Before the 2008 financial crises caused by the Wall Street criminal racketeering cartel, the US Federal Reserve held approximately $800 billion of Treasury notes on its balance sheet. Since then, through a monetary policy known as Quantitative Easing (QE), the balance has grown to an unprecedented $4 trillion.
Critics of the Fed's QE strategy have been saying that what the Fed is essentially doing is monetizing government debt, i.e., printing money out of thin air and exchanging it for government debt. Aside from the fact that the Fed is not allowed to do so directly, the result of what is doing is essentially the same, except that instead of giving the money directly to the government, it is buying the debt from financial institutions (which are acting as intermediaries).
Now, the Fed's stated purpose for buying an average of $85 billions in mortgage-backed securities and U.S. government debt (Treasury securities) each month is to stimulate the economy by incentivizing banks to loan money at low interests. But in reality what's been happening is what some call the biggest redistribution of wealth from the middle class and the poor to the rich.
Here's how billionaire Stanley Druckenmiller describes the situation as reported by CNBC:
The Federal Reserve isn't just inflating markets but is shifting a massive amount of wealth from the middle class and poor to the rich, according to billionaire hedge fund manager Stanley Druckenmiller.What the Fed has been doing with its QE policy is unprecedented, from the staggering $4 trillion balance sheet, to the backdoor way of monetizing U.S. debt.
In an interview on "Squawk Box," the founder of Duquesne Capital said the Fed's policy of quantitative easing was inflating stocks and other assets held by wealthy investors like himself. But the price of making the rich richer will be paid by future generations.
"This is fantastic for every rich person," he said Thursday, a day after the Fed's stunning decision to delay tightening its monetary policy. "This is the biggest redistribution of wealth from the middle class and the poor to the rich ever."
[The emphasis is mine]
These unprecedented actions represent very serious risks, as their effects have spread throughout the entire financial system... Regarding potential risks, here's how John Mauldin from Mauldin Economics puts it:
The world has been focused on central banks and the ending of QE. But Woody muses about a second dimension to this issue. If the true winner under a zero-interest-rate policy (ZIRP) has been the shadow banking system (as many, including your humble analyst, have observed) what distortions are baked into the market? What will happen as ZIRP finally goes away?Now, the reason I opened with the information above was to demonstrate how unprecedented these steps taking by the Fed since 2008 have been, and to point out that they have mainly benefited the wealthiest Americans. I also wanted to call attention to the fact that because of the unprecedented nature of Fed actions since 2008, we could eventually be facing a series of unintended consequences leading up to a financial markets meltdown.
Woody asks questions not unlike those Jonathan Tepper and I ask in Code Red:But what about the second dimension to the unwinding of ultra-easy monetary policy, namely, higher Fed funds rates and an upward shift in the entire yield curve – for reasons having nothing to do with QE? This is seldom discussed. From the research we have carried out, it is this second dimension of the end of easy monetary policy that is the more important of the two. The nation has never experienced six years of hyper-low interest rates. What impact has this had on the restructuring of the balance sheets of insurers and banks? In striving to match assets and liabilities across 24 consecutive quarters of near-zero rates, what tricks might financial institutions have played (reaching for yield via derivative positions) that could backfire and occasion a financial crisis once the yield curve rises from the dead? In particular, what about the increased utilization of new “collateral and maturity transformation” schemes that could occasion future panics?[The emphasis is mine]
In fact, I'm of the opinion that that is exactly what's going end up happening, and sooner rather than later... And I'm not the only with that opinion. On November 15th, I wrote a diary referencing Thom Hartmann's book The Crash of 2016. Here's what he had to say about the current situation during a Democracy Now! interview:
Well, the—some of the biggest fortunes in America over the last century were made during the last Great Depression. If you’re cash rich and everybody is desperately selling everything they have for almost nothing, because they—you know, they’re facing tax liens and they’re going out of business and things, it’s an enormous opportunity to get even richer. So, that’s—they’re benefiting—they are and will benefit from [inaudible].So here's what I'm trying to illustrate: If these arguments are valid, then what we are talking about is a situation where the ruling elites have devised a way to shield themselves from the consequences of market crashes. And not only that, it seems that they actually end up benefiting from them (if these premises are accepted).
