FEDERAL RESERVE REMINDS WALL STREET ' WE SERVE THE RICH!' - The effect of this change is to assure Wall Street that the Fed rate, and the interest rate structure of the entire financial system based on it, will remain at their present ultra-low levels for a long time.

 

Fed resets monetary policy framework to meet Wall Street’s demands

28 August 2020

The US Federal Reserve has announced a major shift in its official framework for determining monetary policy to bring it into line with its existing practice of supporting financial markets, following the 2008 financial crisis and now the pandemic, and to assure them such support will continue indefinitely.

The shift was announced in a statement released by the policy-making Federal Open Market Committee (FOMC) yesterday morning before a keynote address by Fed chair Jerome Powell to the Jackson Hole conference of central bankers.

The FOMC said in future its interest rate policy would be formulated with the aim of seeking to ensure the inflation rate achieved an “average” of 2 percent over time, removing the concern in the markets that the Fed would look to lift rates once the inflation rate went above 2 percent.

Federal Reserve Building on Constitution Avenue in Washington [Credit: AP Photo/J. Scott Applewhite, file]

The effect of this change is to assure Wall Street that the Fed rate, and the interest rate structure of the entire financial system based on it, will remain at their present ultra-low levels for a long time.

To bolster this assurance, the FOMC also made clear that because low official unemployment rates in the period prior to the pandemic had not produced significant wage rises or set off inflation the Fed would not look to lift interest rates if the labour market tightened.

The breakdown in the previous relationship is largely the result of changes in the labour market in the past decade through the increased use of gig economy employment, part-time working and casualisation which have been the major source of increased employment rather than full-time jobs.

Announcing its new policy framework, the FOMC said the “updates reflect changes in the economy over the past decade and how policymakers are taking these changes into account in conducting monetary policy.”

That was an accurate assessment as far as it went. But the rest of the statement and the address delivered by Powell explaining the change was largely an exercise in covering up the real driving forces of the shift.

Powell spoke of the need to ensure the achievement of the Fed’s congressionally mandated goals of achieving price stability and maximum employment “in service to the American people,” together with the claim that through its “listening” program it had been taking into account their views and those of their communities.

There was no reference to the most significant change over the past period, especially in the wake of the financial crisis of 2008, that is, the growing divorce of Wall Street from the underlying real economy and the accumulation of wealth in the hands of a financial oligarchy at the expense of the rest of society.

This process—epitomised by the news on Wednesday that the wealth of Amazon chief Jeff Bezos has now reached $200 billion as he rakes in $321 million per day—has seen the institutionalisation of mechanisms whereby profit is accumulated via speculation, share buy backs and other forms of “financial engineering.”

These mechanisms, which involve the siphoning of ever increasing amounts of wealth produced by the labour of hundreds of millions of workers into the coffers of a tiny financial elite, depend above all on the guaranteed maintenance of ultra-low interest rates and a Fed commitment that it will step in to back the markets whenever rampant speculation threatens a financial crisis.

This has been the actual practice of the Fed, going back to the stock market crash of October 1987 and accelerating after the meltdown of 2008.

But to the extent it was not formally codified and there was any degree of ambiguity in the central bank’s policy framework statement the financial markets demanded that changes be made in the interests of so-called “forward guidance.” That demand has now been met.

In his Jackson Hole speech, Powell recalled that the review of the Fed’s monetary policy statement was initiated in early 2019.

The timing is significant. From December 2015, the Fed had begun to raise interest rates from the near-zero levels it had sent in place following the 2008 crash. This was in line with the claim that the measures it had introduced, including the purchases of trillions of dollars of Treasury bonds, were of an emergency character and would be gradually withdrawn once the economy started to return to “normal.”

In 2017 and 2018 there was a brief upturn in the US and world economy with the largest increase in gross domestic product since the period just prior to the financial crash and the Fed decided to press on in order to provide it with some room to manoeuvre in the event of another sharp downturn.

In 2018, it carried out four interest rate rises, each of 0.25 percentage points, and indicated there would be a further three such rises in 2019. It also stated it would continue winding down its holdings of financial assets, which had accumulated from around $800 billion prior to 2008 to more than $4 trillion, at the rate of $50 billion per month. In October 2019, Powell said the program of asset reductions was on “auto pilot.”

