global agenda 88.
(photo credit: )
A long-standing adage on Wall Street warns traders: “Don’t fight the Fed” –
meaning, don’t take a position that flies in the face of current monetary
policy, as announced and implemented by the Federal Reserve, the US central
Rarely has the Fed’s policy been so clearly articulated as it is
today: Fed Chairman Ben Bernanke has stated in the plainest terms that he wants
to push the rate of inflation UP, because he fears that the economy is, or might
soon be, slipping into deflation. He wants to stimulate spending and investment,
to which end he is prepared to pump very large amounts of money into the economy
via purchases of US Treasury bonds, so that interest rates will fall even
further for medium- and long-term loans (short-term interest rates are already
close to the lower limit of zero). He considers higher stock prices necessary to
foster a “wealth effect,” which will encourage people to go out and spend,
thereby pushing the consumptionheavy American economy out of its rut and back
onto the high road.
You couldn’t hope for a clearer set of guidelines
than that. The Fed is telling you to buy bonds – because it will buy bonds, so
their prices will rise. Buy shares – because there will be lots of liquidity and
low interest rates, so what else is there to do? Shares are an explicit target,
but they are also implicitly recommended as a protection against inflation,
which is going to rise according to the Fed. But so are precious metals and
commodities in general, because they are the stuff from which inflation is made,
so they are also a good buy.
Since Bernanke’s polices are also designed
to weaken the dollar – although he cannot and must not admit that – it follows
that selling the dollar and buying other currencies is also an implicit
recommendation of the Fed.
It is quite apparent that many people have
followed these guidelines and, by aligning themselves with the Fed, participated
in and even caused the surge in prices that has taken place in recent months in
equity markets and in commodity markets. However, it is also apparent that not
everyone has swallowed this line of thinking.
Indeed, it seems that there
are many investors who have chosen to fight the Fed very directly – and, so far
at least, have profited by doing so.
These include investors in the
currency markets – where the dollar hit bottom on the day following the Fed
announcement of the details of its latest $600 billion bond-buying foray and has
been in an uptrend ever since – as well as investors in the bond markets. Bond
prices rose sharply in the period between the general announcement of the new
policy, in August, and the detailed announcement and move to implementation in
early November. Since then, bond prices have fallen sharply, rebounded somewhat
and then fallen again.
It is a basic fact of the financial world that the
currency market is by far the biggest of all financial markets, the bond market
is much bigger than the equity market, and the commodity markets are much the
smallest – in terms of the amount of money passing through them on an average
day. In other words, in the biggest markets, the majority of investors (or at
least those with the most money) have chosen to fight the Fed and – again, so
far – are winning.
The idea of the markets as a democratic mechanism of
expressing opinions and actually taking a stand with regard to specific polices
or the overall direction of policy is well-established. But there has been a
more orthodox democratic process as well: namely, the mid-term elections, in
which the anti-Fed forces – in the inchoate shape of the “Tea Party” – have won
a major victory.
These new members of Congress, especially those of the
new Republican majority in the House of Representatives, come with a very clear
mandate to expressly fight the Fed. Their leaders intend to do so at every
opportunity, and the new session just begun will provide many such
They also intend, of course, to fight the president and
his policies, including the reforms he has succeeded in pushing through in the
first half of his term. That is the more obvious and natural fight, in the
context of a two-party system. But the fight – more correctly, the openly
declared war – on the Federal Reserve, its policies and even (among the
extremists, of whom there are not a few) its very existence, is a new departure
in American politics.
Ironically, these extreme Republicans have allies
overseas, in places such as Beijing, where the leadership views the inflationary
and devaluationary policy being pursued by Bernanke as injurious to the Chinese
economy, and in a slew of South American countries, where reasons to dislike
America and its policies are always being sought and, in this case, easily and
In short, the old nostrum of “Don’t fight the
Fed” is being openly questioned in Wall Street itself, where it originated, and
has been turned on its head in Main Street, where fighting the Fed is
increasingly viewed as either a patriotic duty or a necessary act of economic
This war is already – and will surely remain – the primary
issue in the American economy in firstname.lastname@example.org