By Matthew Piepenburg
We have devoted numerous articles i interviews addressing the dangerous strength of the USD after a deliberately hawkish Fed that raised rates into what is clearly a recession, official or not.
Explaining the Unexplainable: Rising Rates to a Recession?
On the surface, this central bank tightening in the face of a tanking economy and increasingly volatile risk asset markets makes little sense, as strong USD and higher interest expense (i.e. interest rate policy) crushes almost every asset class in its path, from an empirically broken bond market and a grotesquely overvalued stock market to the artificially suppressed precious metals space.
So why is the openly cornered Fed acting so openly at odds with the real world and the US economy after years of feeding it instant liquidity at every market “dip”, cough or sniff?
The fake war on inflation
The standard answer is to “fight” inflation (which only the Fed’s mouse click money created).
But as we have also written and observed so many times, a Fed funds rate of 3%, 4% or even 5% is not only mathematically crippling for a nation that simply cannot afford such rates, it is equally powerless against a headline CPI print in the 8-9% range (and rising).
Bottom line: rate hikes will absolutely not defeat money supply driven inflation or supply constraint.
So again, what is the Fed really doing and thinking, despite the official nonsense that makes the headlines or pours from its double lips?
An armed Fed running out of bullets
One answer: The Fed, like the SWIFT takedowns and foreign reserve freezes, is just another tool weaponized against Russia and the seismic shifts (petrodollar, LBMA alternatives, mono-to-multi-currency trade deals) that are they produced globally since the overtly failed sanctions against Russia were started earlier this year.
To anyone who understands the origins, history, and actual practices of the Federal Reserve, the idea that this cabal of private bankers is an “independent” entity is now an open farce.
That is, the Fed is anything but “independent” and is not only a political fixture on the DC skyline, but rather a political hijacker of the American economy, markets, and politics in a way that goes far, far beyond its supposed “mandate ” of simply managing US inflation and employment.
I strongly believe that one of the main reasons for the current rate policy to strengthen the USD has been to help the US government break the financial backbone of Russia, which like all its previous policies/sanctions (based on reviving the Russian currency , trade surpluses and multilateral trade agreements) is failing.
To that end, it is more than likely that the Fed’s “armed” rate hike will continue this week, much to the chagrin, frankly, of a temporarily fall in the price of gold.
The question, however, is whether this policy will also backfire (?), because it seems that this game of financial chicken with Putin is breaking the back of the markets and the economy of the US (and its allies in the EU) with a much greater effect.
Hubris comes before fall
I am once again reminded of the 2014 statement by then US Secretary of State Condoleezza Rice that Russia would run out of money long before the West ran out of energy.
Less than a decade after this classic example of American hubris was made, it looks like Russia (as well as China, the BRICS and a host of emerging market economy citations) would beg to differ as the world changes of a single currency led by the US. system to an increasingly multinational currency, commercial and political new direction.
None of this, by the way, will be “tidy”.
Inside the US markets and economy, conditions continue to trend from bad to worse in every category, from risk assets, social division and political impotence to the high-profile layoffs at Goldman Sachs, closed profits of FedEx and the destruction of US jobs. class under the invisible tax of persistent more than “transient” inflation..
Meanwhile in Europe…
The price for blindly following the so-called “moral” leadership of the United States in its political and financial war against Putin (to save a less-than-moral subject like Zelenskyy) is getting higher and higher as the delusion that Putin has less power that the West is finding increasingly difficult to sell, swallow or justify.
In addition to facing an extremely cold and expensive winter…
… Europeans are seeing their currency at 20-year lows against an artificially inflated dollar.
But it is not only Europe’s (or Japan’s or England’s) currency that is falling, but also its trade balance, which is otherwise atypical, since weakening currencies are supposed to improve the competitiveness of exports instead of weakening.
But not this time (see EU trade balance, red line below).
At the end of the day: energy matters
What the US-led West’s failed sanctions, policies and visions are making abundantly clear now is that energy is important, and whether people like it or not, Russia has more of it than the West, already that the US is strangling energy production instead of releasing it. the US under a suicidal policy of a new “green” normal.
How the West was lost
In the years immediately following World War II, America’s Greatest Generation, as well as its dollar and Treasury bond, were undeniable leaders and influencers.
In those days, dollars, bonds and influencers, however, are no more.
But isn’t it comical to hear the IQ-challenged governor of a failed state like California push electric cars as the new “solution” (?), an example of open fantasy almost as comical as Christine Lagarde’s latest attempt of blaming European inflation on climate change rather than his own bathroom mirror.
Having moved from a world of fair prices, fair wages, gold-backed money, manageable bond obligations, and strong exports, America has become a modern feudalism of overpaid executives, a shrinking middle class, Wall Street socialism, an air-backed dollar, a Fed-monetized (ie “zombie”) bond market, exported labor/ outsourced and, therefore, anemic productivity.
Once the world’s largest producer and creditor, the US is now its largest importer and debtor, and not only has it exported US productivity to cheaper labor zip codes, it has also exported its inflation, thus destroying the credibility, trust and influence of the US at the same rate America. destroyed the inherent purchasing power of their so-called “strong dollar.”
The real cost of just bad choices ahead
So what can the complicit/Fed-led US do in its pyrrhic financial war against an emerging and changing East?
Well, he can send more debased money and scarce energy to his allies in the EU and Japan to avoid disaster there, which can only mean more not less inflation from sea to shining sea in the US.
Or perhaps US allies in Brussels or Tokyo could cry “uncle” and strike a separate energy deal with the nations of the East that actually have the energy they need, an option that not only keeps the people in the EU and Japan, but improves their embarrassing trade imbalances (above) that stemmed from the demands of Biden’s unofficial caretakers rather than the demands of real politics.
Of course, any détente or separate agreement would have to be paid for in printed euros and yen, only adding to the global inflationary quagmire our central bankers have created since the invention of the first money printer with the click of a mouse.
As a last resort, of course, Europe and Japan could simply stick to the western course and suffer an economic and monetary collapse (as the yen hits 50-year lows) that would make 2020 or even 2008 seem like memories pleasant
The West: Marching Towards a Breakthrough (and Pivot)
Without the benefit of a crystal ball or inside influence within DC, Brussels or even Davos, one can only speculate rather than predict future events as dictated by today’s political charlatans.
Perhaps Japan and the EU will join the growing trend as well as the crowd towards de-dollarization and reach a separate peace (i.e. trade agreement) with the East over energy imports.
Equally likely, as well as mathematically essential, is that the Fed, then feigning concern about inflation (which they actually needed to inflate Uncle Sam’s bar tab), will pause and then reverse their failed QT policies in early 2023 and lower USD and interest rates (via YCC) at essential levels to combat a recession they pretend does not exist.
Despite all the false, real, twisted, straight or bent words, facts and policies emerging today, the West in general and the US in particular cannot escape natural laws of debt nor the harsh realities (as well as the consequences) of pretending that more debt, paid for with increasingly debased currencies and at the click of a mouse, is a viable policy rather than an outright farce, as well as an insult to the science of economy, long forgotten.
Once the reality of the math replaces the current DC policy of distractions, distractions and finger pointing, the USD will fall, bond markets will “accommodate” further and currencies will be further and further degraded.
At this impending turning point, of course, those holding gold will see their recent lows race toward record highs.
Why so sure?
Because mathematics, history and common sense have shown us that (from the Ming Dynasty or 3rd 18th century Rome, in the 18th centuryth century France, 20th Weimar and 21st centurySt century America) that all debt-soaked, decadent, fiscally capricious nations destroy their fiat currencies without exception, and the “modern” West will be no exception.