Putting the ‘F’ in CFR

Age of Wisdom, Age of Foolishness (17)

Written by , KeySignals.com

“In Like Flynn”

Putting the ‘F’ Back in Federal Reserve” observed how “Team America” prepared the way for global cooperation between the Developed and Emerging Nations; in a way that will allow the Fed to “Taper” without the same instability that plagued the global economy, for the second half of 2013, after the “Taper” became reality[i]. G20 Sydney advanced this cause of global cooperation. As the curtains came down on the spectacle of Sochi however, it appeared that the “Fat Lady” was already singing the end of all such cooperative notions. In short order, the Ukraine split into new putative breakaway republics and the Russian Federation moved “in like Flynn” to the Crimea. Capital markets struggled to discount all this new Balkanization.

There are some consistent themes running beneath these apparently confusing global cross currents. Whilst the GOP grandees were busily trying to turn the clock back[ii] President Obama opined that this is not your father’s Cold War; therefore it would be a mistake to discount a return to this form of global attrition[iii].

“Now and Then”

As we noted in “Putting the ‘F’ Back in  Federal Reserve”[iv], President Putin is ostensibly a member of the “Committee to Save the World”; himself being a direct descendent of the original “Committee”. Both he and “Team America” share common threats, which have “Pivoted” from Afghanistan to the Levant and Caucasus. In addition, he has been the great enabler of America’s “Pivot” away from the Middle East towards China. The incursion into the Crimea therefore needs to be seen in this perspective; rather than through the narrow GOP Cold War prism. More than 50% of the Crimean population is ethnic Russian, less than 30% is Ukrainian; and then between 12% and 15% is ethnic Tatar. The Tatars represent the metamorphosis of the common Islamic threat, emanating from the Caucasus, which is the lowest common denominator with America. When President Obama emerged from the huddle, for a rapidly convened press briefing post Russian incursion, his ambivalent tone signaled American understanding of the complexity of the situation and respect for Russian interest[v]. American self-interest is the riddle, inside the mystery of Russian self-interest, wrapped in the enigma of President Putin. The Crimea is a place where great powers redraw maps to fit the unfolding global dialectic; and it would appear that a new redrawing is in process with complicit understanding of the great powers involved.

There is one emerging great power that is still struggling in this new role. This great power is of course the EU. “Team America” is most concerned to elicit the correct response from the EU as “Team Europe”.

This expected response is supposed to be the adoption of an economic stimulus plan and bailout for Peripheral economies. Thus far, “Team Europe” has been a sock puppet that hides the economic and political agenda of Germany. This agenda is associated with the Freshwater School of economics which is anathema to the Saltwater Keynesians from MIT who are now established at the Fed, US Treasury and the ECB.

“Not Your Grandfather’s Yalta Conference”

The Ukrainian incident is now a key event which will be used to make “Team Europe” play the role envisaged by “Team America”. When Mrs Merkel visited Britain last week, the red carpet was extended the full nine-yards longer than what was rolled out for Mr Hollande. She responded with alacrity, in role play worthy of Metternich, by balancing the need for European reform delicately with the need to be more inclusive[vi]. Whilst everything is cosy on the European front, relations between America and Germany are from it. Germany is particularly angered by the NSA spying on Mrs Merkel[vii]. If Germany played the role envisaged by “Team America” however, the need for this kind of spying would go away.

John Kerry also showed himself willing to get “in like Flynn”, by announcing the intentions and capabilities of the State Department in its Annual Report on Human Rights[viii]. In his opening address to this report Secretary Kerry wrote:

Too many governments continue to tighten their grasp on free expression, association, and assembly, using increasingly repressive laws, politically motivated prosecutions and even new technologies to deny citizens their universal human rights, in the public square and in virtual space.

This is a signature change in US foreign policy. There was less emphasis on the threat from the Axis of Evil, Al Qaeda or even the Evil Empire as Russia was once known. In fact, America is very keen to say that it is at war with no one at present; nor does it feel specifically threatened. The State Department goes out of its way to opine that Democracy itself is being threatened globally. In so far as Democracy is threatened, then it is implied that American values are indirectly threatened. As Secretary Hagel scales back American military size, to fit the new economic constraints and America “Pivots” in search of free markets that are growing, Democratic values underpin the whole strategy. Thus having sponsored Democracy, with such catalysts as “Arab Spring”, America is keen to see it develop. Where Democracy becomes subverted by dictatorship and conflicting ideology, America criticizes those who it initially encouraged to aspire to democratic values. Thus the Muslim Brotherhood and the regime that recently replaced them are put on watch that America takes the side of the agents of Democracy rather than specific actors. This principle should put the new government of Ukraine on watch, that it must live up to these principles to continue to receive America’s blessing. It should also put President Putin on watch, that cooperation with America does not extend to allowing the democratic cause in Russia to be diminished. “A friend of Democracy is my friend and an enemy of Democracy is my enemy”, becomes the new lexicon of diplomacy in the multipolar world of global relations.

