Digest: Why the Government Is Actively Trying to Cause a Recession

Welcome to your weekly digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week, why the Federal Reserve is deliberately forcing the U.S. into a recession. 

Minutes from the Fed’s December meeting were released on Wednesday and they showed officials speaking with uncommon candor.  

During 2022, the Fed raised interest rates at the fastest pace in four decades in an effort to tackle the inflation crisis. This policy caused a collapse in the prices of stocks, bonds, crypto, and real estate.  

But the strength of the Fed’s response also led to periodic bouts of optimism that the inflation crisis would be shorter than previously feared. This, in turn, caused several small market rebounds during the year. 

These rebounds clearly frustrated Fed officials, since they were undermining the Fed’s core objective of slowing the economy. 

As the Fed noted in the minutes from the December meeting, “An unwarranted easing in financial conditions, especially if driven by a misperception by the public of” how the Fed will respond to economic conditions “would complicate the committee’s effort to restore price stability.” 

In other words, by raising interest rates, the Fed is deliberately working to slow the economy. It wants to lower stock and housing prices and slow hiring and wage growth. It wants to make Americans poorer so it can get inflation under control and rectify its own economic ignorance when it originally claimed inflation would not result from all the free money the government and the Fed has vomited up in recent years. And it’s frustrated that the economy hasn’t slowed even faster than it already has. 

But here’s the thing… The Fed’s strategy is fundamentally unsound. It cannot, has not, and will not work. 

As I’ve repeatedly pointed out, inflation is a global problem with diverse, international causes.  

The Fed has no control over the war in Ukraine and the food and energy crises it has sparked. It has no control over the supply chain quagmire that emerged in the wake of the pandemic. It has no control over the droughts and flood impacting global food production. And it has no control over the chaos now emerging in China’s economy since it abruptly canceled its zero-COVID policy, leading to mass outbreaks that are filling up Chinese hospitals. This will likely result in an economic slowdown in China, the world’s factory floor. 

The Fed has no control over any of that. And yet, it’s crushing asset prices and job growth in America, and it’s annoyed when the markets display any optimism or hope that the crisis might pass. 

This, to me, indicates trouble ahead… 

The Fed is so transfixed on curing inflation that it’s willing to achieve this goal at any cost, even if it means killing the patient (i.e. the U.S. economy). 

The correct path forward now would be to hold rates at their current level, wait to gauge their longer-term effects, and allow consumers to manage inflation on their own by shifting their purchasing patterns. 

However, the Fed has never been one to take the smart or sensible approach. So, expect more interest rates hikes and more wealth destruction ahead. 

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Next up…the world is turning away from the dollar.  

As discussed above, the Fed went on an interest rate-hiking bender in 2022, pushing up rates from 0.25% to 4.5% in the span of just a year. 

This also pushed the value of the dollar up sharply against other major world currencies.  

Currencies trade as pairs, so if the dollar offers a higher interest rate than, say, the pound, traders will sell pounds to buy dollars, which makes the dollar stronger. 

But a strong dollar is a major problem for other countries around the world.  

The U.S. dollar is the global reserve currency, which means most global trade (about 85%) happens in dollars.  

Imagine for a second that your own an import company in England. You want to buy noodles from China to sell in your domestic market. This trade will almost certainly happen in U.S. dollars. 

Over the past year, those noodles have become significantly more expensive for you to buy from China, since you need to trade your pounds for dollars to make the purchase, even though the exchange rate between the pound and Chinese yuan may not have changed.  

So, in this way, we can see that Uncle Sam’s strategy to tackle inflation in America has been to export inflation to the rest of the world. 

That’s all well and good. The U.S. has the power to pursue this strategy because it has King Dollar, but other countries are not happy about it. And they are looking for ways out… 

India has signed a deal with the United Arab Emirates to transact more in the rupee and to set up trade settlement agreements that bypass the dollar. 

Malaysia, Indonesia, Singapore and Thailand have set up systems to transact between each other in their local currencies rather than the greenback.  

And the percentage of international trade settled in China’s yuan has reached 7% and is climbing. 

The U.S. enjoys a dominant global position thanks to the dollar, but in tackling this inflation crisis so aggressively, it may have overplayed its hand and forced countries to actively find ways to escape the dollar’s dominance.  

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Finally, speaking of ways to transact internationally outside the dollar… 

Turkey’s central bank has conducted the first tests of its Turkish digital lira. 

This is a central bank digital currency—an official sovereign currency based on crypto technology. Turkey says it expects to launch this year full pilot tests of its CBDC involving private banks and financial technology companies.  

Turkey is just the latest significant economy to announce steps like this. China has already partially rolled out its CBDC to consumers, while India is also in the pilot phase of its CBDC project. The Bank of England, meanwhile, has put out proposals for a digital wallet to hold a digital pound that is very likely on the way. 

One of the key attractions of these currencies is that they could allow countries to bypass the dollar entirely and trade directly between each other in their sovereign digital currencies, just as crypto traders today can trade one coin for another instantly. 

It’s no coincidence that the most developed CBDC programs are found in countries such as China that would be more than happy to see the end of the dollar era. 

This is one of the key trends to watch this year and next, because it will mean the beginning of an entirely new economic era. 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.