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by Gary Littlejohn for Ooduarere via The Saker Blog
Implications of Recent Changes in US Monetary Policy
Ramzin Mazaheri’s excellent article of 16th April attracted some very interesting comments:
This supportive response aims to provide recent relevant evidence that many of the likely changes Mazaheri describes are already happening very quickly. Over the past few months since December, it has become clear that the US Federal Reserve (the Fed, which has actually been privately owned since 1913 but is allowed unconstitutionally to act as the US Government’s central bank) has been grappling with serious problems of liquidity in various US financial markets. This included the ‘repo’ market which handles overnight lending between financial institutions, especially commercial banks, but also other very large financial markets, many of which did not have the funds to pay off debts that were due at the ‘year end’ of their contracts. Depending on the contract, the 2019 ‘year end’ could be at any time between 14 December 2019 and 16 January 2020, but it turned out that the problems did not end in mid-January. All of these problems have been made worse by the COVID-19 pandemic.
This link below times the start of the acute liquidity crisis to September 2019, before I had personally noticed it, and argues that the COVID-19 pandemic only triggered the current crisis, rather than caused it:
The author concludes that monetary policy as we know it is as dead as a doornail and that the Fed is, in effect, a lawless economic government unto itself. This deep crisis has recently led to the development of a new strategy to strengthen the US Dollar by new means that have effectively eliminated any safeguarding constraints on US monetary policy. These new measures are reported to have the implicit backing of the Bank of International Settlements [BIS] . This backing by the BIS is said to include backing for the new Fed policy of buying corporate bonds, which effectively means that the Fed controls which companies survive and which do not, and could probably do this internationally. If this BIS backing is true, then that confirms Ramin Mazaheri’s view that the USA would not be acting alone to retain the global dominance of the US Dollar. I think that time will also confirm Mazaheri’s view that such subaltern countries as the UK and the EU Member States will not oppose these new measures, even though they break the already stretched/broken conventions on monetary policy.
The recent outcome of this has been that a version of Quantitative Easing [QE, or electronic ‘printing’ of money] has been being run by the Fed without the usual requirement to buy US Treasury debts to avoid all that money going straight into the everyday economy and fuelling inflation. Very recently, the Fed started to break its own rules and buy corporate bonds, which are private companies’ debt. This effectively means that the Fed is taking a stake in large private companies. Something very similar has happened with the European Central Bank (ECB, based in Frankfurt) but in the EU the Competition Commissioner has very recently changed the competition rules to allow but also to regulate this crisis-driven behaviour (see The Guardian newspaper recently). That has had the intention (if not the guaranteed effect) of trying to avoid one EU Member State supporting its own companies at the expense of other Member States.
Yet what seems to be happening in the USA is that Steve Mnuchin (US Secretary of the Treasury) has formed an alliance with head of the Fed Jerome Powell to permit the Fed to issue unlimited quantities of money but with no safeguards in corporate bond buying. (Remember that corporate bond buying is itself against the Fed’s own rules.) This seems to allow the development of a possible strategy that discriminates against foreign-owned companies (such as Chinese-owned Huawei) to be starved of Fed funds. Indeed it may well become a lot easier to sanction both companies and countries that the US Government sees as a threat or merely a strong competitor. This approach seems to have influenced what looks like a recent change of attitude towards the IMF by Steve Mnuchin, and he has recently appointed a close ally as the No. 2 in the IMF. IMF policy is now especially important because the present crisis has meant that over half of the world’s countries have asked for IMF support.
This seems to give the USA enormous leverage in placing any company it dislikes in a difficult position, at a time when US Dollars [USD] remain the means of payment for at least 80 per cent of all international trade. I will later refer to a link that shows how much USD is being held by various countries, compared to an estimate of how much they need to carry on trading as normal. The largest EU economies such as France and Germany have only a few per cent of USD in their foreign exchange [FX] reserves, and the same applies to the UK. So Mnuchin is now apparently in a position to inform Trump that he could cause very serious damage to the EU, China and Iran such that the USA could come out of this incipient global depression ahead of its main economic competitors. They may also think the same about Russia but in my view that would be more difficult, because Russia’s economy is inherently more resilient these days. And as indicated above, the USA could also target individual companies. [Incidentally, there is a lot of lobbying going on in Congress right now to gain access to the Fed’s largesse and other emergency funding, and so such preferential treatment could be applied within the USA in a Presidential election year.]
Before providing links to show this situation as it has emerged very recently, it is important to show that the non-financial sectors of the US economy have been in real and accelerating trouble, despite Trump’s claims to the contrary. These illustrative indicators make it clear that the problem is not only financial and so any recovery will probably be very slow because the ‘real’ US economy was heading for a deep recession anyway. Doubtless an awareness of this underlying situation has helped drive the desperate financial measures that we now witness, measures attempting to prop up the US Dollar and ensure that it fully recovers its global dominance.
The following indicators of the contraction of the US economy illustrate a process which started months before the COVID-19 pandemic. There were other earlier indicators – this list is just to give a flavour of the developing trends. The first shows that the Fed has been fully aware of all this:
Now for the evidence of the apparent policy changes described above:
Here is a crucial quote from the above link:
“In the U.S., Treasury Secretary Steven Mnuchin has forged a crisis partnership with Federal Reserve Chairman Jerome Powell, giving the central bank a bigger role in fiscal policy.”
Now for the public change of position on the IMF: