How to Defeat Failed Chicago Mayor Rahm Emanuel

This past week witnessed another round of the currency chaos, triggered by seemingly contradictory statements from the failed Federal Reserve chair Janet Yellen. For several years now, the Federal Reserve has been under pressure to raise interest rates. The pressure comes largely from the rentier interest, meaning rich plutocrats who have lots of cash and want to earn a higher return on their holdings. For these plutocrats, the Fed’s post-2008 regime of interest rates close to zero has been a continuing disappointment. Joining in the chorus to raise interest rates are also the self-styled libertarians and Paultards, always eager to raise their voices in the service of wealthy predators. The feckless Yellen has been gradually bending to this rate hike pressure, even though the stock market has lurched sharply downward at her every previous step away from easy money.

In the wake of the bankruptcy of Lehman Brothers and the rest of the Wall Street zombie banks, the privately controlled central bank has tried a $27 trillion line of credit to troubled financiers, plus three rounds of support operations for bankrupt, kited derivatives designated in public as Quantitative Easing. These operations have added more than $3 trillion in junk to the Fed balance sheet, and have not produced a lasting recovery. Instead, most of this hot money has immediately become flight capital headed towards the hottest speculative markets on the planet. In 2009-2010, the Pelosi Democrats in the House pushed through a half-baked Keynesian consumer led-recovery in the form of the Stimulus and the Supplemental, for a total of about $1.2 trillion. This effort produced some positive results in the short run, but these results began to fade as soon as the money began to run out under the attacks of the Tea Party fanatics. The Keynesian approach had not revived capital goods production, and thus failed to overcome the depression.

Mellonite-Austrians like Ron Paul, Peter Schiff, and the 60-odd GOP congressman who currently make up that gaggle of sociopaths that calls itself the “Freedom Caucus” have been agitating since the 2008 panic for their classic remedy: a total deflationary crash that would bring the nation to its knees, after which they promise that a full recovery would quickly and magically ensue. Their favorite model for this is the 1920 panic and depression, which they regard as a model to be imitated today — never knowing, or perhaps forgetting, that the most lasting effect of the 1920 panic was to set the stage for the emergence of fascist rule in Italy in October 1922. When the libertarian legions of greed bully Yellen to raise interest rates, they are actually campaigning to put the United States through the ringer of just such an all-out deflationary crash, since it is widely known that 0% borrowing is now the only thing propping up stocks, real estate, but also auto. These libertarians are people who have money and who are convinced they will continue to have money, so that when the crash is over, they will be able to buy valuable assets for pennies on the dollar. Those assets will include the labor of people like you and your family.

In addition to hot money, Keynesian stimulus, and all-out deflationary crash, there is also the actual solution advocated here, which comes down to a Hamiltonian dirigist credit stimulus obtained by nationalizing the Federal Reserve, in whole or in part, to provide $5 trillion in 0% long-term federal credit for a massive infrastructure program, supplemented by more than $1 trillion in refinancing to freeze the crushing student debt burden by getting interest rates down to 0%.

To sum up, Yellen is currently embracing the hot money variant. If she raises interest rates, she will be moving — whether she knows it or not — towards the deflationary crash option. The Keynesian stimulus plan has been relegated to some academics and political organizations embedded in the left wing of the Democratic Party.

This past week, the Federal Reserve’s communiqué finally stopped describing its approach to interest rate policies as “patient,” which was widely interpreted as meaning that interest rates would be raised for the first time in over five years at the Fed’s mid-June meeting. But Yellen, speaking at a press conference after the Fed confab, stressed that the lack of patience does not necessarily mean impatience, leaving greedy speculators to make their own guesses.

Yellen’s confusion led to immediate chaos in currency markets, where the desirability of parking huge masses of hot money in a given currency is greatly influenced by the interest rates prevailing in that currency. First, the euro rose by three cents or 2.5% against the dollar on Wednesday, scoring its biggest single day gains since 2008. Then, on Thursday, the dollar gained back 1.9% against the euro. These are extraordinarily large fluctuations for major currencies, to say the least.

By the end of the week the dollar was still down by 1.5% against the euro on the week, and down 1.2% in relation to 10 major currencies, according to the Bloomberg Dollar Spot Index, making this the worst week for the US greenback since July 2013.

