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Alasdair Macleod: To rescue markets, pivoting Fed will wreck dollar
By Alasdair Macleod
Thursday, March 16, 2023
Following the day-to-day twists and turns of a banking crisis can make us lose sight of the bigger picture. It is tempting to think that the banking authorities are in control and will secure the integrity of their commercial banking networks. Unfolding events may or may not prove this to be true.
The bigger picture is that the 40-year decline in interest rates is over, as well as the financial bubble that has built up with it. We should also be aware that there is a cycle of bank credit, the downturn of which is long overdue. The two have come together to create chaos in credit markets.
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The reality is that central banks have already lost control over monetary policy and interest rates. Interest rates are now being driven by contracting bank credit, not by monetary policy.
The point commonly missed is that contracting credit at a time when credit demand is still increasing inevitably leads to higher interest rates and bad debts.
Having lost control over interest rates, the Federal Reserve has been forced into its much-heralded pivot, not by reducing interest rates, but by offering to buy Treasury and agency debt at face value whatever the coupon and maturity. This rescues banks from the immediate fate that collapsed Silicon Valley Bank. And it makes it easier for the U.S. Treasury to fund its deficit while containing borrowing costs.
But it is highly inflationary.
The pivot has now been made. The Fed has decided to rescue financial markets at the expense of the currency. Other central banks can be expected to follow suit to help rescue their banking systems. But they are writing the death warrants for their fiat currencies. ...
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