Donald Trump And The Fed Have ‘Ended The Free Market’
The U.S. Federal Reserve, under close scrutiny from president Donald Trump, has made the historic move a pump a staggering $6 trillion of liquidity into the economy since the coronavirus pandemic began.
The Fed's extraordinary actions have been mirrored, and even exceeded, by other central banks around the world as countries seek to offset the economic damage wrought by widespread coronavirus lockdowns.
Now, as stocks and currency markets frantically seek direction, Deutsche Bank has warned this is "the end of the free market"—branding it a "zombie" market.
"There is no such thing as a free market anymore," Deutsche Bank's global head of foreign exchange research, George Saravelos, wrote in a special report titled: The end of the free market: impact on currencies and beyond.
"In a matter of weeks, policymakers have become a backstop for private-sector credit markets. At the extreme, central banks could become permanent command economy agents administering equity and credit prices, aggressively subduing financial shocks. It would be a bi-polar world of financial repression with high real economy volatility but very low financial volatility. A 'zombie' market."
The Fed's rapid interest rate cut to zero and its gigantic raft of credit and lending programs easily eclipse the emergency action taken during the 2008 financial crisis.
The Fed moved quicker and hit harder—and investors are scrambling to adjust to the new world order.
"What we're witnessing here is nothing less than the death of capitalism and birth of something new," said Mati Greenspan, the founder of analysis and advisory firm Quantum Economics. "It's quite fascinating, really."
"By offering to buy an 'unlimited' amount of assets from the market the Fed is basically saying that they'd rather nationalize the markets than see prices drop. What started out a decade ago as an experiment in monetary policy now has us witnessing the transition to a new economic system."
Traders, accustomed to the Fed's market interventions coming rarely and being well telegraphed, have begun looking over their shoulders for unexpected stimulus.
"There's no doubt stock markets and currency markets are being hugely manipulated by central bankers," said financial author and trading veteran Glen Goodman, who made a name for himself by successfully navigating stock markets during the 2008 global financial crisis.
"Every time I place a trade now, I have to be prepared to get out quick if I'm wrongfooted by a surprise Fed announcement."
Despite the massive action from the Fed already, analysts are still trying to guess just how far it will go to support markets.
"Our punchline is that the ultimate impact of the current environment on exchange rate volatility is ambivalent and depends on how far central banks are willing to go in pursuit of financial repression," Deutsche Bank's Saravelos wrote.
"The more central bankers control global asset prices, the more this could offset higher real economy volatility on exchange rates resulting from the exhaustion of policy space."
As a result, traders and investors are desperately searching for markets that are free of interference.
"Commodities markets and cryptocurrency markets are thankfully one step removed from the Federal Reserve's decisions," said Goodman.
"The Fed still affects them, but it doesn't control them in such a direct fashion. This could end up working rather well for crypto exchanges, as traditional traders start looking more fondly at one of the last refuges of free trading in the world."
Bitcoin and cryptocurrency prices, still highly volatile, have remained relatively stable over recent months with bitcoin more-or-less flat since January—though it has seen some wild swings.
"Crypto is the freest market we have left because it’s independent of central banks and monetary policy," said Steve Ehrlich, chief executive of crypto trading platform Voyager Digital, pointing to bitcoin's hard limit of 21 million tokens as the antithesis of the Fed's massive quantitative easing and adding his exchange has seen an increase in stablecoin purchases recently "as investors seek safe-havens for their assets."
"Governments around the world have tried to create strict regulations and even shut [bitcoin] down, but by nature, it can’t be controlled the way other markets can. Central banks can’t print more bitcoin or make it more scarce."
Meanwhile, bitcoin is set to see its coin reward to so-called miners fall from 12.5 bitcoin per block to 6.25 on May 13, with the cryptocurrency community already looking forward to what's expected to be one of the biggest ever events in crypto.
There have been two bitcoin halvings since bitcoin was created in 2009, one in 2012 and another in 2016. Bitcoin halvings are scheduled to continue roughly once every four years until the maximum supply of 21 million bitcoins has been generated by the network—something that isn't expected to happen until well into the next century.
"This [bitcoin halving] event will drive its inflation rate below the U.S. dollar and could cause less bitcoin to be mined in the short term, creating a situation where the supply is greater than the demand," Ehrlich said.
"This, combined with the overprinting of fiat currencies, directly highlights the value of bitcoin and decentralized currencies. We believe that because of this, the halving will again catapult the price of bitcoin over the next year."
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