A financial crisis occurs quite rarely, always in the event of liquidity crises like the great financial stress in 2008 or at the start of the Covid-19 pandemic. During such an event, there is a gluttonous appetite for the US dollar as the entire planet is sorely lacking it. This results in the most fragile players throwing in the towel like what happened at the start of the year in Egypt, where its currency weakened further against the dollar. It must be said that 2.2 trillion of these dollars have been withdrawn from the various markets, State treasuries, and corporate and private accounts. The demand for the greenback is causing inflation and the US Federal Reserve is doing its best to combat it.

In reality, it is a “two-wire fan” American central bank — somewhat schizophrenic — that the experts see emerging before their eyes thanks to the repetitive crises. This unavowable dichotomy could only come to light thanks to the very energetic rise in its interest rates in recent months. Indeed, while the US Federal Reserve stiffens its monetary policy in order to break growth by slowing consumption; at the same time and in parallel, it continues its mission as a major provider of liquidity in order to contain volatility on the sacrosanct financial markets. Let us remember the trillions poured into the system during the panic due to the credit crisis of 2008 or the Covid-19 crisis in March 2020 — they had the immediate consequence of lowering a retreat in the making by more than a notch and considerably reduce hysteria.

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Therefore, there is an indisputable contradiction between a monetary policy which on the one hand, is becoming tougher in a life-and-death fight against inflation and on the other hand, an unlimited generosity which seeks to cushion the shocks to businesses and banks. Yes, the Fed is well aware of the extreme complexity that financial products have become today — some of which are decked out with the dreamy name of “exotics” — like on a moonless night to initially contaminate all the cogs before making them implode, in the absence of its vital liquidity. It has no choice but by this headlong rush that allows (for the moment) the quadrillion of derivatives to continue to be exchanged. From a traditional central bank whose mission is to fight against inflation — which it does by vigorously raising its rates, which also has the effect of slowing down the real economy — the Fed now plays the crucial role of firefighter towards the virtual economy; that of a great peacemaker, by neutralising any hint of volatility of which the markets have a holy horror.

This second attribution of the most powerful central bank (by the grace of the imperium of its universal arbiter currency) clearly takes precedence over the first (fight against inflationary pressures). So much so that the younger generations of analysts — having not lived through the inflationary outbreaks of the 70s and 80s — are now convinced that these massive injections of liquidity into the system aimed at refinancing it eternally constitute the normal and conventional mission of a central bank. Liquidity at all costs has since become the hard drug of the market, companies and even households, which were all in the front row to benefit from it during the Covid-19 crisis.

From the Fed through the Bank of Japan and up to the ECB, the intertwining of our central banks in the financial system is now intense, inbred.

For more information about Michel Santi, visit his website: michelsanti.fr/en

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