The Leviathan is Vertically Integrated

The Leviathan is Vertically Integrated

Why the Fed will keep printing money… at your expense!

By J.M. Hamilton (8-3-13)

“Vertical integration” (VI) in economic and financial parlance is when a company, in a given industry, owns the raw materials, and owns the manufacturing process, distribution, and retail.  Vertical Integration is said to give a company within an industry an economic advantage over it’s competitors; moreover, vertical integration stands up as a business model, as long as vendors in any particular phase of production provide a more costly service, vis a vis, the organization that is vertically integrated.

But enough about VI for now… we’ll get back to that in a second.  J.M.H. over the years has been a Federal Reserve (FED) watcher, and indeed, has written several pieces on the FED.  Among my more recent pieces:

Omnipotent:  In this piece, we point out that the FED has printed trillions upon trillions of dollars out of thin air, because it has a monopoly on the world’s fiat currency.  The primary affect of all this magic, since the 2008 financial crisis, is to bailout the plutocracy, the banks, and support the MIC and the NSA.  The FED also allows, to a very large degree, for our elected officials to act like rogues, campaign 24-7-365, and dispense with the need to govern altogether.  While Omnipotent did not outright say it, it certainly begged the question:  If the FED can print trillions upon trillions to bailout the Leviathan, why cannot it print trillions to bailout the abused middle class,the children born in to poverty, and the destitute and those in need?  Social spending and government support for those in need being but a fraction of welfare for the Leviathan.  My guess is the FED doesn’t print money for the poor, because it might prove that the socialism that works for the elite, also works for the poor and downtrodden, which could rend the entire economic and social structure, and the entire capitalist paradigm.

Chairman Bernanke and Trickle Down Monetary Policy:  Trickle down economics (aka supply side economics) – that is tax cuts for the wealthy, as a means of stimulating the economy – is a failure when the GOP rigs the tax code to favor the plutocracy, at the expense of the 99% (the last 35 years documents both the fallacy and the abuse of a trickle down tax code); but it’s an equally great failure when the FED utilizes trickle down monetary policy (Keynesian monetary policy run through the filter of the Wall Street Cartel), in the hopes of that a rising tide among the rich will aid and assist the middle class and the poor.  Five years later, quantitative easing (QE), and assorted FED props, has mainly papered over a global pandemic of unmitigated banker greed; and Washington, the FED, and the regulatory bodies have not done anything about reforming the cartel, but make the plutocracy richer, more entrenched, and more concentrated and powerful.

As for Addiction of Duplicities, I’ll let a single paragraph within that piece speak for itself, as to why the FED will not be shutting off an ocean of money anytime soon: 

“The Fed has been printing some eighty odd billion a month to purchase T-bills and MBS, and the reasons for this are as multivariate as a rose.  Among them: Fed purchases and balance sheet expansion keeps interest rates suppressed and allows the Wall Street banks and shadow banking to jack up the stock market to new heights (or what this blog has referred to as trickle down monetary policy); it keeps the interest on the national debt low, so that Washington can continue to live beyond its means; it keeps all those adjustable rate mortgages the banks like to sell Americans from being foreclosed upon; it allows the U.S. to export the few products it manufactures overseas at a discount (in the classic “beggar thy neighbor” approach); and of course, there are all those hundreds of billions (notional value) in credit default swaps that are betting on continued Fed interest rate suppression.”

So to recap, we can see from these three articles that the FED – has unlimited power to print money by virtue of it’s monopoly, that the printing of money has mainly served the Wall Street banks and inflated the stock market and asset prices – at the expense of the middle class and poor (who said, “A Crisis is a terrible thing to waste?”), and there are still more reasons why the FED will continue to print money at any extraordinary pace. 

The fact that my arguments have been backed to a large degree by main stream economist, the financial press, and facts we see daily before our eyes, and vice versa, hopefully, further validates the arguments I’m about to make, which is don’t look for the FED to take its foot off the accelerator anytime soon.  Here’s why:

Quite simply the Wall Street cartel, shadow banking and private equity makes billions off the free cash flow the FED provides, albeit in a hyper leveraged and dangerous fashion.  The FED has a dual mandate: maximize employment and price stability.  Chairman Bernanke has all but said that as unemployment declines, and inflation rises, the FED will consider printing less money and will begin cutting back on treasury and MBS purchases.  However, the Leviathan doesn’t want the flood of currency cut off because it makes its money primarily in trading and speculation (the cartel can no longer be bothered lending to the American public or small business, it subcontracts out mortgage lending to the FED and GSEs, via MBS and CDOs; of course, nobody in the private sector will touch these instruments, unless they're guaranteed by the government). 

As a consequence, the Leviathan has no interest in seeing unemployment decline, or inflation rise; and as we all have discovered in the last decade, the cartel very well maybe rigging the system so that unemployment does not drop precipitously, and inflation – or at least CPI - is held in check.  (We also know that Private Equity, the cartel's soul-mate, has had a huge impact on exporting jobs offshore, wage stagnation, and globalization in general.)