However, this new round of dollar instability should not be attributed primarily to Yellen’s substandard public-relations skills. For the past six months, world currency markets have been buffeted by hurricane force winds, signaling in all probability a new and more acute phase of the current world economic and financial depression.

In October 2014, Japanese economic authorities carrying out the policy known as Abenomics massively increased their own Quantitative Easing program, rapidly expanding their money supply and making the yen cheaper compared to other currencies. In December, Belarus responded to an incipient collapse of its ruble by imposing currency controls and exchange controls. After the Russian ruble had declined by almost 50%, Moscow adopted its own informal currency and exchange controls, administered by government officials stationed in the offices of the main financial actors.

The Singapore dollar has been falling for three straight quarters, and its prospects are considered to be at their worst since the time of the 1998 Asian Contagion crisis. The Singapore dollar is significant in its own right, and also because it serves as a speculative proxy for the currencies of neighboring Thailand and Indonesia. In mid-January, Swiss authorities abandoned their euro peg, and the Swiss franc went up by about 30% in a single day, one of the largest major currency moves in recent history. But within less than a month, this vast uptick was surpassed on the downside by the Ukrainian hryvnia, which fell by 45% in a single day, as a result of contorted maneuverings for self-preservation by the Kiev central bank.

Shortly after the Swiss up-valuation, the attention of speculators turned to Denmark, which has similarly pegged its currency to the euro. In order to defend this peg, Danish authorities have had to lower their interest rates four times in three weeks, reaching an all time modern low at negative 0.75%. The speculators have backed off for the moment, but are most likely regrouping for another attack.

The Swiss shock was immediately followed by Mario Draghi’s announcement that the European Central Bank would indulge in €1 trillion of its own Quantitative Easing, and the euro has been falling ever since, reaching a 12 year low against the dollar just before Yellen got into the act.

The half-year of instability we have summed up can thus be attributed to two main factors: first, many countries – most notably Japan — are attempting to exit the depression via competitive devaluation to increase their market share of world exports by driving down their own currencies and thus pricing their competitors out of the market. The second factor is that the Fed functions in reality as the central bank for most of the world, and any move to raise interest rates in Washington has the effect of sucking hot money out of various Third World speculative markets which superficial observers have regarded over recent years as economic powerhouses — when they were merely the beneficiaries of the fact that the hot money advocates momentarily had the upper hand in Washington.

However, these recent events are even more ominous. We have just received another object lesson in the fact that currency values are determined primarily if not exclusively on the basis of hot money forward yields. The Dodd-Frank law is already a failure, as former Maryland Governor Martin O’Malley wrote this week in the Des Moines Register. In addition, the grave problems associated with automated trading and program trading, including flash trading, obviously remain unresolved. As the Wall Street Journal wrote on March 20, 2015:

“[The dollar-euro] episode intensified many traders’ concerns about liquidity – the capacity to buy or sell quickly at a quoted price. Many currency trading firms reported difficulty executing desired trades, and automated trading programs added to the swings by offering euros and dollars and higher or lower prices than many traders said they expected. Bond traders also reported difficulties trading US treasury securities.” There is also the problem of cascading stop loss orders, which became harder and harder to fill as the US currency continued to fall. Wednesday’s events were a demonstration that any unexpected financial or economic event might be capable of triggering a panic based primarily on automated trading and stop loss orders. A major systemic crash could, in short, occur at any time. The only way to prevent another derivatives-based world panic like 2008 is to implement the 1% Wall Street Sales Tax, which would restore stability to these market permanently.

The final proof that a return to the fixed currency exchange rates or parities of the Bretton Woods system (1944-1971) are necessary for the economic prosperity of humankind comes from the haute couture House of Chanel in Paris. On March 17, Chanel headquarters in Paris announced that the company would increase the prices for its designer handbags sold in Europe under the brands of Louis Vuitton, Gucci, and Chanel, while reducing prices on the same merchandise sold in China. The cause was the depreciation of the euro, which had reduced the price of a Chanel bag bought in Paris to less than $4,000, as against the price of just under $5,000 in New York and $6,000 in Beijing. Enterprising traders were buying up the designer items in Europe, shipping them to China, and selling them just under their market price there, resulting in a flourishing gray market. Here then is yet another market thrown into chaos by the post-Bretton Woods currency anarchy.