On the fundamental conflict of interest between the U.S. government and Wall Street.

Since Trump took office, he has been pressuring Powell to lower interest rates quickly. At first, Powell remained silent, but later the trade war broke out, and Powell played a move of 'using their spear to attack their shield', attributing the reason for not lowering interest rates to - tariffs possibly stimulating inflation.

On the surface, Trump appears to be unreasonable and engaging in workplace bullying, as his reckless behavior is undermining the independence of the Federal Reserve, because he is attempting to downgrade the Federal Reserve to a department of the federal government. However, in a recent interview, Trump gave a rather interesting comment about Powell: Federal Reserve Chairman Powell is quite politically colored.

So, is Powell's insistence on not lowering interest rates a politicized operation?? The answer depends on our understanding of the interest rate system.

If we firmly believe in the so-called common sense—that interest rate cuts will stimulate secondary inflation—then Powell's actions are not wrong. Conversely, if we look at it through the model of cross-border capital flows, we would reach the opposite conclusion: interest rate cuts would lead to the withdrawal of overseas hot money, which in turn would help reduce inflation. Therefore, Powell must be protecting the interests of a certain group.

In this article, we mainly start along the path of counterintuitive thinking, let's take a look at how Powell protects the interests of Wall Street.

Interest Rates, Rent, and Inflation

If we believe the nonsense from Wall Street, we would definitely 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 an interesting conclusion: the higher the interest rate, the higher the rent.

1. Cross-border capital flow model

The above figure depicts a very simple story: when the Federal Reserve maintains high interest rates and the average interest rates in non-U.S. banking systems remain unchanged, a global deposit migration occurs. As a result, the balance sheets of U.S. banking systems expand, while the balance sheets of non-U.S. banking systems contract.

It is not hard to find that this is a story about stock resources, where deposits will spontaneously flow to places with higher deposit rates. The reason this story is simple is that at the micro level, depositors will also put their deposits in banks with higher interest rates.

2. Say's Law

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

Thus, we have obtained the above figure, where the demand curve for land expands from D1 to D2 when the supply of other factors expands. 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 a supply curve of 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, rent accounts for about 30-36% of the CPI in the United States.

Thus, we came to a very peculiar conclusion: the reason why the CPI reading in the United States remains at 2.7% is because the Federal Reserve maintains high policy rates.

Conflict Between the U.S. Government and Wall Street

On one hand, the yield on the 10-year U.S. Treasury remains above 4.2%.

On the other hand, the total amount of U.S. national debt has risen to 36.83 trillion. Therefore, a higher federal funds rate will impose a significant interest cost on the U.S. government, as a 1% interest rate differential could result in an additional $368.3 billion in interest costs.

So, the U.S. government's account is very clear; Trump has spoken out more than once, demanding Powell to immediately cut interest rates by 1%.

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

Once this money runs away, can the US stock market hold up?? No one knows.

Secondly, the U.S. economy is highly financialized, with various forms of economic rents embedded within its GDP, where the essence of income in industries such as healthcare, insurance, law, and real estate is interest.

In other words, once the Federal Reserve cannot maintain high interest rates and hot money flows out of the domestic market, then the rental prices in the U.S. will decline, indicating a recession in the real estate industry.

The high degree of financialization in the United States means that many industries are essentially "rent-seeking industries" (note: 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, a rate cut could lead to a collective recession in the "rent-seeking industry" in the United States, which is what Wall Street can least tolerate.

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

The Federal Reserve has attracted global hot money through high interest rates and has used this hot money to ensure the flourishing of the "rent-seeking industry." The prosperity of these industries has further pushed up inflation, allowing the Federal Reserve to refuse to cut interest rates on this basis. 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 crazy demands (ps: frequently asking the Federal Reserve to cut interest rates by 1-2%), we no longer think of Trump as a complete outsider who knows nothing about finance.

Trump has another famous saying: no virus without testing.

Once the Federal Reserve cuts interest rates by 1-2%, a large amount of overseas hot money will withdraw, and various problems in the US economy will be exposed. At that time, people will be concerned about the recession issue; 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 is reluctant to lower interest rates, Powell is a wise and mighty figure, a tragic hero fighting against inflation and Trump's bullying; once the Federal Reserve significantly lowers interest rates, everyone will realize that the Federal Reserve lowered rates TOO LATE.

Conclusion

There is no free lunch in the world.

The high profits of the "rent-seeking industry" in the United States come partly from the American public who bear high costs, and partly from the high interest rates borne by the U.S. government. Therefore, the conflict between the U.S. government and Wall Street is very sharp, as the U.S. government can no longer bear the hefty interest payments, yet the greedy capitalists are still thinking about "let everyone hold on for another month."

Once we abandon toxic dogmas like "lowering interest rates to stimulate the economy" and "lowering interest rates to stimulate inflation," we will find that:

1. Powell is not a white lotus at all; he has been covering things up until he can no longer hide it.

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

Recently, the non-farm data in the U.S. has been terrible, with poor non-farm data for May, June, and July. Coupled with the resignation of Governor Kuger, the U.S. government has finally gained the upper hand. Therefore, the probability of the Federal Reserve lowering interest rates in September is very high. If the U.S. does enter a recession due to interest rate cuts, please do not be surprised, as it simply indicates that "lowering interest rates stimulates the economy" and "lowering interest rates stimulates inflation" are just nonsense used by Wall Street to fool people.

In the end, this article does not attempt to persuade anyone; its main purpose is to explore, to explore new paths of reasoning.