The Punctured Bag and the Firehose

Few people are able to see through the smoke and grasp the sinister machinations of the Federal Reserve, the US Treasury and their affiliate the European Central Bank. It’s possible to endlessly pour over news articles, faithfully read all of the Fed’s reports and maybe even take night classes in macroeconomics and finance, and still not have much of an intuitive grasp of what’s happening. Statistics don’t so much lie as just sit there and let you stare at them blankly without a clue as to what all of it really means.

And yet once in a while a statistic catches my eye that describes the situation quite eloquently. Here is one: 83% of all the US dollars that now exist in the world have been summoned into existence during just the past 22 months; since May 2021, that is. Four out of every five dollars in existence has been conjured up pretty much yesterday in historical terms.

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And so it begins… Financial Crisis of 2023

Banks are failing, financial markets are swooning and the Fed is once again getting ready to step in and turn on the dollar liquidity firehose. Whereas the previous financial crisis of 2007-2008 was caused by credit risk (subprime mortgages bundled into toxic mortgage-backed securities, remember all that?) and risk of market failure, this one is caused by an interest rate crisis: the Fed tried to reign in inflation caused by its previous crisis management by hiking interest rates faster than it had ever done during the previous 45 years or so. This made various low-yield financial instruments held by banks worth a lot less. This is not necessarily a problem (the banks have various mechanisms to fix cash flow problems)… unless there is a bank run, forcing the banks to sell their not very valuable financial instruments for not enough money, resulting in bankruptcy.

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A Cold War Do-Over or the Way of the Red Panda

In his recent address to the Federal Assembly, Putin announced that Russia is suspending its participation in the late Soviet-era Strategic Arms Limitation Treaty and, shortly thereafter, the Russian parliament ratified this decision. Since then, many commentators have tried to make sense of this decision, often using terms such as “a new nuclear arms race” and “the likelihood of nuclear war.” But I am yet to hear from anyone what I think this actually means: a Cold War do-over. Also, I don’t think that this decision raises the chance of nuclear war at all because it remains too risky for either side. Those who think that nuclear wars are meant to be fought by blowing up lots of nuclear weapons don’t understand the term “strategy”: nuclear wars are fought by developing, testing and deploying nuclear weapons — or failing to do so. The side that fails to keep up and provide for the sine qua non of nuclear strategy — mutual assured destruction — is forced to forfeit, sue for peace and accept whatever terms are offered by the winning side. This is precisely what happened to the USSR under Gorbachev. It was thought at the time that the USSR would not be able to keep up with Ronald Reagan’s Strategic Defense Initiative, a.k.a. “Star Wars.” Consequently the USSR folded, the country fell apart, and then Russia, which inherited the USSR’s strategic arsenal, signed a humiliating agreement that allowed Americans access to its secret strategic objects and required Russia to cut up for scrap many of its prized rockets and bombers. It later turned out that “Star Wars” was pretty much a bunch of Hollywood smoke and mirrors, as befits a president who was a grade B actor turned politician, but by then the USSR was no more.

What happened over the intervening decades can, I believe, be adequately described by the phrase “The agony of victory and the thrill of defeat.”

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