Is Powell Playing a Deeper Game?

Is Jerome Powell playing a far deeper game than most realize?

Someone asked about this article where Tom Luongo theorizes the Fed is playing a different game than most realize. Right off the top, I think it is very helpful to come up with these types of theories as thought experiments because they help crystallize interlocking parts of the market. Whether you end up agreeing with it or not, it can be helpful. The trouble with these theories is when they lean too much on conspiratorial thinking and not plain facts. You want to work back from the facts and then ask: how might the power players like to use this situation?

I've given examples before. One, Xi Jinping in China could have allowed a deflationary crash in the economy as a means of eliminating political opponents in the aftermath, since the public is always looking for scapegoats. He can also use a deflationary crash as an excuse for devaluing the Chinese yuan. He can also use the U.S. trade war as an excuse. A perfect retaliation for Biden's move on semiconductors would be letting the yuan drop, something that is inevitable anyway if the dollar continues rising with U.S. interest rates. If WW3 has started, retaliatory tariffs from the U.S. merely pushes along a tit-for-tat economic separation.

Conversely, we can play that same game with the U.S., which is where Luongo goes. The article is worth reading and the DiMartino Booth interview linked within is worth watching. Most of what follows is my riff on his article, as this article doesn't explain his position with much depth so I don't want to attribute things he may not believe.

When They Call For the Bailiff You Know You’re Winning

I haven't read Luongo all along, but my read of it is he's arguing the Fed is fighting against the Great Reset. He sees Truss getting knocked out as an anti-Brexit (can confirm reading all the people who think Britain will now return to the EU) and anti-Federal Reserve move. The Anglos are independent and aligned. He also notes which countries' banks are on the Fed's new commercial repo list: Anglos (he doesn't put it that way) and Japan.

Perhaps this is happening, perhaps not. Socialists love cheap money and any restrictive policy on credit will upset them. Since neosocialists (neoliberals, globalist, whatever) control most of the world's governments, they do not want tight credit policies and high interest rates. As commercial speculators, the Anglos are more comfortable with unleashing the wrecking ball of inflation to screw up their enemies and frenemies for fun and profit.

Another question is whether the U.S. will also exit as reserve currency. I've maintained for what seems like a decade now, that the dollar dies in deflation. All these foreign countries want to inflation. They don't like that the Fed is actually fighting inflation. The $100 trillion question is whether global capital would prefer to sit in socialist serial inflator countries or stay in the United States. The Empire Strikes Back if you know what I mean. It can all be boiled down to China and neverending belief that the yuan will become a reserve currency. Short of winning WW3 against the United States, China is still many decades away. Their capital account is closed! It's shocking that people still think China is in some kind of strong position here. A competitor to the U.S. dollar that is not gold is the Argentine peso in waiting. If gold, then the U.S. will depreciate more slowly versus gold.

The U.S. has already lost the trade war. The American worker is on the bottom looking up. He's being crushed by neoliberals in Washington, Wall Street, China, he's being overrun by migrant labor, he's watched his factories and then his neighborhood get packaged up and sold off to foreigners. Any shakeup in the global order has a high probability of helping the average American worker if only because everything has gone against him. That doesn't mean it will. Things can always get worse. Yet even if the dollar collapse scenario plays out, that would close the American consumer economy to the world because exports would be too expensive. Many products now imported would have to be made in the United States. A massive transfer of wealth from capital to labor would ensue. A massive transfer of employment from China and Germany to the USA. To think this through is to answer the question of whether any other nation wants reserve status. The U.S. has it. The Federal Reserve can gut other central banks like fish with rate hikes if that's their prerogative because whatever they say publicly, almost all the other central banks inflate harder than the USA. Only closely aligned nations that pull their security weight will be safe from retaliatory tariffs if currency devaluations start popping off.

Social mood is also negative and falling. The one out for a rising dollar would be Plaza Accord 2.0, but I've explained why this is impossible before. Social mood means nations will not cooperate. China has said it'll never go along with it. It's a dead story with the current geopolitical situation.

Where Can U.S. Policy Go?

America First was policy until around 1945. Critics of American foreign policy will point out that didn't exactly end, but it's also true that the much of the country was supporting what in hindsight is the American empire because they were confronting global communism. Many people were appalled with U.S. actions against Serbia and Russia in the 1990s. The nationalist, anti-communist mask dropped from the globalist traitors within the U.S. government. USG has been openly and brazenly imperialistic in its foreign policy since then, as well as going to war with domestic opposition. Journalists are in prison. Books are banned. Social media accounts are censored and shutdown. A return to the 1920s, when the United States was still a mostly neutral global commercial power, seems impossible because of this war. It seems like there's no support for it because the political constituency for it is being openly crushed. Whether Powell is consciously or unconsciously driving policy in that direction, I cannot say, but he sure could go a long way to giving outsiders a chance at power.

None of this is to say things can't go poorly. The U.S. government can print up treasury bills. Another election like 2020 could unleash double-digit CPIs. I'd expect the Federal Reserve would be all but captured at that point, with any idea of inflation-fighting rate hikes going out the window. The general intelligence of the ruling class is going downhill at high speed with Kool-Aid drinkers replacing the mercenaries who instituted identity politics. Competent people implementing evil policies are retiring and the rising generation actually believe in the evil ideas such as white privilege. To say nothing of their near total ignorance of math, economics and physics. The wheels can certainly fall off if the value of the U.S. dollar collapses after socialist economic policies are passed.

Conversely, whether he cares or not, Powell dropping a deflationary bomb (disinflationary if you like) on credit markets is going to damage the outlook for socialism. People say the U.S. is bankrupt at 5 percent or 7 percent interest, but this isn't true. They say that because they take it as a given that U.S. economic growth will slow and that the government will never cut welfare and warfare spending. high interest rates will be expensive for the imperialist USA and could push it into a fiscal crisis, but it'll be a different story for a nationalist government. The debt will become a budgetary weapon that some have always dreamed it could be. The U.S. government is far too large and spends way too much money. If high interest rates instead force a political shift to economic nationalism that tears the welfare-warfare state down, then the U.S. not only won't go bust, but it'll enjoy high inflation via a rapidly growing economy with wage inflation assuming tariffs and nationalist development are part of the package.

Many predicted the U.S. dollar would crash when China started dumping treasuries, and instead the opposite happened because China was dumping to defend the yuan. The new common wisdom predicts high interest rates and an eventually lower U.S. dollar will wreck the U.S. Instead, it could power a rebirth of the U.S. domestic economy, rising wages, high nominal GDP growth and shrink the government's footprint in the economy. It depends in part on whether its done intentionally. It depends on who is in power. Is it a flailing incompetent government or a Machiavellian one that uses great turmoil to reshape the future? Will the Machiavellians be globalists or nationalists? Never let a crisis go to waste as they say. Whether Powell is kicking off that domino I doubt it, but it doesn't mean he isn't kicking it over accidentally.

Going back to Luongo's piece, one of the most important points is that the Federal Reserve will not pivot. I've said I could see them pausing and stock market bulls treating it a pivot, but looking at stocks and crude oil lately, I'm not sure they can pause anymore. The market is still extremely bullish, sentiment indicators be damned. For investors, that's the main point. The Fed will disappoint financial markets and global central banks alike until something really major breaks. Everything else is downstream of that.