The financial crisis will not happen

This phenomenon occurs quite rarely, always in the event of liquidity crises, i.e. in times of great financial stress such as in 2008 or at the start of the Covid crisis. It translates into a gluttonous appetite for the US dollar sought after by the entire planet because it is sorely lacking. It is of course the most fragile who toast first, like what is happening at the very beginning of the year in Egypt where almost a single dollar no longer circulates. It must be said that 2,200 billion of these dollars have been withdrawn from the markets, and therefore from State treasuries, corporate and private accounts over the past 20 months by the US Federal Reserve, having made the fight against inflation its top priority. As it is the only one able to issue this coveted greenback, the whole world is trying to borrow it.

In reality, it is a two-speed 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 it 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 crisis in March 2020: they had the immediate consequence of lowering the routs in the making by more than a notch and considerably reduce hysteria.

There is therefore 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”, likely on a moonless night to initially contaminate the all the cogs before making them implode, in the absence of its vital liquidity. It therefore has no choice but by this headlong rush which 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 has the effect of slowing down the real economy – the American Federal Reserve now also plays the crucial role of firefighter towards the virtual economy: that of a great peacemaker, by neutralizing any hint of volatility of which the markets have a holy horror.

This second attribution of the one that remains the most powerful central bank by the grace of the imperium of its universal arbiter currency now 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 therefore now 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 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.