This week, the United States continued its march toward a potential crisis with alarming ease. The Federal Reserve made a 25 basis point cut to the federal funds rate, deepening its strategy of mass money debasement. However, outwardly, everything seemed remarkably positive.
Stock markets beamed with optimism, reminiscent of the “permanently high plateau” described by Irving Fisher. By Thursday’s market closing, the Dow Jones Industrial Average had crossed the 27,000 mark, the S&P 500 surpassed 3,000, and the NASDAQ stood tall above 8,000. Additionally, 401(k) accounts swelled beyond the wildest expectations of workers across demographics.
Yet, beneath this facade of prosperity, turmoil brewed in the overnight funding market. Between Monday night and Tuesday morning, the overnight repurchase agreement (repo) rate surged to 10 percent, leading to a breakdown in short-term liquidity markets.
In response to several technical issues, the Fed conducted its first repo operation in a decade, injecting $53 billion to ensure the interbank funding market remained operational. Zero Hedge tracked this chaos in real time. Following this, the Fed held additional repo operations on Wednesday and Thursday, each worth $75 billion and both oversubscribed. It seems these operations might become a regular fixture until the Fed implements QE4.
Simultaneously, the effective federal funds rate—the upper limit of the rate—has surpassed what the Federal Reserve pays on excess reserves (IOER). This indicates that the Fed’s key mechanism for managing credit market pricing is not functioning as intended, necessitating further intervention.
Centrally Planned Credit Markets
These are the predicaments that centralized planners inevitably face. At the core is a lack of alignment; planners push credit markets in one direction, and the markets respond in unpredictable ways.
In centrally planned economies, the natural adjustments of supply and demand are often stifled, leading to shortages and peculiar occurrences—like store shelves filled with potato peelers but devoid of potatoes. Centrally planned credit markets experience similar dysfunction.
Through its interest rate control policies, the Fed creates a landscape rife with liquidity mismatches (i.e., supply and demand discrepancies). Consequently, the Fed is forced to impose even stricter price controls to manage these imbalances, compounding the situation and exacerbating the errors.
It appears the policymakers, from their comfortable seats in the climate-controlled Eccles Building, remain blissfully unaware of their futile pursuits. For instance, a recent excerpt from the Fed’s implementation note states:
“Effective September 19, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.70 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.”
What are we to make of this?
Firstly, it’s evident that the central planners are improvising. Secondly, there’s no favorable resolution to this chaos in sight. Lastly, the ramifications could be severe—and the public will bear the cost.
Fiat Money Cannibalization in America
During his tenure, former Vice President Dick Cheney famously remarked that “deficits don’t matter.” While his assertion was contextually tied to political, rather than fiscal, implications—essentially suggesting that deficits aren’t a concern for voters—his statement rings true even today.
Most citizens remain indifferent to deficits. Likewise, many members of Congress exhibit little concern for fiscal health. The recent suspension of the debt ceiling and escalated federal spending encountered scant resistance.
This compliance was driven by voter demand, and Congress acted with minimal deliberation. The illusion of fiscal restraint at the national level evaporated alongside the Tea Party movement over the past decade.
The general populace seems to believe in the possibility of accessing free resources—such as food, medications, retirement benefits, and money—thanks to government spending. They assume the government can operate without limitations and indefinitely postpone the consequences of debt accumulation. This belief in the absence of repercussions is fundamentally misguided.
Contrary to Cheney’s assertion, deficits do matter, and citizens should be concerned about them.
Currently, the U.S. budget deficit has surpassed $1 trillion for the first time since 2012, with one month left in the fiscal year. If the economy falters, it’s possible deficits could soar to $2 trillion, with interest rates potentially sinking even lower—possibly even into negative territory like much of Europe and Japan.
The Fed, inevitably, will continue to stretch the boundaries of control in a futile effort to maintain stability. They will flood credit markets with liquidity without hesitation because they have no other choice.
The very foundation of the debt-based fiat money system hangs in the balance. The Fed will do everything within their power to sustain it—devaluing the dollar relentlessly until it ultimately undermines itself.
In light of these circumstances, holding some gold or silver is critically important.
Sincerely,
MN Gordon
for Economic Prism
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