Masters of the financial universe lift US interest rates and inflict their crisis
The US Federal Reserve recently raised by a quarter percentage point the interest banks charge each other. This generally expected rate rise had been clamoured for by 'sages' in the financial media who argued the need for the Federal Reserve to protect monetary credibility by raising the federal funds rate.
Why has this interest rate rise occurred after years of near zero interest rates in the US which was ostensibly to stimulate the productive economy? Because the machinations of the financial system threatens its own very existence!
Banks' excess reserves of money capital
Normally the purpose of a rise in interest rates is to halt demand for credit and control inflation. Presently the US banking system has no need to borrow for it has in excess of $2.42 trillion in reserves.
Avaricious investors, searching for new ways to achieve high returns after the fiasco of the subprime mortgage bubble, have been using cheap credit to invest in the corporate and junk bond market rather than investing in the productive economy. The US junk bond market more than doubled the volume of issuance in the years before the Global Financial Crisis (GFC), and in 2013 reached a record of $361 billion.
However the decline in the productive economy - drop in sales of manufactured goods, fall off in trade and crash in prices for gas, metals and oil - is now threatening to undermine the US bond market and destabilise the whole financial and banking system.
Recently the growing crisis in the US high-yield but high-risk junk bond market erupted and saw the closing down of three energy junk bond funds - Lucidus Capital Partners, Stone Lion Capital and Third Avenue. Their closure was caused by the collapse in oil prices below $40 a barrel and an avalanche of clients calling in their bond investments that finance houses could not honour, which caused a fire-sale in the $1.3 trillion junk bond market.
When the US Federal Reserve reduced interest rates close to zero and forced down long-term rates it increased enormously the junk bond business, which are bonds issued by finance houses with high levels of debt and low credit ratings and therefore a high risk market.
Looking around for emerging countries to exploit
Whilst the US had near zero interest rates, bond funds using cheap credit reached all over the world to find high yield assets to invest in. Investors were buying securities backed commodities and sovereign debt bonds from Asia-Pacific and South American markets.
Now investors have lost faith in betting on high risk financial assets achieving high dividends in these markets, which are full of insecurity and trepidation. The capitalist world started to shudder when in August this year the Shanghai stock market steeply dived and losses in stock markets around globe reached hundreds of billions of dollars.
Seven years after the bankruptcies of the GFC days, this crisis continues with more casualties occurring from one geographical region to another, from one business sector to another. The emerging (developing) countries of the Asia Pacific region that depend on the export of commodities for their income are now facing a serious brake on their economies.
Money comes home to the masters of the financial universe
And now investment money is coming home to the wallets of Wall Street moguls, its real masters. They have decided it is more secure to place their money in US Treasury bonds for the moment.
Despite the colossal public debt, investors have faith that US will not declare bankruptcy for now. If this ever happened the US would lose its dominant status as a reserve currency, and weaken Washington's political hegemony of the globe.
Even though other currencies like the Chinese yuan have expanded their influence, faith in the US dollar has not weakened since the GFC crisis of 2008. Consequently there has been a fall of the emerging countries’ stock markets and exchange rates.
The International Monetary Fund (IMF) asked the US to not increase its federal funds rate until 2016 or later, to forestall the increasing global financial panic.
So now this money will be assembled and employed to create acquisitions and mergers of US enterprises, as opposed to massively increase production and reduce unemployment. US finance houses and banks have increased their levels of money capital through mainly speculative ventures in the stock market and less to supplying credit to small and medium business.
The rise in the federal funds rate will have a negative effect on small banks. When these small banks become fully loaned up, by lending to businesses and consumers in their community, and are in need of extra reserves to meet their reserve conditions, they will have to borrow from a larger bank with excess reserves.
Therefore the interest rate rise results in the smaller banks paying more for their loans to the big banks. Consequently the Federal Reserve favours the mega-banks who have mega-reserves and predatorily exploit the small banks, businesses and consumers.
Central banks have differences but not over exploiting workers
In contrast to the US plans of steadily raising the cost of credit, Europe and Japan are organising to commence an aggressive boost to their supply of credit programs. There is no consensus among the three strongest central banks on how monetary policies should be used to overcome the global recession.
This was evident in the Group of 20 (G20) summit, held November this year in Antalya, Turkey. Therefore there is the certainty that instability of the financial markets will not decrease, but will rise for some time to come.
However, agreement was found among the G20 principal looters of the world to increase and hone their exploitation of their respective working classes via ever-increasing structural reforms. Although reforms to regulate financial activities of hedge funds and corporate tax evasion are slow to amount to anything and lack any real bite.
The money capital paradises that the masters (whether it be in Berlin, Brussels, London, Paris, Tokyo, or New York) of the financial universe operate are presently secure and their rules unassailable. The rapacious policies of the central banks, such as the Federal Reserve, actually subsidize the expansion of speculative and parasitic financial activities of hedge funds and derivatives.
The administration of near-to-free credit to investors produced boon profits and another transfer of wealth from the bottom to the extreme top, and has created another new debt and credit crisis that threatens to again cause the collapse of the capitalist financial system.