dollar Markets politics

The United States Has No Government. The Fed And Steve Mnuchin Are Serving As Caretakers

On Monday, reports indicated that The White House was pondering the prospect of Donald Trump taking unilateral action to extend supplementary federal unemployment benefits and an eviction moratorium if Congress didn’t manage to find a compromise on the next virus relief package.

Trump, sources said, is worried that the economy will take another turn for the worse with just three months to go until the election.

The Senate is set to take their summer break on Friday, which is just insult to injury for everyday Americans. So little do some of the country’s elected representatives care about the plight of the people they work for (i.e., voters) that they assume it’s their prerogative to take (another) vacation, irrespective of whether there’s an agreement to help rescue millions of people from economic ruin. The House is already on break, although they’re “on call”, as it were, should the Senate manage to agree on something with a chance of making it through both chambers and eventually to Trump’s desk.

Mitch McConnell intends to compel votes on a hodgepodge of GOP proposals which together are supposed to be viewed as a comprehensive package. None of them will ultimately pass because some Republicans are against providing any further stimulus for Americans whatsoever, a position so callous and politically suicidal that one struggles to comprehend how a rational political operative could possibly adopt it.

Democrats, on the other hand, are opposed to half-measures and stopgaps, and are holding out for a real solution rather than a piecemeal approach that leaves the country in limbo.

It’s not clear what kind of unilateral action Trump could legally take. He’s an autocrat when you don’t want one, but when you could use an authoritarian approach, he suddenly loses his nerve. Rest assured no legislature would be holding up a stimulus package that Recep Tayyip Erdoğan wanted passed by the end of the week.

And let’s face it, the federal response to the epidemic has been (and continues to be) a colossal failure — a total abdication of duty at the highest levels of government, (mis)informed at every turn by a steadfast refusal to let policy be guided by science.

Time and time again, the administration was warned that failure to contain the outbreak prior to re-opening the economy would result in rolling shutdowns, as state and local officials played Whac-a-Mole with a biological threat that nobody fully understands.

Fast forward two months from the onset of the re-opening push and here we are with ~155,000 dead Americans or, for context, more fatalities than combined US battle deaths in World War I, Vietnam, Korea, and Iraq. You can even include 9/11.

This is, simply put, a complete failure of government.

While some states succeeded in implementing containment protocols consistent with similar efforts adopted abroad, the re-opening push in the Sun Belt was implemented too early and in haphazard fashion. From the early days of the outbreak, the administration’s legendary disdain for science and juvenile approach to dealing with Democratic state governors, undermined the effectiveness of the federal response.

Even that’s a generous assessment. Some reports suggest the plan was always to put the onus on governors in order to ensure that if things went awry, blame could be placed elsewhere. “Their ultimate goal was to shift responsibility for leading the fight against the pandemic from the White House to the states”, The New York Times wrote, in a lengthy exposé last month. “They referred to this as ‘state authority handoff'”.

The Fed (including Jerome Powell) has explicitly linked the economic recovery to the evolution of the virus. That was enshrined in the July FOMC statement. It was almost as if the committee wanted to be on the record, in (literal) writing. “The path of the economy will depend significantly on the course of the virus”, the statement read. Powell reiterated the point in his press conference and his colleagues are emphatic about driving it home.

“While it is noteworthy to see such a direct reference tying the economic outlook — and therefore policy trajectory — to the realities of the public health crisis, we have long warned that the worsening of the virus and rising infection rates means economic activity may be restrained and maybe even reversed in some areas”, BNY Mellon strategist John Velis wrote Monday, adding that,

In those states with the largest increases in case counts, mobility and hours worked are the lowest. Social distancing — voluntary in most instances, and not enforced by top-down mandates — remains pervasive and in some case is increasing. Without a clear retreat of the spread of the virus, economic activity remains constrained. There is historical evidence on pandemics and economic activity, and the record of the 1918 influenza outbreak shows that in cities where social distancing was implemented most stringently, the local economy recovered faster and stronger. 

This is leading to a crisis of confidence in the US dollar. I’ve discussed that across multiple lengthy missives in these pages over the last several weeks.

July was the worst month for the greenback in a decade, and although the fundamental driver from a kind of mechanical, market perspective was plunging US real yields, one has to remember that the reason why the Fed is compelled to push real yields deeply negative is because the country is in crisis. The longer the crisis persists, the longer monetary accommodation will be in place, and the more pressure on the dollar.

Read more

Dollar Decline Goes Decadal

Why ‘The Tide Is Going Out On US Dollar Exceptionalism’

Exceptionalism Lost

As detailed extensively in the linked articles, global confidence in America’s institutional capacity to cope with crises has suffered a grievous blow.

That is now serving as headline fodder for mainstream media outlets.

