American capitalism has broken: now everyone is for themselves

8:45, 12 сентября 2021

МОСКВА, 11 сентября 2021, Институт РУССТРАТ.

The phrase put in the title is not an exaggeration at all. Over the past few days, the heads of the leading economic departments of the United States have made a number of essentially revolutionary statements.

Thus, in a letter to the US Congress, the country’s Finance Minister Janet Yellen stated a few days ago: “When all available measures and means will be completely exhausted, the United States will be unable to fulfil its obligations for the first time in history.”

Translated from their bureaucratic newspeak into normal language, this means two inevitable prospects. Firstly, the money available to the American government will definitely run out within the next three weeks. Whether congress critters want it or not, they will have to authorise an increase in the national debt level from the current $28.7 trillion to “very much higher”.

Secondly, since the American economy continues to be one of the key segments of the global economy, and new loans are increasingly being less and less taken by foreign borrowers, whose share in the total volume of US government debt has shrunk to 26.6% (the lowest figure since 2008!), this process will cause an acceleration of inflation not only within American markets, but will inevitably lead to a similar result in global markets, including Russia. And these are the prices for building materials, housing, cars, gasoline, vegetables, fruits, meat, fish, oil, and so on – in full swing.

It cannot be said that the American economy got sick only yesterday. Americans have been living beyond their means since the early 1980s. But if it took them 6 years to eat up $2 trillion during that period (the US national debt in 1986 was 2 trillion, in 1992 – 4 trillion), then in just 8 months of 2021, the size of America’s public debt jumped by 1.3 trillion!

And most importantly, the volume of REPO operations (short-term “interception” of free money in the market by banks in the “overnight” mode to quickly close holes in their own liquidity) in the American financial sector has risen from $40-60 billion in 2010 to more than 500 billion already at the beginning of 2020. Moreover, if earlier commercial banks “quickly borrowed” only from each other, then after the crisis of 2007-2008, the Federal Reserve System began to conduct REPO transactions directly.

And now the head of the Fed, Jerome Powell, has announced two big pierces of news. The first is that the Fed is radically changing the rules of its ERLP (Emergency REPO Loan Program) program. In its new version, the term REPO remains, but instead of the “overnight” mode (a short loan for one night or one day), banks will receive “short money” for 30-60 days. Formally, not all of them, but only the major ones, without providing collateral, because the offices which belong to this category are “too big to fail”. And, yes, the Fed does not expect to charge them for using the “new REPO”.

Also important is the fact that the Fed is going to decide itself in the future whether they will comply with the set bar of $500 billion in the total volume of “overnight loans” issued, or exceed it “if it seems necessary”. This means that the real size of the total debt of the American banking and financial system of the United States definitely exceeds the official figure of 28.7 trillion. It cannot be excluded that the hidden part of the” loans for the night to their own ones ” will exceed $1 trillion by the end of this year.

The Fed leadership clearly understands how all this will end for the economy, even such a huge one as the American one. As well as the fact that they are loosing control of the process.  They print money out of thin air not because they can, but because they are unable to stop. If the influx of inflated money is stopped, the American economy, like a carriage from a fairy tale, will immediately “turn into a pumpkin”.

However, the process of its degradation has already become irreversible.

The second piece of news from the Fed is even more interesting.

In order to somehow delay the beginning of the “panic” that will finally kill it, Powell announced that now the Fed stops publishing data on the state of American GDP. Formally – because of  “the complexity of calculating GDP according to the updated methodology due to the presence of new highly volatile variables in our model”. In fact, due to the obvious excess of the share of exchange indicators that reflect anything but the actual economy.

In other words, both the US Treasury and the dollar printing press stated the same idea. A terrible thing has started in the United States – the American economic pool has overflowed. The Fed’s money poured into it accelerates inflation, which becomes uncontrollable. The question is not even that it has already reached 5.4% – the highest level in the past 13 years. Worse, it jumped by 3.2 percentage points, that is, by half, in just a year and a half. Thus, more than clearly confirming the conclusion about the pool.

And the worst thing is that all the existing mechanisms to contain it have stopped working. The Fed’s rate is already “at zero” (0-0.25% per annum), actually making money free. There is nowhere to lower it further. According to the rules, it should be unscrewed in the opposite direction. Ideally – up to 4-5% per annum. But it is impossible to do this due to the total unprofitability of the American economy as a whole and impossibility to afford servicing of the already accumulated debt.

After all, here’s how it looks like. The US GDP at the end of 2019 was $23.165 trillion. During 2020, allegedly for saving the economy from the economic consequences of the coronavirus pandemic, the Fed “printed” $9 trillion, but by the end of the year, GDP reached only $27.5 trillion.  That is, it grew by only 4.3 trillion, and where did the remaining 4.665 trillion go?

They went to cover the current losses. Consequently, the current unprofitability of the US economy is already 20.13%. If we use the same method to calculate previously produced QE programs, it is easy to see that in 2008-2009, the calculated loss rate did not exceed 3-4% in this way. It turns out that over the past decade, the unprofitability of the United States has jumped by about 5-7 times.

So the sudden desire of the Fed to stop showing others the figures of the current state of the US economy (and here there is also the event in Afghanistan) is completely understandable. Just do not rush to rejoice. Whatever it is, America still forms 31.1% of the total world economy, about 40% of international settlements are carried out in dollars and up to 60% of all assets on the planet are denominated. Therefore, the US will not sink quietly. “Blowback” will cover everyone.

PS. By the way, experts of the RUSSTRAT Institute warned in June about the possibility of such a scenario here