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Charles Hugh Smith: Beware False Either/ Or Choices–Especially with the Fed

Echoing Sun Tzu (“All warfare is based on deception”), successful central banking is based on deception masked by a torrent of transparency.

Guest Post by Charles Hugh Smith from his blog on OfTwoMinds.com: 

One classic form of manipulation is to set up a false either / or choice, as if there are no other choices. For example, while our political choice is limited to Red and Blue, a great many people are revolted by the excesses of both parties–possible even a majority. This doesn’t mean non-partisans favor <i<>purple–a mix of self-serving failed policies from both obsolete garbage scows; many favor an entirely new frame of reference that requires retiring both garbage scows.

Other false either / or choices include: growth vs. anti-growth, ecological limits vs. innovation and Fed tightening vs. Fed easing.

What we want is growth of efficiencies, conservation, productivity and faster-better-cheaper, not “growth” of wasteful consumption in the Landfill Economy.

What we want are innovations that scale and don’t require vast resources that serve to lower humanity’s burden on planetary ecosystems.

As for the Fed tightening or easing–that’s a false dichotomy as well. Recall that the Fed serves not just as the central bank of the U.S., but of the entire world. Trillions of dollars in Fed backstops and guarantees in the 2008-09 Global Financial Meltdown saved foreign banks and propped up other central banks.

In other words, it’s not all-or-nothing: the Fed can ease here and tighten there. Given Triffin’s Paradox, the Fed must play 3-D chess, not about inflation and stable employment, but about the U.S. domestic economy as a whole and the global economy and financial system. Call it whatever you want, but that’s the game the Fed must play.

Here are a few of the many posts I’ve written on Triffin’s Paradox:

What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)

Understanding the “Exorbitant Privilege” of the U.S. Dollar (November 19, 2012)

The Big-Picture Economy, Part 1: Labor, Imports and the Dollar (September 23, 2013)

The Fed has a variety of tools to manage the game boards. While the punditry is transfixed by the Fed Balance Sheet and Money Supply, there are other things going on in discount windows, swaps, (for example, Central Bank Liquidity Swap Operations), and in the Fed’s Repo and Reverse Repo markets.

The Fed also uses proxies. Major players buy and sell at the behest of the Fed. (Below is a graphical depiction of the machinery.)

The point is tightening or easing is a false either / or. The better question is: what is being tightened and eased at the same time via various tools and proxies, as part of a larger strategic program?

Echoing Sun Tzu (“All warfare is based on deception”), successful central banking is based on deception masked by a torrent of transparency.

Guest Post by Charles Hugh Smith from his blog on OfTwoMinds.com.


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