prints USD to near-infinity and the USD loses value relative to other reserve currencies, the U.S. loses its exorbitant privilege of trading “money” created out of thin air for real-world goods.

So everyone expects the Fed to “print” the USD to zero is claiming the Fed is consciously choosing to lay waste to the foundation of American power–just to boost Big Tech Robber Barons and zombie global stock markets.

Recall that the Fed is not the Empire, it is the handmaiden of the Empire. The Fed’s dual mandate– for PR purposes, stable employment, and prices–is actually balancing the conflicting demands of a global and domestic currency–Triffin’s Paradox writ large.

The inherent problem with a reserve currency is that it must meet global economic needs and domestic needs, and these are intrinsically in conflict. America’s billionaires and pension funds want the US stock market to loft higher on the back of a declining USD, but that diminishes the global purchasing power of the USD–a trend spiraling down to economic ruin.

The Fed’s balancing act has run out of runway. It’s either destroy American hegemony by crushing the USD or secure hegemony and let the stock market function as a “market” rather than as a device to further enrich the top .01%. (Recall that “nearly half of the new income generated since the global financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens. The richest three Americans collectively have more wealth than the poorest 160 million Americans.” The Dangerously Diminishing Returns on Monetary and Fiscal Stimulus)

As for diminishing returns: consider what the Fed “bought” by handing $1 trillion to financiers, banks and billionaires in 2008-09 and what it “bought” with $3 trillion last March. The Fed’s balance sheet shot up from $925 billion on 9/9/08 to $2.08 trillion on 9/9/09– an injection of $1.16 trillion to “save” the global financial system (and the U.S. stock and debt markets) from a complete meltdown.

The Fed continued goosing markets higher, adding another $1 trillion by 2013 (balance sheet $2.96 trillion). So the Fed “bought” a five-year rally in global risk assets–a rally that sent wealth and income inequality into orbit–for a mere $2 trillion.

Last year the Fed had to print over $3 trillion in three months to “save the markets” from a reckoning with reality. Take a quick look at the chart below. Notice how the Fed’s “saves” are tracking a near-parabolic curve. So will the next “save” require $5 trillion, or will it be $7 trillion? And what are the consequences for such insanity on the U.S. dollar’s global hegemony?

So the Fed has a binary choice: preserve America’s global hegemony or further enrich the billionaires. You can’t have both. Hegemony requires a currency that’s increasing its value relative to other currencies, not plummeting to near-zero.

If the Fed chooses to further enrich the billionaires and top .01%, then the skyrocketing wealth-income inequality will unravel the domestic social and political orders. There is no way that will be a “win” for the Fed, as the resulting backlash against the Fed’s strip-mining the nation to enrich the top .01% will have consequences for the Fed as well as the nation.

So the Fed will fail. If it spews endless trillions to further enrich the billionaires it will destroy the exorbitant privilege of the reserve currency and the global hegemony that privilege enables. If it preserves global dollar hegemony by not spewing endless trillions, global stock and debt markets will experience the equivalent of a financial tsunami, earthquake, and hurricane hitting all at the same time.

It’s either/or–there is no win-win. Choose wisely, Fed.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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    Author: Charles Hugh Smith
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    Date: January 25th, 2021
    Website: https://www.oftwominds.com/blog.html

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    1. Andrea.Iravani. says:

      It is not only the Fed that has to make the choice between the billionaires and national survival, and I totally disagree that it can be construed as international supremecy or hegemony, because if that would have been a true statement, China would not be growing at the rate that it has been growing at. It is the Biden administration and congress that has to choose between saving the billionaires, or saving themselves and the rest of the country. Luckily, when I immediately deleted all Facebook apps from cell phones, including Whatsapp, but Zuckerberg kept hiding Facebook apps behind other apps, even though I have never had a Facebook, Instagram, Whatsapp, Messenger, Pintrest, account, or anyother Facebook owned account and immediately delted and disabled every single app owned by Facebook hackers.

      Now the data thieves, doing what they have always done, which is an illegal bait and switch data theft practice, either agree to Facebook stealing users data from Whatsapp, or accounts will be deleted and Facebook will steal user data from Whatsapp.

      Send them to prison for life where they belong! They are terrorists and thieves! They practice mafia tactics of intimidation, harassment, voyeurism, and opression! They are evil monsters! They are organized crime rings full of low life InfraGard, good for nothing thugs that the country would be better off without! Their life styles are obscene crimes against humanity! They are aloso wrong about almost everything that they claim to be true! Totally sick fucking losers! Too God damned fucking bad if your feelings are hurt for me saying what you really are! Grow up and Face the consequences! Book em!
      https://sputniknews.com/science/202101251081875466-millions-of-users-flee-whatsapp-after-update-to-terms-of-service/

      Andrea Iravani

    2. cranerigger says:

      Charles Hugh Smith, thanks for the important article. The U.S. Dollar has been the WORLD RESERVE CURRENCY for a long time. The USA has enjoyed & benefitted from this status for ages. Unfortunately, the combination of ceding U.S. control of our currency to the FEDERAL RESERVE and financial mismanagement by D.C. politicians (think congress critters) has led us to the brink of financial ruin. The idea that anyone can print money out of thin air, endlessly, with no repercussions is asinine. The Weimar Republic, Zimbabwe, and other failed economies should have taught US this lesson.

      http://www.pagetutor.com/trillion/index.html

    3. Sarcastic tone says:

      Let’s just keep on printing more and more and more money.Don’t worry about any debt or future consequences. All will be well again.Relax. We can keep printing money and party like it’s 1999! Our economy IS JUST GREAT!Just trust in the system.Nothing to see here.We’ll be fine,Trust me😂

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