As we observed in “Putting the ‘F’ Back in Federal Reserve”, Liberal Democracy evolves conspiracies to deal with dictatorships. An essential part of these conspiracies are the global agencies and NGO’s, which are financed by the Liberal Democracies, to promote their values. This amounts to policy execution by proxy, to avoid the traditional violent confrontation which follows from direct policy action. It was therefore timely to see Christine Lagarde’s IMF swiftly mobilise to assist “Team America”.

“The Orange Revolution’s Little Orange Book”

The IMF brains trust of Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides recently published the IMF Staff Discussion Note (SDN/14/02) entitled Redistribution, Inequality, and Growth[ix]. The IMF is now changing its own spots as America changes its spots. Having been all for austerity and debt reduction, the IMF is now for income redistribution. The change of rhetoric directly reflects the Obama Administration’s new emphasis on the Middle Class and the Fed’s new interest in the Wealth Effect and Income rather than Unemployment. Income inequality is now being framed as the greatest threat to economic growth. Politically speaking, income inequality is also what leads to instability and the domestic conflicts, which are now unfolding in the Emerging World, as the Fed “Tapers” and removes the rising tide that once supported all. Income inequality and its solution are therefore challenges facing both the Emerging and Developed Nations. These conflicts are also seen developing on the “Periphery” of the Developed Nations. On a more humorous note, it was amusing to see that the IMF omitted to opine that central bank quantitative easing has exacerbated these inequalities in wealth which now threaten the world of nations. Central Banks have therefore threatened the democratic values that America embraces.

For those who are perplexed therefore, by events unfolding in the news and the markets, the guides for the perplexed have been written by the State Department and the IMF. Democracy is to be bolstered; and where it is threatened by income inequality this must be rebalanced. All actions, by policy makers and central bankers in both Developed and Emerging Nations, will be dovetailed along these two broad policy guidelines.

“Pivoting” further east into the Orient, the next testing ground for this new mantra will be the upcoming China Peoples’ Congress. “Likonomics” has thus far reciprocated smoothly with the new global policy agenda. Income inequality is being purged from the system; and where this has been associated with a misallocation of economic resources market derived interest rates are now being applied to resolve it. To the alarmist, the application of this medicine will taste like a crisis. For the observer who has read the guides for the perplexed all this will resonate with the new global agenda.

In Age of Wisdom, Age of Foolishness (15) “Putting the ‘F’ Back in Federal Reserve”[x] the return of Richard Fisher, to become a voting member of the FOMC, was noted because this return was marked by a decline in his vociferous dissent.

The New Old “Team America”
Richard Fisher- “Far Right”!!!

Fisher was noted as a member of Pete Peterson’s original “Team America”. At his latest appearance in Frankfurt, Fisher made it clear that he expected fiscal policy to replace the Fed stimulus; although he admitted that he would lose any argument to accelerate the pace of the “Taper” with his FOMC colleagues. He therefore sent the clear signal that a fiscal policy stimulus is coming; and that the Fed will not respond to the inflationary implications of this stimulus with any zeal. For the normally colourful and outspoken Fisher, this quiet aside was much louder than all his previous canting dissent. Having seen the epiphany of the “Quiet American” Nathan Sheets at Treasury and the coincident minimum wage rhetoric building, it is clear that Fisher was giving the gambler’s tell signal that inflationary fiscal policy is about to be enabled by an obliging Fed. From our perspective the engineering of minimum wage hikes, through the agency of the tax code, with the Fed on hand to enable this policy is the same thing as “Helicopter Money”.

Confirmation of the signal provided by Fisher came from the GOP itself. Firstly, Speaker Boehner embraced President Obama’s offer to address the minimum wage issue in a bipartisan framework[xi]. Secondly, the Republicans themselves have now outdone the Democrats by proposing that Wall Street bank levies should finance new tax cuts. Robin Hood and his Merry Men are now loose in both parties, stealing from the Rich to give to the Poor. Neither party will admit that the Fed has made the Rich richer and the Poor poorer since 2009 however; because they know that the Fed is still required for the next trick. Clearly both parties are now on the same page; in terms of stimulating Democratic values by wealth transfers. In order to finance these transfers however, the Fed will need to support asset prices; and provide companies with liquidity at low interest rates in order to carry the higher payroll cost. The risk is of course that all this democratic fervour will lead to the big threat to democracy known as inflation; but this is some way off in real economic terms and thousands of points away in equity index price terms. The Germans know all about this, which is why they are dragging their heels; Paul Volcker knows all about this and he is remaining quiet for now.


  1. Putting the ‘F’ Back in Federal Reserve
  2. Top Republicans Call for Return to Cold War
  3. President Obama: Russia disputes ‘not some Cold War chessboard’
  4. Putting the ‘F’ Back in Federal Reserve
  5. Ukraine crisis: Obama warns Russia against intervention
  6. Angela Merkel: EU reform not ‘piece of cake’
  7. Germany Says U.S. Spying Requires Serious Discussion
  8. 2013 Country Reports on Human Rights Practices
  9. Redistribution, Inequality, and Growth
  10. Putting the ‘F’ Back in Federal Reserve
  11. Obama Hosts Boehner in Discussing Immigration, Trade

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