If the Fed succeeding is a “Black Swan,” bring it on.
What if the “Black Swan” of 2023 is the Federal Reserve succeeds? Two stipulations here:
1. “Black Swan” is in quotes since the common usage has widened to incorporate events that don’t match Nassim Taleb’s original criteria / definition of black swan; the term now includes events considered unlikely or which might be off the radar screens of each the media and the alt-media.
2. The definition of “Fed success” will not be so simple as the media and the alt-media present it.
In the traditional telling, the Fed made a policy mistake in keeping rates of interest and quantitative easing (QE) in place for too long, and now it’s made a policy mistake in reversing those policies. Huh? So ZIRP/QE was a policy mistake, OK, we get that. But reversing those policy mistakes can also be a policy mistake? Then what isn’t a policy mistake? Doing nothing? But wait, isn’t “doing nothing” maintaining ZIRP/QE or ZIRP/QE Lite?
This narrative is unnecessary.
The opposite conventional narrative has the Fed’s policy mistake as tightening financial conditions, a.k.a. reversing ZIRP/QE, an excessive amount of too quickly, as it will cause a recession. OK, we get the avoidance of recession is taken into account “a very good thing,” but aren’t recessions a vital cleansing of excessive debt and speculation, i.e. a vital a part of the business cycle without with bad debt, zombies and malinvestments construct as much as levels that threaten the steadiness of your entire system?
Yes, recessions are a vital a part of the business cycle. So avoiding recessions is systemically disastrous. So in accordance with this narrative, the Fed should “do whatever it takes” to avoid recession, despite the fact that a long-overdue recession is desperately needed to cleanse the deadwood, bad debt, zombie enterprises and speculative excesses from the system.
So this narrative can also be nonsense.
A well-liked narrative of the alt-media is that debt levels are too high and the Fed jacking up rates will crush the economy so badly it’ll usher in Depression and TEOTWOWKI (the top of the world as we understand it). OK, we get that debt service (interest payments) rising will pressure households, enterprises and governments, but again, isn’t the discipline of capital actually costing something a very important feedback in a healthy economy?
The proper answer is yes. Without the discipline imposed by capital actually costing something meaningful, you then find yourself with the orgy of borrowing, malinvestment, corruption and speculative excess that’s currently undermining the long-term stability and vitality of our economy.
So this narrative can also be nonsense. Fearing the associated fee of capital might crush excessive borrowing, malinvestment, corruption and speculation is to cheer on the collapse of an economy hollowed out by the near-zero cost of capital.
If higher rates disintegrate zombies (entities living off reducing debt service by refinancing debt at lower rates), that’s a very good thing, not a nasty thing. If marginal borrowers who were going to default anyway can not borrow more, that’s also a very good thing. If malinvestments that only made sense with zero-cost capital are not any longer funded, that’s a very good thing, not a nasty thing.
One other narrative has the Fed tightening financial conditions with the intention of destroying the labor market because the means to scale back inflation. OK, we get that higher wages are increase the prices of employers, but what concerning the past 45 years of wage suppression (See chart below) during which capital siphoned $45 trillion off of labor?
What if inflation is being driven by greater than wages snapping back from 45 years of suppression imposed by financialization and globalization? What if what’s driving inflation isn’t wages however the reversal of the gross distortions created by hyper-financialization and hyper-globalization?
Put one other way: perhaps the Fed isn’t as blind to the sources of wages rising (demographics, etc.) as many think. Perhaps the Fed sees a powerful labor market and rising wages for what they’re, good things, not bad things.
Summing up: the hysteria a couple of recession is totally misplaced. Recessions–of a certain kind, we must stipulate– are a vital a part of a healthy business cycle, and once this is known, then we needs to be cheering for a recession of the sort that imposes desperately needed discipline on an economy being crippled by the excesses triggered by zero-cost capital and excessive debt / leverage / speculation.
