The Fed has been pumping up the economy since the Bush Crash of 2008, buying US and corporate bonds with money it creates out of thin air (only the Fed can “print money”). money” like that just wanting dollars to exist).
By buying and holding these bonds over the past 14 years, the Fed has created and then injected into our economy $8 trillion in liquidity. This is how the Fed stimulates an economy in crisis: by pouring newly created money into the system.
As a result, our economy has been running since 2008 on high-sugar, high-octane stimulus. Several trillions of that money came in the last year of the Trump presidency. While Republicans are shouting about spending for social needs that could also boost the economy, they and Trump were very happy to see that money from the Fed.
But now the Fed and its Trump-appointed Republican Chairman, Jerome Powell, are backing down.
When the Fed started selling these bonds, it reversed the process after 14 years. Instead of stimulating the economy, they try to slow it down in the hope that sucking in money will calm inflation.
When they receive the money from these sales, they will simply deposit it in the same Schrödinger catbox it came from: it will disappear into the icy, dark depths of fiscal interstellar space, never to be seen again. . What the Fed creates, the Fed can dissolve.
This month, the Fed plans to “pull” $47.5 billion off its balance sheet – take that amount out of our economy – to reach $90 billion a month by the end of the summer.
While not huge sums in the grand scheme of things, the very fact that the Fed has gone from pumping money created out of thin air into the economy to pulling that money out is a very big problem.
Add that to his plan to keep raising interest rates, which is also slowing the economy, and we’re looking at a potential Category 5 event.
So the FinancialTimes was the bearer of the predictable bad news yesterday. Just from the ‘Live News Updates’ column on the FT (digital) homepage of that day, here are some of the headlines:
- Ford plans auto industry consolidation as capital gets tight
- Treasuries and U.S. stocks slide as investors brace for monetary policy tightening
- Bank of Canada ready to “act more forcefully” after latest rate hike
- European stocks enter June on a muted note after a turbulent month
- German retail sales fell 5.4% in April
- UK house price growth slows in May
- Chinese manufacturing activity declines for third straight month
- Government bonds sell off as eurozone inflation hits record high
- JPMorgan chief says ‘hurricane’ weighs on economy
In this latest article, JPMorgan CEO Jamie Dimon, who a week ago predicted “storm clouds” over the economic horizon, got much more blunt yesterday.
“I said it’s storm clouds, it’s big storm clouds here,” Dimon said, adding, “It’s a hurricane.”
Noting that the war in Ukraine and Europe’s disconnection from Russian fossil fuel markets could push oil up to $175 a barrel, Dimon worried aloud:
“This hurricane is right out there on the road coming our way. We just don’t know if it’s Minor or Superstorm Sandy. . . And you better get ready.
So how did we get here? Between the Republican Great Depression of 1929-1937 and Reagan’s inauguration in 1981, the United States experienced a few recessions, but nothing as severe as what Republican President Herbert Hoover oversaw on Black Tuesday, October 29, 1929. .
Hoover’s crash was set up by the 1920 election, when Republican Warren Harding convinced Americans to abandon the progressive, anti-confidence policies of Presidents Teddy Roosevelt, William Howard Taft and Woodrow Wilson in favor of the version of this generation of neoliberalism or what we now call Reaganomics.
Harding called it the “horse and sparrow economy” – it was the early 20th century version of what Reagan later reinvented as “trickle down economics.”
If horses (wealthy people and big business) were fed more oats (thanks to deregulation and tax cuts), more of that oat would pass undigested into the horse manure that then littered the streets of American. The sparrows (working class Americans) could then pick up the extra oats from the manure.
In 1920, Warren Harding won the presidency on a campaign of “more industry in government, less government in industry” – privatize and deregulate – and “a return to normalcy”, his promise to abolish the top tax bracket of its then -91 percent rate up to 25 percent.