This is no mere conspiracy theory, since the Wall Street cartel can withhold loans that grow business or residential and commercial building, often sits on interlocking boards of directors, and is vertically integrated throughout the economy. (In fact, Wall Street and the international banking cartel has undergone sizable layoffs in order to hit their financial targets, and arguably, to keep the flood of FED money coming.)  To learn what our friends have been up to, and just how vertically integrated the cartel is, observe the following:

·      The cartel is presently under investigation for distorting the commodities market.  Some economist have stated that speculation in oil means a 25 to 33% mark up at the pump, all so that the cartel can report record quarterly profits.

·      The cartel is under continuing investigation, and has already been fined, for rigging Libor, an interbank lending rate that is based upon fiction, since bank’s no longer trust one another’s financial statements.  The Libor rates impacts billions, indeed trillions, of financial transactions, from adjustable rate mortgages to derivatives and swaps.

·      A banker from Goldman Sachs is currently on trial and appears to have been convicted for misleading clients.  Many say, not an uncommon practice on the Street.  UBS just paid a record fine for it's betrayal of it's clients.

·      J.P. Morgan, a la Enron, has been accused of rigging energy markets, and is attempting to pay out a $440 million fine, to put the issue behind it.  So much for Sarbanes Oxley!

·      The Wall Street cartel is presently under investigation for rigging the swaps and derivatives market.  The embodiment of collusion is none other than the International Swaps and Derivatives Association, collusion made legal.  This organization governs an opaque market, worth 100’s of trillions in notional value, and there is not a bank, central bank, or government on the planet that can secure or reinsure this market.  And yet, the instruments of our destruction and malaise, derivatives and swaps, continues to be sold in unregulated markets, and exclusively by their purveyor, the Leviathan.  Derivatives of course, have a very real use in insuring direct counter-parties; however, the vast majority of this market consists of naked shorts, that is to say, pure speculation.  The dance that nearly destroyed the world economy continues.

Those are just some of the activities Wall Street banks have been up to lately; and let's not forget M&A activity, often driven by the Street, that invariably kills jobs through synergy, and allows CEOs to parachute out wealthy.  Despite soaring legal bills, the banks continue to report out record profits.  In fact, the banking industry is one of the largest employers in the United States, and they like it that way.  This, plus mercenary battalions of lobbyist and attorneys and boatloads of cash, allows the banks to make their thoughts and feeling known in Congress and with the regulatory bodies they've captured.  Besides high unemployment not only keeps the FED printing truck loads of currency, but it also keeps wages low and stagnating…. A boon for any major U.S. employer. 

So as you can see, the cartel has a vested interest in maintaining high unemployment and low inflation.   Of course core CPI conveniently leaves out headline inflation, and many other variables – such as college tuition and ever soaring energy prices (this, despite having achieving U.S. energy independence) -  that impacts 99% of Americans daily, and allows the FED to keep printing money at an extraordinary pace.

As for vertical integration… well judging from Wall Street bank behavior, the Leviathan has locked a tentacle into nearly every facet of your life, and judging from the near record fines, often nefariously.  From a gamed commodities market to mortgage rates and derivatives contracts that are all rigged by Libor, to ripping off their clients, and interest rate suppression by the world’s central banks: Why an American would have to be very naïve to believe that the manner in which Wall Street banks behave daily isn’t impacting American business, investors, and the 99%, and in particular, their wallets and employment prospects.  Many of these banking activities are a direct and unseen tax upon your life.  

Perhaps inadvertantly, the FED has created a perverse incentive for banks, shadow banking, and private equity - and the businesses they collectively own and operate - not to hire American.  As such - isn't it time for the FED to take away this incentive?

Truly, the Leviathan is vertically integrated.  It has a tentacle in nearly every aspect of your life, from the cradle to the grave; if it could charge interest and fees on your prayers, and sell derivative bets on your prospects for heaven and hell, it would do so. 

Give them time.  

In the meantime, the only measure of the FED's success is the stock market, otherwise QE has been a failure.  Perhaps it's time to stop measuring the FED's success by a benchmark that favors so few; but that assumes the FED is independent from the Leviathan's mechanization.

P.S.  There is probably no worse candidate for future FED chairperson than Mr. Lawrence Summers.  Mr. Summers played a key role during the Clinton years in helping to finish off proposed derivatives and swaps regulation, and in ending Glass-Steagall.  As such, arguably, he may not be fit to run Harvard, let alone the Fed's omnipotent power.  The FED has a regulatory role and plenty of power to rein in banks, but Mr. Summers is least likely to exercise those powers.  Quite simply, he's the Leviathan's man!

Mr. Summers personifies my belief, oft stated in these pages, that we live in a one party state, where both parties have been captured by the plutocracy, and the government is merely there to do the plutocracy's bidding, at the expense of the 99%.  Many of us look forward to being convinced otherwise.

Copyright JM Hamilton Publishing 2013