The Federal Reserve has responded to runaway inflation by hiking up interest rates at the same time that Americans are drowning in historic levels of personal debt. With interest rates up, prices will only rise faster than wages, hitting the vast majority of people with stagnant or declining wages in real terms. The result is yet another upward transfer of wealth to the minority of capitalists responsible for the crisis in the first place. Economist Richard Wolff joins The Chris Hedges Report to discuss the origins of the inflation crisis, the Fed’s response, and what this all means for working people. Richard D. Wolff is Professor of Economics Emeritus at the University of Massachusetts, Amherst and a Visiting Professor in the Graduate Program in International Affairs at the New School. He is the host of the weekly program Economic Update, and the author of several books, including his most recent title, The Sickness in the System: When Capitalism Fails To Save Us From Pandemics or Itself.
We’re still getting over a pandemic. Healthcare costs are totally out of control. Everyone’s in debt and hates their job. The insects are disappearing, which feels like a bad sign. I have to watch a Jeff Bezos interview just to see bug eyes anymore. On top of all that, the bankers at the Federal Reserve have decided they’re going to make things way worse. As reported in Common Dreams, “Federal Reserve Chair Jerome Powell said… that the U.S. central bank is ready to inflict ‘pain’ on households as it continues to fight inflation, remarks that drew widespread backlash from experts who warned the Fed appears poised to spark a devastating recession and mass layoffs.” The Federal Reserve – the privately owned central bank of the U.S. – wants to screw us all some more. So the Fed claims it’s raising interest rates to fight inflation, but that isn’t why they’re doing it.
In prescribing cures for inflation, economists rely on the diagnosis of Nobel laureate Milton Friedman: inflation is always and everywhere a monetary phenomenon—too much money chasing too few goods. But that equation has three variables: too much money (“demand”) chasing (the “velocity” of spending) too few goods (“supply”). And “orthodox” economists, from Lawrence Summers to the Federal Reserve, seem to be focusing only on the “demand” variable. The Fed’s prescription is to suppress demand (borrowing and spending) by raising interest rates. Summers, a former U.S. Treasury Secretary who presided over the massive post-2008 bank bailouts, is proposing to reduce demand by raising taxes or raising unemployment rates, reducing disposable income and thus people’s ability to spend.
The chairman of the US Federal Reserve, Jerome Powell, said his goal is “to get wages down.” In a press conference on May 4, Powell announced that the Fed would be raising interest rates by half a percentage and implementing policies aimed at reducing inflation in the United States, which is at its highest level in 40 years. According to a transcript of the presser published by the Wall Street Journal, Powell blamed this inflation crisis, which is global, not on the proxy war in Ukraine and Western sanctions on Russia, but rather on US workers supposedly making too much money. “Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years,” Powell complained. The Fed’s proposed solution: bring down wages.
Not only will raising interest rates not fix the supply crisis, but according to Alasdair Macleod, head of research at GoldMoney in London, U.K., that wrong medicine is likely to trigger the next financial crisis. He thinks it is imminent and will start in Europe, where negative interest rates brought the cost of doing repo trades to zero. As a result, the European repo market is now over €10 trillion ($11.4 trillion), far more than the capital available to unwind it (to reverse or close the trades). Rising interest rates will trigger that unwinding, says MacLeod, and the ECB lacks the tools to avoid the resulting crisis. Meanwhile, oil prices have risen over 50% and natural gas over 60% in Europe in the past year, “due to a supply crisis of its governments’ own making,” writes Macleod.
The Federal Reserve is caught between a rock and a hard place. Inflation grew by 6.8% in November, the fastest in 40 years, a trend the Fed has now acknowledged is not “transitory.” The conventional theory is that inflation is due to too much money chasing too few goods, so the Fed is under heavy pressure to “tighten” or shrink the money supply. Its conventional tools for this purpose are to reduce asset purchases and raise interest rates. But corporate debt has risen by $1.3 trillion just since early 2020; so if the Fed raises rates, a massive wave of defaults is likely to result. According to financial advisor Graham Summers in an article titled “The Fed Is About to Start Playing with Matches Next to a $30 Trillion Debt Bomb,” the stock market could collapse by as much as 50%.
Millions of Americans have joined the ranks of the unemployed, and government relief checks and savings are running out; meanwhile, the country still needs trillions of dollars in infrastructure. Putting the unemployed to work on those infrastructure projects seems an obvious solution, especially given that the $600 or $700 stimulus checks Congress is planning on issuing will do little to address the growing crisis. Various plans for solving the infrastructure crisis involving public-private partnerships have been proposed, but they’ll invariably result in private investors reaping the profits while the public bears the costs and liabilities.