However, the orgy of financial speculation that had accelerated after 2008 had now become deeply entrenched in Wall Street and the entire financial system.

This meant that even very gradual moves to anything resembling what had previously been regarded as “normal” and the merest hint the supply of ultra-cheap money was an emergency measure, to be withdrawn at some point, produced a violent reaction.

It took the form of a sell-off on Wall Street in December 2018, recording its worst result for that month since 1931 in the midst the Great Depression. Together with a campaign in sections of the financial press, especially the Wall Street Journal, as well as the continued denunciations of Powell by US President Trump for keeping interest rates too high, this led to a U-turn.

In a speech in January 2019, Powell made clear that interest rate rises were off the agenda and the reduction of the Fed’s assets would be put on hold. This was followed by cuts in rates from the middle of 2019.

But Powell and the FOMC recognised this was not sufficient so long as there was even a trace of ambiguity remaining in the Fed’s policy framework. This led to the policy review the results of which were announced yesterday—a guarantee to the financial oligarchy that the ultra-cheap monetary policy, so essential to its operations, would continue indefinitely.

In his speech, Powell did not specifically deal with the measures initiated by the Fed in response to the meltdown of the financial system in mid-March when the Fed stepped in to act as the backstop for every area of the market.

It announced further massive purchases of Treasury bonds, the buying up of student loan and credit card debt, short-term commercial paper and initiating, for the first time, a program of buying corporate bonds, including from companies that had been junk-rated as a result of the pandemic

There were more than enough reassurances for Wall Street in the speech that these measures, described as temporary and to be withdrawn at some point, would also be permanent.

Powell noted that in previous times expansions in the economy typically ended in overheating and rising inflation but in the past period long expansions had been more likely to end with financial instability “prompting essential efforts to substantially increase the strength and resilience of the financial system.”

In another part of the speech, he said Fed policy was determined by risks to the economic outlook, “including potential risks to the financial system that could impede the attainment of our goals” and that to “counter these risks, we are prepared to use our full range of tools.”

There can be mistaking the essential content of the Fed’s adjustment to its statement of objectives. It makes clear that the orgy of speculation, leading to the creation of fabulous wealth at one pole and increasing poverty and misery at the other, is the official policy of the central financial arm of the capitalist state.

The key question concerning financial elites around the world is how the Fed and other central banks intend to continue the stimulus to markets that has sent Wall Street to new record highs after it plunged in mid-March.

 

Last May, Forbes ’ global rich list reported that the world’s 25 richest individuals had increased their total wealth by $255 billion in the space of just two months.

 

Markets focus on Fed chair’s Jackson Hole speech

27 August 2020

The eyes of financial markets around the world will be focused today on the keynote address to be delivered by US Federal Reserve Chairman Jerome Powell to the annual Jackson Hole conclave of central bankers.

Powell’s speech, to be given in a completely virtual format because of the COVID-19 pandemic, will focus on the two-year review by the Fed of its monetary policy. The key question concerning financial elites around the world is how the Fed and other central banks intend to continue the stimulus to markets that has sent Wall Street to new record highs after it plunged in mid-March.

The massive $3 trillion injection by the Fed since the plunge, backing every sector of the financial markets, has poured hundreds of billions of dollars into the coffers of the financial elites, above all those holding technology-based stocks.

Last May, Forbes ’ global rich list reported that the world’s 25 richest individuals had increased their total wealth by $255 billion in the space of just two months. With the continued rise of Wall Street since then, that figure will have further increased.

Powell has previously stated there are no limits to the Fed’s action so far as injecting money is concerned, and if there is another crisis it will act. But there are questions about what form such action will take under conditions where the world economy is experiencing its worst downturn since the Great Depression.

Mark Sobel, a former US Treasury official and now the chairman of a central bank think tank, told the Financial Times: “The Fed and the European Central Bank have used up a lot of ammo. Even when advanced economies are significantly recovering, there will still be a legacy of sky-high unemployment, large output gaps and enormous dislocations to deal with.”

As far as the real economy is concerned, further monetary stimulus will do nothing to lift output or ease unemployment. The central bank is “pushing on a string,” according to Adam Posen, the president of the Washington-based Peterson Institute for International Economics.