“The dollar is flashing a warning sign to US policy makers — get a grip on the virus”, reads the first line of a Bloomberg article published Monday. “With cases now exploding at home, the ineffectual American response to the disease has become a millstone for the currency, spurring concern about lasting damage to the US economy that could keep interest rates and growth low for years”.

The silver lining during the first half of 2020 was that Congress avoided the pernicious tendency to pretend as though deficits matter for issuers of reserve currencies during acute crises. There were no atheists in foxholes — no deficit dogmatists in pandemics — earlier this year.

Predictably, the budget hawks have since begun to circle, suspecting that perhaps they can get away with undermining additional spending without triggering an outright economic collapse, now that trillions in aid has already been disbursed.

That is a gamble that nobody in Washington should be willing to take for one simple reason: the public will not forgive a mistake when the proximate cause of the recession was a virus. Just as voters in a hurricane-ravaged city would never forgive lawmakers if disaster relief was not approved, neither will the electorate forgive anyone associated with a refusal to extend critical benefits if the economy were to plunge into a more sustained downturn.

Dithering on the part of lawmakers is further undermining America’s credibility abroad. While the bungled response to the pandemic can be placed at Trump’s feet, Congress is well aware of both his incapacity to develop comprehensive proposals and his willingness to spend borrowed money if it means bolstering the economy. Therefore, the blame at this juncture is on Congress. It is incumbent upon lawmakers to develop a plan and put it on his desk. Clearly, he will sign it. I doubt if he even cares what’s in it. He surely won’t read it.

In addition to a hapless executive, the US has a legislative duopoly that has once again proven itself incapable of acting expeditiously to safeguard the people whose interests it is duty-bound to protect.

The inescapable conclusion is that America effectively does not have a functioning government at the current juncture.

Or, perhaps it’s more accurate to say that the country is being run (de facto) by a caretaker government of technocrats (the Fed) operating under the loose authority of the Treasury secretary.

If you doubt that assessment, I doubt you’ve been paying much attention over the last six months.


11 comments on “The United States Has No Government. The Fed And Steve Mnuchin Are Serving As Caretakers

  1. joesailboat says:

    You have been warning of and do state clearly what it is that our Nation now faces.
    Vacation, really?
    No, self-centeredness run amok.

  2. runamok says:

    Thank you for being frank and for using strong, unambiguous language. Thank you for using bold emphasis in the third paragraph from the bottom.

    Many suspected that the outcome we are experiencing today would be the case, and that the managers of our country would fail in their responsibilities. Now the time has passed and their actions are visible for all to see, the history can be evaluated.

    Three months ago, we suspected we would be where we are today. It was the future and it was too early to say we have no government. Next, we know we are in a depression today, but don’t have the history yet to say so and commit the words. We will in January, if not sooner. I look forward to your posts at that time.

    The handoff of this administration to the next administration (presuming Trump loses) will be a real humdinger. They are going to be handed an economic depression. (This morning I was looking at the collapse of electricity consumption.)

    Our country was abandoned by our elites. For what? Why? Why?

    Thank goodness for the Fed having done a good job responding and keeping the financial economy together. (Honest opinion, no sarcasm.)

  3. Tom says:

    “Therefore, the blame at this juncture is on Congress.”

    More specifically. on the Republican-led Senate. The House has prepared its version of the stimulus bill two months ago. Meanwhile Republican senators cannot even agree on a comprehensive stimulus plan within their own party.

    • joesailboat says:

      They bet the ranch on covid fading in the summer like the flue does. Hence early reopenings in predominantly Southern States, so no need to help Dem states. Trump has lost control of them. My question is whether McConnell is in control and playing hardball or is it pure disarray. We need some Republican Senators to have an epiphany and give Chucky some cheese.

  4. Mr. Lucky says:

    In an effort to reduce what he saw as a risk of upsetting his base in an election year the president made a very risky decision to do nothing and pass the buck to local leaders where nests of supporters could get their way. He reasoned he couldn’t be blamed if the locals screwed up but I strongly suspect he might have been dangerously wrong. He has also found out that time flies when you are screwing up and lots of precious time has been lost through a long sequence of miscalculations throughout government.

  5. It boggles the mind watching the news and seeing all the idiots out partying.

  6. At least in Lebanon, the Foreign Minister had the decency to resign, calling Lebanon a failed state on the way out…I was hoping for the same from at least one Republican, but then I fell off my unicorn…

  7. Joey says:

    It’s easy to say that the Republican senators are making a huge mistake and that the voters will hold them to account. But they clearly don’t see it that way. A week or two ago there was a discussion of what the Republican strategy is here. Anyone care to update opinions on that? Perhaps it is a variety of individual reasons for each Republican senator. But it can’t possibly be that they are blind, stubborn, and unable to do what is politically necessary. Can it?

  8. Jose Diaz says:

    “These violent delights have violent ends, and in their triumph die, like fire and powder,
    which as they kiss consume.”

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