Why One Bank Thinks Yesterday’s Events Are “Only The Beginning”

While the whole world is blaming Trump for what happened yesterday at the Capitol, here is a slightly different take from Rabobank’s economst Philip Marey who last July predicted all of Wednesday’s events in a post we titled “Civil Unrest.” Picking up on what he said, here are his follow up observations:

As we noted last summer in Civil unrest, in a polarized society trust in institutions is vulnerable. We explained how the polarization in the US is a process that has been decades in the making. No matter who had won the elections, the turbulence in US politics and society was not likely to pass. Protest, riot, insurrection, sedition, coup, … all of these terms have been mentioned on television. The ever increasing polarization of US politics and society has reached a level that poses a serious threat to the stability of the country.

Adding some more detail to this ominously view, we go back to the conclusion of his July note, which predicted that what is taking place in the US – and really everywhere – is “Only the Beginning”

The question is where does the US go from here? If President Trump is re-elected, he will be at the wheel for four more years, but this time without any restrictions imposed by concerns about re-election. If Biden takes the White House, federal policies will shift to the left again (for more details see the May Monthly Outlook). But will this lead to renewed trust in institutions? Perhaps for some on the left, but what about the rest? In a heavily polarized country, there is little common ground. Meanwhile, if right-wing populism is expelled from the White House, this does not mean it is going to disappear. It will only reorganize. Hopefully in the political arena, but we could also see another boost to violent right-wing extremism. In fact, right-wing attacks and plots account for the majority of terrorist incidents in the US since the mid-1990s. In the last six years, this has grown substantially (Figure 4). So no matter who wins the elections, the turbulence in US politics and society is not likely to pass. In fact, what we are seeing now may be only the beginning.

Finally, for all those blaming Trump for the dysfunction in the US the reality is that Trump is and was always only the symptom of a fractured society, torn between a tiny number of haves and record numbers of have nots. The underlying cause is else, as Marey also explained in his fantastic follow up note from last August, “The Wrong Kind of Symmetry.“

What really matters

It took the Fed six years to describe symmetry of the inflation target in the Statement on Longer-Run Goals. While not completely irrelevant, it is the wrong kind of symmetry to focus on. While the Fed’s step to make the inflation target ‘more’ symmetric may benefit the wages of the average American somewhere beyond 2022, it does not really address the deeper problem with the role the Fed is playing in the US economy. It could be argued that the Fed’s policies have become part of the problem, instead of the solution. At least this should be a topic for debate in the FOMC, instead of talking a whole year about whether to use an average or not.

The much deeper problem for the US economy is the asymmetric impact of Fed policies on households and businesses. The Fed’s monetary and regulatory policies have contributed to a form of capitalism where the rewards are going to the 1% and the risks are borne by the 99%. The current crisis response has made it painfully clear again that the Fed’s policies benefit high income individuals and large corporations, while small businesses and low income individuals bear the burden. While the Fed likes to see itself as part of the solution to America’s economic problems, it should ask itself whether it is also part of these problems.

It should… but why would it when there is a much more convenient scapegoat to blame for all of America’s problems.