“You can alleviate liquidity problems, you can put a floor under some asset prices, you can stabilise credit markets, all of which is constructive, but none of which is sufficient to create recovery,” he said.

Investors in the financial markets, however, are eagerly anticipating that the Fed will signal action to further expand monetary intervention to keep the Wall Street surge going.

However, there are concerns in some quarters about where the unprecedented intervention is going to end. According to Robin Brooks, chief economist at the Institute of International Finance, “There’s a legitimate worry at this point that we are doing a bit of levitation. The massive increase in leverage and the low rates forever… all of these things are worrying from a financial stability point of view.”

In the past five months, corporations have taken on massive amounts of new debt in order to stave off bankruptcy. According to the rating agency S&P, corporations globally have raised $2 trillion in bonds alone so far this year, an increase of $600 billion over the same period last year.

In the US, companies have issued a record $1.25 trillion in debt, of which almost $1 trillion was raised following the March 23 decision by the Fed that it would intervene to buy corporate bonds as a backstop to the market.

The largest share of borrowing has been by investment-grade companies. But money has also been raised by junk-rated companies, which have issued $220 billion worth of bonds so far this year.

The debt issuance has been predicated on the assumption that the economy will “bounce back” and the debt will be able to be paid back. But these expectations will be thrown awry if there is a second wave of infections and consumer demand does not recover. There is no prospect for an increase in investment—the key driver of the economy—as it was already in decline before the pandemic struck.

Even under relatively favourable conditions, S&P estimates that the default rate for US junk-rated companies will rise to 15.5 percent by next March, higher than the peak experienced in 2009 in the wake of the global financial crisis. And if there is a deepening downturn in the global economy, investment-grade companies will also be hit.

There is another significant development in the stock market that underscores the unprecedented character of the present economic and financial crisis. While Wall Street indexes continue to surge, the so-called “recovery” has been far from broad-based. It is concentrated in the high-tech stocks such as Apple, Google, Microsoft and Amazon, which make up a large proportion of the S&P 500 index.

This has given rise to what is being referred to as a K-shaped development—a situation in which the share prices of market leaders diverge from others. In analysis of the market, Vincent Deluard, the director of global macro strategy at the brokerage firm Stone Group, told Bloomberg: “I would summarize 2020 as the bear market for humans. Like many things, COVID is just accelerating social transformation, concentration of wealth in a few hands, massive inequalities, competition issues and all that.”

He pointed out that firms that have relatively few employees have beaten the more labour-intensive ones by 37 percentage points in 2020.

One aspect of the divergence is the fact that high-tech companies employ relatively few workers and have been able to benefit from the pandemic, as reflected in the 33 percent rise in the tech-heavy NASDQ index so far this year. The one exception is Amazon, which has been able to increase its sales because of the increased turn to online purchases.

Bloomberg cited one extreme example of this process. MarketAxess Holdings, an automated bond trading firm, has seen its shares rise by 29 percent this year, five times the gain in the S&P 500, and now has a market capitalisation of $19 billion, while employing just 530 people.

According to Deluard’s calculations, the cluster of companies with the smallest number of employees relative to market value has risen by 18 percent this year, while the group with the highest labour intensity has recorded a 19 percent loss.

This situation has far-reaching implications the workers employed in these industries. Under conditions where all companies operate under the dictates of market value and returns to shareholders—the vast bulk of which are hedge funds and investment banks—these companies will be under increasing pressure to boost their share price through job cuts and ever-intensifying exploitation.

 

Pope Francis: Unequal Wealth Means ‘the Economy Is Sick’

ANGELO CARCONI/POOL/AFP via Getty

THOMAS D. WILLIAMS, PH.D.

26 Aug 2020174

3:51

ROME — Pope Francis said Wednesday unequal wealth among nations and individuals reveals a sick economy, “an injustice that cries out to heaven.”

The coronavirus pandemic “has exposed and aggravated social problems, above all that of inequality,” the pontiff told those following his live-streamed remarks delivered from Library of the Apostolic Palace in the Vatican.

“Some people can work from home, while this is impossible for many others,” he said. “Certain children, notwithstanding the difficulties involved, can continue to receive an academic education, while this has been abruptly interrupted for many, many others.”

“Some powerful nations can issue money to deal with the crisis, while this would mean mortgaging the future for others,” he added.

These economic differences are pathological, the pope suggested, signs of a “sick economy.”