On November 20, US Treasury Secretary Steven Mnuchin informed Federal Reserve Chairman Jerome Powell that he would not extend five of the Special Purpose Vehicles (SPVs) set up last spring to bail out bondholders, and that he wanted the $455 billion in taxpayer money back that the Treasury had sent to the Fed to capitalize these SPVs. The next day, Powell replied that he thought it was too soon – the SPVs still served a purpose – but he agreed to return the funds. Both had good grounds for their moves, but as Wolf Richter wrote on WolfStreet.com, “You’d think something earth-shattering happened based on the media hullabaloo that ensued.”
The Federal Reserve Board – our unaccountable Central Bank – needs more citizen and Congressional supervision. Fees from financial institutions fund its operations, not Congressional appropriations. It is as secret as it wants to be and that’s plenty. (See Secrets of the Temple: How the Federal Reserve Runs the Country by William Greider). Plus, the Fed can print money at will. In the past several years it has “produced” trillions of dollars that juiced the stock market’s speculation. Fed Chairman, Jerome H. Powell, has chosen to instill “confidence” in the stock markets and credit markets by injecting trillions of dollars into the financial system to reassure the Wall Street speculators that the Covid-19 pandemic won’t crash the money markets into chaos and bankruptcies. But Powell, the Fed and the bankers who dominate the Fed and its regional branches have set the stage for this constant bailout of reckless bubbles and debt binges.
Ever since bailout talk began this spring, climate campaigners have worried funds would be funneled to Big Oil and other polluting giants. Now it seems that fear was more than justified. While economic recovery money is being disbursed through multiple channels, including the Main Street Lending Program and various tax breaks, on Sunday the Federal Reserve released the list of bonds it has purchased so far through its BlackRock-managed Secondary Market Corporate Credit Facility, in its attempt to prop up the investment-grade corporate bond market. The Fed’s disclosures show the institution is making it easier for fossil fuel corporations to get relief than it is for struggling state and local governments, some of which are facing unemployment rates north of 40 percent.
One of the readers of this blog recently asked me my views on topics such as the call by some left economists for a general debt forgiveness (Debt Jubilee), on Modern Money Theory (MMT or sometimes referred to as ‘Magical Money Tree’), and the Federal Reserve bank (central bank) pre-emptive bail outs of banks and non-banks underway and whether the latter will succeed in generating an economic recovery from the current deep Coronaviral impacted US economy. What follows are some of my quick reflections and commentary on these topics. My views on monetary policy are somewhat summarized by the argument that in the current era of finance capitalism dominance, monetary policy has been the first and foremost choice of capitalist governments and policymakers.
Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt. No such threat looms over the banks, which have made out extremely well in this crisis. The Federal Reserve has dropped interest rates to 0.25%, eliminated reserve requirements, and relaxed capital requirements. Banks can now borrow effectively for free, without restrictions on the money’s use.
As states and cities face a tsunami of emergency expenses, collapsing tax revenues, and a shrinking bond market, we wanted to bring to your attention some new funding possibilities that have recently opened up. The Federal Reserve has stepped up to the plate by relaxing some of its rules and dropping interest rates to zero, but only for banks. The state could take advantage of this opportunity by having its own bank, something that could be done quickly by Executive Order. That and two other new funding possibilities are detailed below. #1 Use your emergency powers to set up a state-owned public bank. The Fed is now making its discount window available for loans at 0%-0.25% and is encouraging banks to use that facility to extend credit where needed to alleviate the current crisis.
According to an April 6 article on CNBC.com, Spain is slated to become the first country in Europe to introduce a universal basic income (UBI) on a long-term basis. Spain’s Minister for Economic Affairs has announced plans to roll out a UBI “as soon as possible,” with the goal of providing a nationwide basic wage that supports citizens “forever.” Guy Standing, a research professor at the University of London, told CNBC that there was no prospect of a global economic revival without a universal basic income. “It’s almost a no-brainer,” he said. “We are going to have some sort of basic income system sooner or later ….” “Where will the government find the money?” is no longer a valid objection to providing an economic safety net for the people.
The lone watchdog on a congressional committee formed to oversee the Trump administration's handling of a multi-trillion-dollar coronavirus bailout package demanded Wednesday that the Federal Reserve release to the public both the names of corporations receiving taxpayer bailout money and details on how the funds are being used. "The public deserves to know which companies are receiving taxpayer-backed lending through the Fed and on what terms, and to be able to monitor what those companies do after receiving taxpayer support," Bharat Ramamurti, thus far the only person who has been appointed to the newly created Congressional Oversight Commission, wrote in a letter to Federal Reserve Chair Jerome Powell and Treasury Secretary Steve Mnuchin.