On the Fundamental Conflict of Interests between the U.S. Government and Wall Street

Since Trump took office, he has been pressuring Powell to quickly cut interest rates. At first, Powell remained silent, but later, with the outbreak of the trade war, Powell employed a tactic of "using their spear to attack their shield," attributing his reasons for not cutting rates to the fact that tariffs could potentially stimulate inflation.

On the surface, it seems that Trump is being unreasonable and engaging in workplace bullying, as his reckless behavior erodes the independence of the Federal Reserve, because he attempts to downgrade the Federal Reserve to a department of the federal government. However, in a recent interview, Trump made an interesting remark about Powell: Federal Reserve Chairman Powell is quite political.

So, is Powell's insistence on not cutting rates a political maneuver? The answer depends on our understanding of the interest rate system.

If we firmly believe in the so-called common sense—that cutting rates will stimulate secondary inflation—then Powell's actions are not wrong. Conversely, if we view it through the lens of cross-border capital flow models, we would arrive at the opposite conclusion: cutting rates would lead to the withdrawal of hot money from overseas, which would actually help reduce inflation. Therefore, Powell must be protecting the interests of a certain group.

In this article, we will primarily explore the unconventional path, looking at how Powell protects Wall Street's interests.

Interest Rates, Rent, and Inflation

If we believe Wall Street's nonsense, we would certainly conclude that the lower the interest rates, the higher the rent. Therefore, maintaining high interest rates is the only way to curb the rapid growth of rent.

However, if we connect the cross-border capital flow model with Say's Law, we arrive at a very interesting conclusion: the higher the interest rates, the higher the rent.

1. Cross-Border Capital Flow Model

The above diagram depicts a very simple story: when the Federal Reserve maintains high interest rates while the average interest rates in non-U.S. banking systems remain unchanged, deposits will move globally. As a result, the balance sheets of U.S. banks expand, while those of non-U.S. banks contract.

It is not difficult to see that this is a story about stock resources; deposits will spontaneously flow to places with higher deposit interest rates. The reason this story is simple is that, on a micro level, depositors will also place their deposits in banks with higher interest rates.

2. Say's Law

Say's Law tells us that supply automatically creates demand. In other words, the demand for a specific factor x comes from the supply of a bundle of other factors.

Thus, we arrive at the above diagram: when the supply of other factors expands, the demand curve for land expands from D1 to D2. It is evident that deposits are an extremely important resource, and the inflow of overseas deposits will expand the demand curve for land

Furthermore, if we assume that the supply of land in the United States is inelastic, with the supply curve as S1, when the demand curve for land expands from D1 to D2, we will find that the rent price rises from P1 to P2.

In summary, when we combine the model of cross-border capital flows with Say's Law, we can easily conclude that the higher the federal funds rate, the higher the land rent and the higher the housing rent.

Interestingly, the proportion of rent in the U.S. CPI is about 30-36%.

Thus, we arrive at a rather peculiar conclusion: the reason why the U.S. CPI reading remains at 2.7% is that the Federal Reserve maintains a high policy rate.

Conflict Between the U.S. Government and Wall Street

On one hand, the ten-year U.S. Treasury yield remains above 4.2%.

On the other hand, the total U.S. national debt has risen to $36.83 trillion. Therefore, a higher federal funds rate will impose a high interest cost on the U.S. government; after all, a 1% rate difference can lead to an additional interest cost of $368.3 billion.

Thus, the U.S. government's calculations are clear, and Trump has repeatedly called for Powell to immediately cut rates by 1%.

So, where are Wall Street's interests? First, a higher federal funds rate locks in a large amount of overseas deposits, supporting the U.S. stock market.

Once this money leaves, can the U.S. stock market hold up? No one knows.

Secondly, the U.S. economy is highly financialized, with various forms of economic rent permeating its GDP; the essence of income in sectors such as healthcare, insurance, law, and real estate is interest.

In other words, if the Federal Reserve cannot maintain high interest rates and overseas hot money flows out, then U.S. land rents will fall, leading to a recession in the real estate sector.

The high degree of financialization in the United States means that many industries are essentially "rent-seeking industries" (ps: Michael Hudson refers to these sectors as the FIRE sector). The story of the real estate industry will not be an isolated case; there will be a significant decline in EPS across various industries.

In other words, interest rate cuts may lead to a collective recession in America's "rent-seeking industries," which is what Wall Street cannot tolerate.

If the above reasoning is true, then we will see a different Federal Reserve, one that is solely focused on "rent-seeking industries."

The Federal Reserve attracted global hot money through high interest rates and used this hot money to ensure the flourishing of "rent-seeking industries." The prosperity of these industries further pushed up inflation, which the Federal Reserve could then use as a reason to refuse to cut interest rates. Therefore, "rate hikes - inflation - rate hikes" is a self-fulfilling cycle. In simple terms, this is an alternative Ponzi scheme.

When the reasoning reaches this point, looking back at Trump's erratic demands (ps: frequently calling for the Federal Reserve to cut rates by 1-2%), we no longer see Trump as someone completely ignorant of finance.

Trump also has a famous saying: No testing, no virus.

Once the Federal Reserve cuts rates by 1-2%, a massive withdrawal of overseas hot money will expose various problems in the U.S. economy. At that time, people will be concerned about recession issues; will anyone still care about inflation?? Everyone will complain that the Federal Reserve cut rates too late.

This situation is so bizarre: the Federal Reserve holds off on cutting rates, Powell is seen as a wise and heroic figure fighting inflation and Trump's bullying; once the Federal Reserve significantly cuts rates, everyone will realize that the Federal Reserve cut rates TOO LATE.

Conclusion

There is no such thing as a free lunch in this world.

The high profits of America's "rent-seeking industries" come, on one hand, from the high costs borne by the American public, and on the other hand, from the high interest rates endured by the U.S. government. Therefore, the conflict between the U.S. government and Wall Street is very sharp. The U.S. government can no longer bear the high interest expenses, yet greedy capitalists are still thinking about "holding on for another month."

Once we abandon toxic dogmas like "cutting rates stimulates the economy" and "cutting rates stimulates inflation," we will find:

1. Powell is not a white lotus; he has been covering up until he can no longer do so;

2. The Federal Reserve is not that independent; they serve capital and the interests of Wall Street;

Recently, the U.S. non-farm payroll data has been disastrous, with poor data for May, June, and July, coupled with the resignation of board member Kugler, the U.S. government has finally gained the upper hand. Therefore, the probability of the Federal Reserve cutting rates in September is extremely high. If the U.S. is indeed pushed into recession by rate cuts, please do not be surprised; it only indicates that "cutting rates stimulates the economy" and "cutting rates stimulates inflation" are just nonsense used by Wall Street to deceive people. Finally, this article does not attempt to persuade anyone; its main purpose is exploration, exploring new paths of reasoning.

This article is sourced from: Cang Hai Yi Tu Gou, original title: "On the Fundamental Conflict of Interests Between the U.S. Government and Wall Street"

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