Charles Hugh Smith has penned a great set of arguments for why the Fed must taper. It’s a great piece and we won’t print it all here, so go and give it a read if you haven’t already. We like his general argument, but we read it with a healthy skepticism. Why? Because America may have already crossed a crucial tipping-point which makes his argument (possibly) irrelevant. Without further ado, we’ll jump straight to the part that troubles us:
If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.
Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied “free money.”
For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed’s free money are not even secondary.
We would love for those sentences to ring true in our ears, but there’s a nagging question that needs to be addressed: Does the Deep State really matter?
CHS has frequently discussed the “Deep State” in his writings. By “Deep State” he refers to [we paraphrase] the core of the Imperium, or that set of central actors and interests whose future is directly aligned with the survival and success of the State itself. Smith makes a solid case for the growing rift between the Deep State and the Federal Reserve, as the money-printing of the latter clearly debases the power and potential of the former. And we don’t disagree. The Deep State is indeed getting a bit jittery watching the empire fall apart at the fringes. As Iraq burns, Ukraine falls back into the fold of an old nemesis, and the supposed “Pivot to Asia” looks to have already been aborted as red lights start blinking furiously across the global threat-map. The threats to the mighty greenback are increasing too, as monetary swap deals between China, Russia, Brazil and India slowly eat away at the dollar’s central position as the world’s reserve currency. The “Deep State” is watching it’s power erode at an ever increasing clip — and the Fed, while not wholly to blame, is a major contributor to the Deep State’s precipitous tumble from historic strength.
But back to our beef: Does the growing anxiety of the Deep State matter?
The ultimate question comes down to “Where does power actually reside in the USA”? Smith has answered, [again, we paraphrase] “With the Deep State”. In his analysis, the Deep State is the ultimate mover in both monetary and foreign policy. All debates according to Smith, must end when the survival of the Empire enters the frame.
But allow us to ask a somewhat disturbing follow-up: What if the Deep State isn’t where power resides anymore? What if the State has essentially already been deposed by the Fed/Banking cartel and their beltway puppets? What if traditional power has already shifted? What if the nature of power in America today is that it has become dangerously, if not terminally, disconnected from the Deep State? In Smith’s analysis, such disconnects are short-lived, and ultimately revert to the core: The power of the State ultimately trumps the power of other interests operating within the framework of the nation-state.
But what if that’s not true?
Money, as we all know, is liquid. It moves fluidly across borders and is not easily controlled.
If the US were to enter a terminal blow-off state of an inflationary supernova — would the banking elite actually care? Or would they see such potentially-massive near-term profits that the ultimate “short” might be America itself?
If there’s one dynamic which defines the financial crisis and the resulting circus of fraud, graft and insider-dealing, that dynamic is “short termism”. Or put another way, who cares about tomorrow, when the getting is just so good today.
We don’t deny the power of the Deep State. But we do question it’s supremacy in an era that may have already witnessed a historic shift in the balance of power towards non-state actors .