[The emphasis is mine]
And it's not as if these suspicions are new:
The new law will create inflation whenever the trusts want inflation. It may not do so immediately, but the trusts want a period of inflation, because all the stocks they hold have gone down... Now, if the trusts can get another period of inflation, they figure they can unload the stocks on the people at high prices during the excitement and then bring on a panic and buy them back at low prices.…The people may not know it immediately, but the day of reckoning is only a few years removed.”Finally, if you compare what current critics are saying, including Thom Hartmann, with what people were saying back in 1913, the circumstances look eerily similar.
(Congressman Charles A. Lindbergh, referring to the Federal Reserve Act. Congressman Lindbergh stated this a few years prior to the stock market crash in 1929 which ushered in the Great Depression Congressional Record, Vol. 51, p. 1446. December 22, 1913.)
On Saturday I posted a comment in a diary titled This Could End the NSA: Financial Market Manipulation published by David Harris-Gershon.
Let me acknowledge right off the bat that I know that the premise I used to support that comment is highly speculative. Nevertheless, my take (my opinion) is that if in fact there is a massive market crash (for the reasons I state above), not only the wealthy will end up benefiting when the dust settles (as they have in the aftermath of every single crash during more than a century), but that the chaos and panic brought about by such a crash would work as a kind of Shock Doctrine event giving the ruling elite an excuse to use the massive (proto-fascist) total-information-awareness surveillance and security apparatus (and legal framework) is has built during the last 12-plus years.
If this does happens, and if it happens by surprise, in the aftermath of the next financial/market crash we may end up in a situation where pensions and retirement accounts are depleted, the social safety net has been completely dismantled, the public sector (i.e, democracy itself) is totally undermined as cities and states run out of money...
I argue that in a situation like this, the ruling elite would come out ahead by both, further increasing their wealth and power, and fully deploying the surveillance police state it has built for itself (for this very occasion), free then to subjugate, oppress, and exploit the citizenry.
Again, I'm not asking the reader to agree with my conclusions on these very complicated issues; there may be no connection between what the Fed is doing and the Security Apparatus agenda. I fully understand that.
But, in closing, think how you would react if someone told you in 2006 and 07' that top banking executives were engaging in a massive ponzi-type scheme that involved the selling of overvalued collateralized mortgage obligations securities, and that rating agencies would be complicit in the crime, and that as a result average citizens would lose tens of trillions of dollars in the value of their pensions, savings, and real estate... And that after all that, those who perpetrated the crimes would not only not be prosecuted, but would become even wealthier?
I encourage readers to do their own research about the Quantitative Easing issue, and find out what critics and skeptics are saying...
In the end, none of these things may be related, but if a massive market crash does end up happening (as many respected people are predicting), it is not hard to imagine how the surveillance police state (and proto-fascist legal infrastructure) may be put to use, a la Shock Doctrine.
What can we do about any of this? Well, I think Chris Hedges offers some very good suggestions and ideas in the following The Real News Network's interview with Paul Jay:
Here's a quote from the interview:
Well, the more we create self-sustainable systems that are local, the more we sever ourselves from these corporate forces, the less we need them. And the less we need them--I mean, let's remember that 70 percent of the U.S. economy is driven through consumption--the less we need them, the more we impoverish them. I mean, the goal has to be to break these corporate power, this entity that has seized control of our government, our systems of communication, our judiciary.
I mean, now we're watching them eviscerate our systems of education. Anytime hedge fund managers walk into a city like Baltimore and propose charter schools, it's not because they want to teach people to read and write. It's because they know the federal government spends about $600 billion a year on education, and they want it, and they're getting it.
So I think that building local centers that are self-sustaining and that can create forms of community that are not dependent on these corporate forces is a political act, because these corporate forces need us to continue to consume their products and rely on their services. And the less we consume and the less we are hostage, the less we need these forces, the more independent we become.
Now, that has to come with a kind of political consciousness, but I think they come hand-in-hand, that both things--I think that as people take control, once again, of their own lives, that will bring a kind of consciousness, because these corporate forces, especially if they begin to feel threatened, are going to see these acts as political acts and are going to move--as we have seen corporate farming move against organic farming, they are going to move to try and destroy these forces.
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