Harding delivered on both his promises, plunging the nation into a frenzy called the Roaring Twenties, where the rich got fabulously rich and working-class people were beaten and murdered by industrialists when they tried to unionize. Harding, Coolidge and Hoover (the three Republican presidents from 1920 to 1932) all applauded the onslaught, using phrases like “the right to work” to describe a union-free nation.
Ultimately, the result of the “horses and sparrows” economy advocated by Harding was the Great Republican Depression – yes, they called it that until the end of World War II.
FDR’s response to the Hoover Depression was to raise the top income tax bracket to 91% and impose strict regulations on banks and Wall Street, creating the Securities and Exchange Commission (SEC) and entrusting the responsibility to Joe Kennedy.
Gloria Swanson, who knew Kennedy well and didn’t like her at all (he had robbed and exploited her), told me at one of our many dinners in her New York apartment that FDR knew: “You have to a crook to catch a crook. And FDR was chasing the crooks.
High taxes on the government’s morbid and aggressive enforcement of banking and securities rules prevented another full-scale crash for half a century until Reagan came along and repeated Harding’s mistakes in the 1980s.
After Reagan finally lowered the top tax rate from the 74% he inherited when he took office to 28%, there was a one-day stock market crash of 22% – on Black Monday of Oct. 27, 1987 – which rivaled Black Tuesday 1929 for the first time.
When Reagan deregulated the savings and loans industry, bankers stole so much money they destroyed S&Ls across America, the first serious bank run since the Great Republican Depression.
We still live in Reagan’s deregulated neoliberal economy. It brought us two financial crises while he was president, the dotcom bubble of 1999/2000, the Bush Crash of 2008 and arguably the trillion dollar heist of 2020 when Trump handed out cash to his big buddies. without checks (we’re still trying to figure out where all that money went).
Now, if Dimon is right, hang on to your hat for another “event.”
The foundation of Harding’s and Reagan’s versions of neoliberalism is that the economy is essentially a force of nature. This is why Harding removed regulations on stock market speculation and why Reagan deregulated everything he could as fast as he could.
The economy “runs by its own rules”, they would tell you, and anything the government does to interfere with it will simply produce a bad outcome. In fact, the opposite is true.
Players at the top of finance, banking and speculation are much like boxing or football players: they are engaged in high-stakes competitive play defined by very specific rules, and when they know they can get away with breaking these rules, they often will.
The difference is that instead of winning or kicking off a game of football or boxing, when bankers and speculators break the rules, they can wipe out the entire economy.
Financial speculators, of course, are rarely hurt in the process. We bailed out bankers and speculators in the 1980s, 1999/2000, 2008 and 2020 to the tune of trillions of dollars. Senior executives and shareholders took away hundreds of billions of those dollars, plundering the system they themselves had destroyed.
Since 2008, most of this money has been created out of thin air by the Fed. Now the Fed wants it back, but bankers and speculators have already hidden it in their offshore tax havens. As a result, working-class Americans and small and medium-sized businesses will largely foot the bill.
Dimon and the bringers of doom may be wrong about a crisis at this particular time, but the system is still fragile and fraud is rampant in banking, brokerage and finance, as Elizabeth Warren and Katie Porter continually remind us.
As I lay in The Hidden History of Neoliberalism: How Reaganism Drained Americait will likely take another 1929-type event to shake Americans enough to reject Reagan’s vision of a deregulated economy and put the nation back on the stable and steady Keynesian growth path that FDR gave us from 1933 to 1981.
Now, in addition to an economy held together with the Fed’s stimulus thread (which is coming to an end), the United States and the world face a wild array of attacks that could have huge economic impacts.
And Republicans have pledged to do whatever they can to cripple our economy, refusing to embrace much of Biden’s economic agenda, in their belief that a Crash will help them in the 2022 and 2024 elections.
Between the global food and oil crises caused by Russia’s invasion of Ukraine, the billions in climate change damage and the millions of climate change refugees, Republican intransigence and the Fed calling for the 8,000 billions of dollars it has given to our bankers and speculators, a real crisis could be upon us sooner than any of us would like.