Part I: Why the US rate cut may kill the dollar
Central bankers, economists and analysts are an anxious lot. As stock markets across continents are inexorably linked to the US Fed, they realise that the move to cut interest rates has far reaching implications. They know for sure that to save the United States' financial sector as a whole from complete collapse, the Fed has taken a huge gamble, especially on the dollar.
This could, in turn, have a debilitating impact on the US financial sector, American economy and by extension on the global economy, as talked about in the previous part of this column.
But as global markets debate the rate cut move, the US Fed -- the author of the move itself -- goes virtually un-scrutinised and unquestioned, in and outside the US. Crucially, the approach of the Fed to savings, investments, stock markets and the symbiotic link provided to all these is central to understanding its motives and what drives its decisions.
Interest rate cuts -- Who benefits?
Despite being dependent on other countries for funding its trade deficit, the US establishment has never been bothered about domestic savings. It is in this connection that Ben Bernanke, who was the head of George Bush's Council of Economic Advisers and subsequently became the Fed chief, had suggested in 2005 that the world suffers from excessive savings -- what he termed as 'savings glut,' implying lack of investment opportunities within developing countries.
Further, he argued that people save less in developed countries, especially in the Anglo Saxon ones, because of the sophistication in their financial markets -- read investments in stock markets -- and that higher savings in other countries is because of the 'poor returns' and 'underdeveloped markets.'
And Bernanke is not alone in this matter. In fact, this is the thinking within the Fed. . . Bernanke's predecessor, Alan Greenspan, a celebrated economist and a Fed chief for over 18 years between 1987 and 2005 in his book The Age of Turbulence, goes a step further and theorises that the propensity of the people to save is a sign of underdevelopment.
In contrast, he points out how developed countries, through their vast financial networks, enable a 'significant fraction of the consumers to spend beyond their current incomes.' In short, according to Greenspan, Bernanke and the Fed, savings is a sin, spending a virtue.
This paradigm was captured brilliantly by The Economist which in a paper published on April 7, 2005, points out: 'It may be a virtue, but in much of the rich world thrift has become unfashionable. Household saving rates in many OECD (Organisation for Economic Co-operation and Development) countries have fallen sharply in recent years. Anglo-Saxon countries -- America, Canada, Britain, Australia and New Zealand --have the lowest rates of household savings. Americans, on average, save less than 1 per cent of their after-tax income today, compared with 7 per cent in the beginning of the 1990s. In Australia and New Zealand, personal saving rates are negative as people borrow to consume more than they earn.'
All these are not as simple as it seems on superficial examination -- an issue related to the importance of savings in an economy. What is crucial to remember is that if the developing ones do not fund the developed ones, especially the Anglo-Saxon countries, for the requirement of their capital, these 'developed' countries could come to a grinding halt. This is one issue that Alan Greenspan failed to answer in his book.
Naturally, as savings are scarce and remain only in the hands of the developing countries, it is in the strategic interest of the developed countries to pay lower rate of interest for such 'import of capital.' And contrary to popular belief, it is this export of capital from the developing country that is sustaining the developed ones, not the other way around.
But that is not the end of the matter. Crucially, by lowering interest rates, Ben Bernanke and his predecessor at the Fed have been batting openly for the routing of the capital from developing to the developed countries and from investments bearing fixed rates of interest to the stock markets, not only within the US but also outside.
With substantial US investments in global corporates and in stock markets across the globe, a cut in interest rates is in the interest of US economy and also American corporates.
Move savings into the hands of the corporates
To understand the above a return to the textbooks is necessary. Fundamental economics tells us that interest rate cut leads to two consequences.
First, it acts as a disincentive to savings and it simultaneously encourages spending. The second consequence is far more complex. It moves money from the hands of individuals to the corporates through two routes: one, as stated above, it encourages spending in the hands of individuals -- which means more income to corporates; and, two, it acts as an dampener for interest-related
I term this as the double-dose booster plan by the Fed for the markets.
Naturally, as individuals are prevented from saving in interest-related investments, viz. banks, and are simultaneously encouraged to spend, interest rate cuts effectively are a double-dose booster for stock markets. No wonder, as interest rates are cut by the US Fed, corporates and by extension stock markets across the globe are jubilant.
After all it must be the biggest subsidy, albeit implicitly, provided by the State to the (stock) markets and by the developing countries to the developed ones!
The calculated effort of the US Federal system to shift savings from the households to the corporates, not only within the US but also outside the US, as briefly explained above is central to the approach of Fed. And that would explain the logic propounded by the Fed.
In fact, it would seem that the Fed is wedded to cause of the American corporates rather than American citizens. And in this process anyone or any institution (including the institution of family which by its very structure encourages savings) has to be de-legitimised, de-recognised, even destroyed. And it shall be done systematically by the powers that be.
The net result: America's savings rate has fallen to historic lows as mentioned above to less than 1 per cent. It does not require an economist to state who is the net beneficiary of all this.
But who controls the Fed?
Before one proceeds to critically analyse the Fed, it is important to note its significance. It is in effect the central bank of the world. Naturally, it needs to be put under maximum global scrutiny. Despite such overwhelming requirement there is an important difference between the Fed and the other central banks. If most of the central banks are state owned or government controlled, the Fed is an exception to this fundamental rule.
Readers may be surprised to note that the US Fed system is neither controlled by the US government nor is it a private body, subject to oversight by a Regulator. Rather, as some analyst put it so succinctly, it is a cartel of private banks. And it is structured in such a manner that its functioning is absolutely independent and secret -- even the US President or the US Congress cannot interfere in its working.
Now the crucial question: who owns or controls these private banks that, in turn, control the US Federal system? Different studies, conducted at various periods of time, have repeatedly pointed out that the owners of these banks include some of the best and well-known global financial giants controlled by a few families.
Since these are private banks, ownership details are not disclosed to the public, there is considerable speculation about the ownership of Fed. This is part of historical arrangement within the US.
But why should these private bankers be interested in controlling an interest rate regime? The final piece in this global jigsaw puzzle: Approximately 75 per cent of the shares (another 10-15 per cent are with the pension funds) of Fortune 500 companies are with these investment bankers, who in turn own/control the Fed. No wonder, the Wall Street is interested in the Fed and the Fed is interested in Wall Street. It does take two to tango.
Good luck to the dollar
Needless to reiterate, it is in the interest of these investment bankers to ensure lower interest rates to profit from the double-dose booster plan as explained above. In other countries that would go in the name of lobbying. In the US it becomes highly sophisticated.
Where is the question of lobbying when you have enslaved the regulator itself? And that explains the fixation of the US Fed with lower interest rates, stock markets and rewarding reckless borrowers and lenders even at the cost of endangering the dollar.
The first indicator that the US dollar is going to have a torrid future is borne out of the fact that ever since the Fed announced the cut in interest rates the value of gold has shot through the roof and hit the all time high of $925 per troy ounce (even as I write this).
Naturally, other commodities, viz. silver, crude oil, uranium, palladium, copper, tin, et cetera, will follow the pattern of gold in the coming days.
And when prices of commodities go up, the net beneficiary would once again be American corporates who, anticipating these developments, would already have built up significant positions on these commodities or planned some other alternatives.
In the process if the dollar is affected, who cares? Not the Fed, definitely. After all it is a creation of the Wall Street, by the Wall Street, for the Wall Street.
For a variety of reasons it would seem that endangering the dollar is in the interest of the Wall Street at this point in time. The Fed has merely obeyed its masters at Wall Street. Good luck to the US dollar!
The author is a Chennai-based chartered accountant. He can be contacted at mrv1000@rediffmail.com