Thread by @ArashKolahi

On Friday I wrote a thread explaining why the Fed’s recent liquidity injections (~$5 TRILLION since January) amounts to a ‘hand-out’ to the financial markets that largely benefits the 1%.

Here I’ll explain EXACTLY why it’s a HAND-OUT that you & I will end up paying for. 1/31

When the Fed partakes in open market transactions, including repo markets, it’s considered monetary policy. It’s a large part of what they do.

When they buy debt, it’s expansionary monetary policy because they are increasing the money supply – putting out dollars/liquidity. 2/31

This is non-controversial as it was their stated purpose: to provide more liquidity.

These open market transactions took place in the Repurchase Agreement (Repo) market. The Repo market is an open market that provides short term liquidity to banks & financial institutions. 3/31

Yes, repo markets are short term collateralized debt. That’s the nature of the repo market. That was true before the Fed stepped in & it’s true after they stepped in.

That doesn’t change the fact that the Fed stepped into an open market to inject liquidity FOR A REASON. 4/31

So, the question is, WHY did the Fed step in? To answer that, we have to go back to when these injections started. Back in Sept. 2019, the markets were booming, stock-buyback were approaching record levels: cash was being used to buy-up stocks, not real-economy investments. 5/31

Despite all REAL economy indicators, such as unemployment, near full capacity utilization, low real-economy reinvestment etc., the Fed was driving interest rates into the ground for the obvious reason to inflate the financial markets. 6/31

Not only was it obvious to anyone paying attention, this administration - notorious for saying the quiet part out-laud was publicly pushing the Fed to keep lowering interest rates to pump up the markets! 7/31

Trump was literally on full public display saying the quiet part out-laud that the Fed should serve the interests of the financial markets, NOT the REAL economy.

Prop up the markets by driving down interest rates. 8/31

So, it is with this context that in September 2019, demand for liquidity in the repo markets started to exceed supply. There is this obscure concept mainstream economists might not be familiar with, called Supply & Demand.

What happens when demand is greater than supply? 9/31

Like Tickle Me Elmo on Christmas Eve, when demand is greater than available supply prices go up. What is the price of money/liquidity? Interest rates! Interest rates are the price of money.

And the last thing the Fed wanted was for interest rates to go up! 10/31

The Fear was that interest rate spikes in the Repo markets would put upward pressure on interest rates elsewhere and threaten the fluffing of the financial markets. That was the last thing the Fed, which obviously cared NOTHING about REAL economy indicators wanted! 11/31

So that’s why the Fed stepped into the Repo markets. To prevent normal supply & demand in an open market from increasing interest rates to keep fluffing the financial markets.

To anyone who was paying attention at the time, it was obvious. 12/31

At the time, the handout was GREATER than just the trillion-dollar liquidity injections. It was sacrificing the REAL economy to inflate the financial markets, which, as explained below, overwhelmingly benefits the 1% at the expense of everyone else. 13/31

https://twitter.com/ArashKolahi/status/1234899879463276544

And who pays for the recklessness of the Fed? We all do. How? Through a combination of stagnant wages & inflation.

The propping of the markets with low-interest rates at a time of near full-employment/full-utilization with little real-world investment means one thing: 14/31

Inflation: A hidden tax you & I will pay through higher cost of living. In effect, it’s an upward redistribution of wealth: pump-up the markets with no regard to REAL economy indicators puts upward pressure on our costs of living.

A tax on us to pay for their fluff! 15/31

The concept of inflation is critically important to understand. Please take a moment to learn the truth about inflation here: 16/31

https://twitter.com/ArashKolahi/status/1228060794748727296

And, it gets worse!

There is good reason to believe that the Fed’s reckless driving down of interest rates for the obvious reason of inflating the markets BEFORE THE CRASH will now make expansionary monetary policy less effective AFTER THE CRASH! 17/31

So, not only will we be paying for the propping up of the financial markets, there is a good chance that we may be paying again for a less effective ability to recover from recession.

With monetary policy now less effective, we need a decisive New Deal-style fiscal plan. 18/31

Ask mainstream economists to show you 1 tweet or 1 critical word of the Fed’s obvious, blatant, out-in-the-open, Trump spilling the family secrets like a drunk uncle on Thanksgiving HANDOUT over the past months. If they didn’t see THAT, they have NO credibility on Handouts! 19/31

When the Fed steps into the open repo market, injecting liquidity with the obvious intent of keeping interest rates low to prop up the markets, why is Vox saying “It’s not a stimulus,” when that’s the definition of stimulus in MAINSTREAM economics! 20/31

vox.com/policy-and-pol…

Instead, for actual good takes on what’s going on check out Mike Whitney’s articles, like this one: 21/31

globalresearch.ca/repo-fiasco-fe…

Like anyone who understands capitalism, I’m anti-capitalist. I want to see it replaced by a fair, equitable & democratic system. But so long as we have to endure capitalism, so long as we have to endure Central Banks, Central Banks must serve the REAL economy, not the 1%! 22/31

The role of any Central Bank should be to curb the worst effects of capitalism & its cycles on the REAL economy. Recessions/depressions, unemployment, inflation, etc. 23/31

The Fed has redistributed wealth upwards, increased market speculation & prioritized financial markets over the REAL economy.

Any economist who hasn’t been calling them out in the months leading up the crash is a tool & has no credibility on what is or is not a handout. 24/31

The Fed’s liquidity injections were handouts. They were handouts when they started back in September 2019.

And by all indications of the economy at the time, WE would have been paying for it through increased cost of living. 25/31

It takes more than surface-level thinking like ‘they’re a loan that needs to be repaid.’ No shit. That’s a large part of what the Fed does: open market operations buying & selling of bonds to increase or decrease the money supply to affect interest rates. 26/31

The point is: Does the Fed serve the interests of the REAL economy? Or do they serve the interests of the financial markets & the 1%?

This Fed has sacrificed the REAL economy to serve the 1%. And now we pay for it. 27/31

Mike Whiteney: “The stock and bond markets have not thrived because of a strong economy but because the Fed is engaged in the greatest bubble-blowing experiment in history. The $60 billion per month infusions into the repo market just adds more helium to the bubble”. 28/31

Economist David Rosenberg: “This is a liquidity and momentum driven market. It’s been that way for the past four months where the correlation between the S&P 500 and the Fed’s balance sheet has expanded to a 95% relationship…” 29/31

Continued: “The power of the Fed has become so acute that it has replaced the economy as a principle influence over the stock market to the point where there is only a 7% correlation between GDP and the S&P 500.” 30/31

7%! That is insane!

The Fed has demonstrably failed to care about the REAL economy. They have demonstrably failed to care about any REAL economy indicators. They have only served the interests of the financial markets & 1%: propping them up at OUR expense. 31/31

For reference: here is the thread from Friday:

https://twitter.com/ArashKolahi/status/1238606465234923521?s=20