“These symptoms of inequality reveal a social illness; it is a virus that comes from a sick economy,” Francis said. “And we must say it simply: the economy is sick. It has become ill. It is sick.”

This sickness “is the fruit of unequal economic growth – this is the illness: the fruit of unequal economic growth – that disregards fundamental human values,” he said.

“In today’s world, a few rich people possess more than all the rest of humanity. I will repeat this so that it makes us think: a few rich people, a small group, possess more than all the rest of humanity. This is pure statistics. This is an injustice that cries out to heaven!” he said.

The pope went on to suggest that such unequal economic growth is the fruit of greed and demands rectification.

“When the obsession to possess and dominate excludes millions of persons from having primary goods,” he said, “when economic and technological inequality are such that the social fabric is torn; and when dependence on unlimited material progress threatens our common home, then we cannot stand by and watch.”

It is unclear from the pope’s words how he believes equal economic growth among nations and individuals should be achieved, or whether it is merely a question of redistribution of all the world’s wealth equally among individuals.

Catholic social teaching has, however, consistently recognized the natural differences among persons and nations and insisted that economic homogeneity is an unworkable utopia.

In the first “social encyclical,” Pope Leo XIII’s 1891 text Rerum Novarum, the pontiff called for a healthy realism, bearing with “the condition of things inherent in human affairs” for “it is impossible to reduce civil society to one dead level,” as opposed to the Socialists’ utopian efforts toward perfect economic equality, since “all striving against nature is in vain.”

Leo called to mind that manifold differences naturally exist among persons: “people differ in capacity, skill, health, strength; and unequal fortune is a necessary result of unequal condition.”

At the same time, Leo insisted that these natural inequalities are not necessarily evil, either for individuals or for the larger community. In fact, he wrote, social and public life “can only be maintained by means of various kinds of capacity for business and the playing of many parts; and each man, as a rule, chooses the part which suits his own peculiar domestic condition.”

While the Catholic Church teaches that there are, indeed, “sinful inequalities that affect millions of men and women,” which stand “in open contradiction of the Gospel,” it also recognizes that not all inequalities are evil and the campaign to impose perfect economic equality would cause more harm than it would alleviate.

 

Signs of emerging crisis in economy and financial system

By Nick Beams
25 August 2020

As Wall Street continues to surge to record highs—Apple has doubled its market capitalization from $1 trillion to $2 trillion in just two years and the S&P 500 index has surged 50 percent since the mid-March crash—there are clear indications of a crisis building up both in the real economy and the financial system.

Last week, the Financial Times reported that while the market was at a record high, “corporate distress” in the US had never been worse with “large corporate bankruptcy filings” running at a record pace and set to exceed levels reached in the aftermath of the financial crisis of 2008.

As of August 17, a record 45 companies, each with assets of more than $1 billion, had filed for Chapter 11 bankruptcy, compared with 38 in the same period in 2009 and more than double the figure of 19 in the comparable period last year.

It reported that in total 157 companies with assets of more than $50 million have filed for bankruptcy with a lot more expected to follow.

Ben Schlafman, the chief operating officer at New Generation Research, which tracks bankruptcy filings, told the newspaper: “We are in the first innings of this bankruptcy cycle. It will spread far across industries as we get deeper into the crisis.

“It pains me to say it, but bankruptcy is a growth industry in America.”

The Labor Secretary in the Clinton administration, Robert Reich, said cutting off the $600 per week federal unemployment benefit will push tens of millions into poverty or close to it.

“They won’t have the money to buy billions of dollars worth of goods and services. As a result the entire economy will suffer. Small businesses will continue to suffer the most because they are already precarious.”

Goldman Sachs has said it expects that of the 22 million workers cut from payrolls in the first wave of the pandemic almost a quarter will be permanently axed. In a research note published on Friday and reported on Bloomberg, Goldman Sachs economist Joseph Briggs said that while there was a return to work from temporary layoffs, “other patterns suggest that rehiring prospects for temporarily laid-off workers started to deteriorate in July” and some 2 million workers could remain unemployed well into next year.

Reporting on the situation in Britain, the Financial Times said that accounting, law and investment banking firms were “preparing for a fresh wave of distress in the autumn” when government loan schemes to run out.

