Almost three years ago, the masters of global finance and public health thought they had everything under control.
They believed that they were carefully calibrating the machinery of power, pushing and pulling all the right levers, twisting and turning knobs on their control panels, to manage a pandemic with a shutdown while mitigating the downside with vast new spending and printing schemes.
That happened all over the world.
Nothing worked out as planned. The virus swept the world’s population anyway and we’re left with a huge mess. Tragically, it only gets worse. And the timing is particularly bad because it all happened in the midst of another wackadoodle plan to forcibly and quickly convert the world’s energy supplies to wind and sun from fossil fuels.
Today, many countries around the world, and increasingly the United States, too, are faced with a real energy crisis on top of intensifying inflation and continued supply chain breakages.
The lesson from all of that is that the planners aren’t as in control as they believe. Their actions have caused unexpected reactions and effects that were impossible to predict ahead of time. For example, this past weekend, I received a note from a book publisher that they were out of cream paper and must use white instead. Digging around, we found that the paper shortage that began in late summer has gotten worse.
Why might that be?
In the spring of 2020 in the United States, the Treasury Department, backed by the Federal Reserve, flooded the economy with trillions of new dollars. Interest rates were effectively zero. This prompted a wild housing boom along with a rush on plywood for construction, which soared in price. Suppliers retooled, too, from paper to plywood, setting up conditions for a shortage later, and here we are.
Another case of unforeseen effects concerns semiconductors. U.S. manufacturers had grown accustomed for decades to using just-in-time inventory strategies. When the lockdowns came, they stopped their orders for six months. Chip manufacturers needed business, so they retooled factories to provide chips for laptops, gaming consoles, and smartphones for the Zoom class and put carmakers on the back burner.
When carmakers were ready, the chips were gone. That, in turn, prompted the United States to put a priority on domestic chip manufacturing, which, in turn, provoked export restrictions to China. This week, Americans working in the chip industry in China were told they have to stop work unless they get a special permit.
In sector after sector, the carnage keeps accumulating. Another metaphor might be dominos falling in slow motion.
So far, global finance hasn’t been hit anything like it was in 2008. That’s been the one blessing of the past 30 months. At least the banks and the money still work, and there’s no mighty liquidity crisis facing us ... yet. But when one looks at Fed policy today, one wonders.
A federal funds rate of 3 percent isn’t high by long historical standards, but only recently as this time last year, it was effectively zero. This makes the Fed’s tightening strategies the most extreme in a short time on record, a 5,000 percent rise year over year. This has tipped the once-booming housing industry off a cliff.
We’re waiting to see the effects of that. We might not see homes “underwater” as we did in 2008, simply because no home can be refinanced today for anything close to what it was purchased at only a few years ago, but we could see other impacts.
The Fed’s actions here have all the arrogance we saw in the lockdowns, and, for that matter, the sanctions against Russia: a belief that a policy decision alone can alter and remake the historical trajectory regardless of other conditions. The Fed caused the inflation and so has attempted to turn it off, as if there were some on-off switch to which they have access.
That’s no different from the disease planners who thought they could control a wildly transmittable virus. It’s also no different than the belief that some trade sanctions will intimidate a powerful foreign leader to take a different course or step down.
The real virus here is the arrogance of power!
The recessionary environment, the energy crisis, and the global inflation—most governments in the world have followed the same foolish path—have disrupted international money markets in surprising ways. I pity the American reader today who sees headlines about high inflation right next to headlines about the strong dollar. What does this mean? Both can be true: The dollar can be extremely weak and falling in terms of its goods and services purchasing power, while at the same time being very strong in terms of its trade relationship to other currencies.
Let’s just pause a moment to observe that this market for fiat currencies in which they all trade against each other is a historical anomaly. The system was set up in 1974 as the be-all and end-all of monetary systems. It was clear by 10 years later that this wasn’t the case. Such a system destabilizes business planning and carries other enormous costs.
The Reagan administration tried to end the system in 1986 at the urging of Treasury Secretary James Baker, who attempted to bring about a fixed-rate system. But with all governments and trade regions of other countries retaining fiscal discretion, this proved impossible. So we’re stuck with what we have.
A strong dollar makes goods imported into countries that aren’t on the dollar standard very expensive relative to just one year ago, introducing a major financial squeeze for corporations, governments, and central banks.
The Fed believes it’s obligated to support those in need with ongoing temporary loans through overnight repurchase agreements. These work rather like pawnshop agreements: cash for collateral and paid back the next day, if only to get people, or in this case, whole countries, through a financial pinch. The Fed in this case is the pawnshop: It has excess cash held in U.S. debt, so it effectively lends to foreign central banks.
“Lending from the Fed’s so-called discount window for emergency loans ticked up in recent weeks, to $7.67 billion as of [Oct. 12], the highest level since June 2020. The Fed also lent $6.5 billion to two foreign central banks last week, part of standing arrangements to extend dollars and relieve pressures in dollar-funding markets.”
Why might the Fed be doing this? It has vast amounts of excess cash but this isn’t really a profit opportunity as much as it is a mechanism of stabilization. The patient is bleeding, and the Fed has a crate of Band-Aids on hand and keeps applying them—all over the world.
The trouble: None of these are real fixes. They’re just improvisations to deal with an emerging global crisis that has sent millions of people to the streets to protest higher prices and falling standards of living, as if that would do any good. It won’t because the damage is done. We’re watching a slow-motion unraveling that’s actually happening very quickly by any historical standard.
“The worst is yet to come,” International Monetary Fund Managing Director Kristalina Georgieva said at a recent press conference.
Indeed it is. The recession is global. At some point, the liquidity crisis will come home, and we might long for the calm of 2008.
