- Federal Reserve Chairman Jerome Powell resumed his Congressional testimony on Wednesday.
- He told lawmakers that low interest rates have become a reality. Twenty-four hours earlier, he said that the US economy was doing well.
- Right half of Powell: The United States cannot survive normal monetary policy without risking financial ruin.
Jerome Powell told Congress on Wednesday that the Federal Reserve had no other option than to print more money in the next recession.
This is because low interest rates are "no longer really a choice ... [but] a reality. "With low interest rates already embedded in the economic and financial fabric of the United States, the Fed can never return to a normal political regime. At least, not without major repercussions.
I let the recently banned Twitter ZeroHedge translate this for you: The Federal Reserve "can never allow price discovery again" without overturning the house of cards it has created since 2008.
Fundamentally, Powell has just admitted that the "big American economy" can only survive on low interest rates and that "aggressive" quantitative easing is the only cure for the next major recession.
All the semantics
Of course, Powell ignored the fact that the Fed has already returned to QE - albeit under a different name.
Since September, the central bank has been buying short-term treasury bills and mortgage-backed securities to save the day-to-day repo market from imminent fate. the size of repurchase transactions exploded in early 2020, a clear sign that there is something serious about the plumbing of the financial system.
Remember when the Bonanza repo was supposed to be temporary? Well, President Powell told Congress on Tuesday that operations would continue until April (at least):
The Fed won't reveal which bank (s) is under the most stress, but we have a few ideas.
The real reason why the U.S. economy is screwed
The real reason the Fed cannot raise interest rates is that such a regime would overturn an economy built on massive debt.
Last month, the Congressional Budget Office (CBO) predicted that the US budget deficit would exceed $ 1 trillion at the end of the fiscal year on September 30. The same CBO expects the deficit to increase by an average of $ 1.3 trillion between 2021 and 2030. the appropriate rounding is a cumulative gain of $ 13.1 trillion over the next decade .
Since debt service is largely dependent on interest rates, any substantial (i.e. one percentage point) increase in rates could have a catastrophic impact on financial stability.
Much of the economy is financialized through the Fed, so rising interest rates could disrupt all the paper wealth created since the financial crisis. Financial assets relative to GDP are an obscene report - 5.6 according to Bank of America and the Fed - monetary policy must therefore welcome all investors who have entrusted their financial future to the stock market and other hot air balloon assets.
Nor should we forget what happened the last time the central bank raised rates triggered a bear market in the S&P 500. A massive 20% drop in the stock market, peaking in December 2018, was all that which was necessary for the Fed to start its course of shame, starting in January 2019 and ending in July when it cut rates for the first time since 2008. (The Fed would continue to cut rates twice after that.)
The Fed is now stuck in paralysis: keeping rates low and bubbles growing, freeing up money by helicopter in the next recession, eroding the hegemony of the US dollar anyway.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Josiah Wilmoth.