Leading insolvency barrister Mark Phillips said: “There are a series of crises looming. The full wave of insolvencies hasn’t even started yet.”

Financial and accounting firms have been involved in efforts to aid companies in restructuring their debt and raise capital to avoid a collapse.

“But the winding down of state support schemes is expected to trigger a large number of insolvency proceedings, as many of these companies run out of cash,” the FT said.

In the major industrial centres of Europe there are fears that after what was described as bounce back from the sharp economic contraction in the spring, the recovery is now starting to slow.

There was a 22.5 percent rise in industrial production across the euro zone in May and June, but this was not enough to compensate for the 28 percent fall in the first two months of the pandemic. Germany’s central bank has reported that euro zone manufacturers are still only operating at 72 percent capacity in July compared to their long-term average of 80 percent.

The car-making industry, which forms a vital component of the German economy, has been hard hit, with predictions that global car sales will fall to 69 million this year compared to 88 million in 2019. The head of Audi has said he does not expect the levels of car production to return to their pre-crisis levels at least until 2022 or 2023.

But even these predictions could be knocked awry in the face of what is clearly a resurgence of the pandemic. In the US, it continues to rage out of control while in Europe there are sharp rises in the number of infections due to the return to work drive of governments amid the push to reopen schools.

Last Friday alone, Spain reported 8000 new COVID-19 infections, with the infection rate rising across the region. In Germany the Robert Koch Institute, the country’s main public health organisation said infections had risen sharply in all of the country’s 16 regions in seven days, describing the situation as “alarming.”

Infections have surged again in South Korea, one of the world’s major industrial and manufacturing centres with an additional 397 cases reported on Sunday, the highest number since the beginning of March.

“Cases are rising in 17 cities and provinces across the nation, and we are now at the verge of a massive nationwide outbreak,” the head of the country’s Center for Disease Control and Prevention, Jung Eun-kyeong, told a news briefing on Sunday.

Amid this wave of disease and economic devastation, markets have continued to rise. But there are growing fears that the conditions are building up for a major financial crisis. The market rise has driven the surge in technology stocks, which form a large component of the S&P 500 index and, above all, the supply of cheap money from the Fed.

One indication of the effect of the intervention by the Fed, which has pumped around $3 trillion into the financial system, is the lowering of the yield on US Treasury bonds as a result of the central bank’s purchases of government debt.

The yield on the 10-year Treasury bond, a benchmark for both US and global financial markets, is now around 0.6 percent, a full percentage point below its level in February. With the yield on government debt now bringing a negative return when inflation is taken into account, this has fuelled a turn to the stock market, gold and corporate debt. This search for a positive return has sparked what has been termed an “everything rally.”

But the rise of the market rests on very shaky foundations as evidenced last week when the minutes of the Fed’s July meeting were published, sending a tremor through Wall Street.

Contrary to many expectations in the market, they showed that the Fed had still not determined into “forward guidance” policy, that is, firm guarantees that there will be no tightening of monetary policy into the indefinite future, including a commitment to purchase bonds to set a cap on bond yields.

With the US government to issue more bonds to finance its debt, this measure is regarded in some quarters as necessary to insure that the increased supply of bonds does not lead to a fall in their price and a consequent rise in interest rates.

Commenting on the massive disconnect between the underlying economy and the stock market, an article in Bloomberg noted that “any number of looming threats could bring the historic rally in US equities to a screeching halt.” They could include conflict over the re-opening of schools, the November election, the conflicts with China or the effects of US monetary policy.

Then there is the issue of the massive increase in corporate debt—more than $1.6 trillion over the past few months. Such is the extent of the debt mountain that Bloomberg reported that an analysis conducted by its intelligence unit revealed that the average below investment-grade firm (or junk-rated company) had debt levels relative to earnings so high in the middle of the year that they would have triggered warnings from bank regulators had they occurred a few years ago.

However, it noted, regulators had dropped those warnings which a few years ago had applied only to a few but which today “could apply to many more.”

Gold has also been part of the “everything rally”—a rise sparked by the search for profit as its price reaches record heights and underlying uncertainty about the stability of the global monetary system as trillions of dollars are created at the press of a computer button by central banks.

While it has been on the rise, the gold price is highly volatile and so sudden downward movement is another factor that could trigger a collapse of the global financial house of cards.