One other popular narrative has the US dollar going to zero sooner fairly than later because it’s replaced by multipolar currencies and arrangements. OK. we get some great benefits of a multipolar world and competing currencies / payment schemes–competition is a very good thing when it’s transparent and everybody has to follow the identical rules–but aren’t we missing something necessary about currencies here?
There’s a funny thing called interest. If you buy a bond issued by a sovereign state treasury, that bond pays the owner interest denominated (as a general rule) within the sovereign state’s currency.
As a general rule, higher interest is best than near-zero interest. The upper the rate of interest, the more moolah the bond owner earns.
The potential spoiler is risk: if the sovereign state defaults on that stunning high-interest-rate bond, then much or all the capital invested within the bond is lost. That’s a nasty thing. If the sovereign state’s currency drops in purchasing power (i.e. it buys progressively less oil, grain, semiconductors, etc. per unit of currency), that’s also a nasty thing because a ten% drop in purchasing power vis a vis other currencies and commodities not only offsets the 5% interest, it reduces the worth (as measured by purchasing power) of the capital.
So higher interest is simply of interest (heh) if the danger of default and currency devaluation is low. This brings up one other popular narrative: a currency losing value vis a vis other currencies is a very good thing since it (supposedly) makes our exported goods and services more attractive because they’re now cheaper.
Wait a minute. So reducing the purchasing power of everyone’s money by devaluing the nation’s currency is a very good thing because a handful of exporters might profit? But because the value of the currency is dropping, how much will they really gain when measured in purchasing power? And what concerning the 95% of the people and economy who change into poorer as their currency loses purchasing power?
This narrative can also be nonsense. A stronger currency is a very good thing for the overwhelming majority of the citizenry and the economy since it magically increases the purchasing power of everyone’s money. A devalued currency is a catastrophe, not a very good thing. A currency that’s gaining purchasing power is a very good thing.
If we put this all together, we see how the Fed might well succeed, with success defined thusly:
1. the labor market doesn’t collapse and wages proceed rising.
2. A much-needed cleansing of distorting excesses as a consequence of zero-cost capital has already taken place over the past 12 months.
3. The upper yields on US Treasury bonds and private-sector debt has strengthened the US dollar, increasing the purchasing power of everyone using / holding dollars, i.e. 100% of the American populace, and everybody who owns dollar-denominated assets globally.
Measuring “recession” by the stock market, housing or GDP is misleading. Assets inflated to bubble heights by zero-cost credit have to be deflated by pushing the associated fee of capital high enough to impose much-needed discipline. Speculation / malinvestment driven by hyper-financialization and hyper-globalization are destructive to the long-term stability and health of the economy and nation and these have to be deflated together with the asset bubbles.
If we measure “recession” by the success of reimposing some much-needed discipline via tighter financial conditions and better rates of interest, we get a much different definition of success. Paradoxically, the stock market will actually do a lot better once the excesses of zero-cost capital have been wrung out of the system.
By raising rates aggressively, the Fed has wrung much of this excess out of the system, without many even noticing. By telegraphing the top of The Fed Put, zero-cost capital and excessive stimulus, the Fed has put the world on notice that a weaker dollar and an economy based on speculative malinvestment is not any longer “the secure bet.”
That’s the definition of success if we care to revive stability and vigor.
It’s hard not to note the emotional desire of many observers for the Fed to fail. Many object (for good reasons) that the Fed even exists. (I’m sympathetic to this view.) Others hope the system collapses in a heap since it so richly deserves it, or since it should collapse for one reason or one other.
We are able to understand the emotional satisfaction to be derived from the all-powerful Fed failing, but when we put aside the various delights of schadenfreude and deal with the long-term stability and vitality of our economy, society and nation, we must always cheer aggressively higher rates that are kept high, come what may, because the needed cost of reimposing desperately needed discipline via higher rates and tightening financial conditions, and a equally needed defense of the nation’s currency.
If the Fed succeeding is a “Black Swan,” bring it on.
Hat tip to Santiago Capital for this tweet: Ever stop to think that the Black Swan everyone knows is on the market…is the Fed pulling this off?