Subduing without fighting: Avoiding Hyperinflation

“The supreme art of war is to subdue the enemy without fighting.” 
― Sun Tzu, The Art of War

You’ve probably seen press reports about China making significant commercial deals that promote its renminbi (yuan) currency in large scale sovereign resource and development contracts. This is particularly seen with China leveraging its position and the largest crude oil importer and recently surged commerce with France, America’s oldest ally. While there’s a long way to go before the renminbi unseats King Dollar as the world’s prime reserve currency, the point is that China is really trying hard to make that happen which is a first. The downside of losing prime reserve currency status would be as devastating as a war and would result in hyperinflation the likes of which America has never seen.

Of course, we won’t go straight to being Argentina, but there could easily be pressures along the way that would cause our inflation to spike, particularly for those who live off of wages fixed by the government from Social Security to the statutory mechanical royalty rate. This makes fighting for Cost of Living Adjustments all the more important.

Sleeping Through the Wars

Let’s go back to February 23, 1998. Like most days, there were some odd coincidences. The U.S. Air Force announced that the iconic RQ-4 Global Hawk drone was cleared to file its own flight plans and fly in civilian air space in the United States. Pam and Tommy got divorced. President William Jefferson Clinton was bogged down in a personal crisis of his own making. Celine Dion was number one with a song from a movie about an unsinkable ship that sunk.

The U.S. was a debtor country, meaning our balance of payments was negative. Howard Stern’s radio show premiered on WAVF in Charleston, South Carolina.

And a fellow most of the world had never heard of declared war on the United States. And nobody noticed. We were, after all, Fortress America, etc., etc., and did not pay attention to such things. Well, it wasn’t quite a declaration of war as we know it. Al-Quds al-Arabi, an Arabic newspaper published in London, printed the full text of a document in Arabic titled “Declaration of the World Islamic Front for Jihad against the Jews and the Crusaders” (now studied at West Point). That document was ostensibly signed by a relatively unknown Saudi financier who masterminded the August bombings of the US embassies in East Africa, and even more obscure leaders of militant Islamist groups in Egypt, Pakistan, and Bangladesh. That Saudi financier was named Usama bin Ladin, and nobody paid much attention, not even when he repeated the fatwa on CNN the next year.

China Declares a People’s War on the US

Another event happened in 1999, Two colonels in the Peoples’ Liberation Army of the Peoples Republic of China published a book in Mandarin entitled Unrestricted Warfare. The titles is variously translated as Unrestricted Warfare: Two Air Force Senior Colonels on Scenarios for War and the Operational Art in an Era of Globalization, or the more bellicose Unrestricted Warfare: China’s Master Plan to Destroy America. The thesis of the book is that it is a mistake for a contemporary great power to think of war solely in military terms; war includes an economic, cyber, space, information war (especially social media like TikTok), and other dimensions–including kinetic–depending on the national interest at the time. I think of Unrestricted Warfare as an origin story for China’s civil and military fusion policy, later expressed in various statutes of the Chinese Communist Party that were on full display in the recent TikTok hearing before Congress. Although the book was translated and certain of the cognoscenti read it in Mandarin (see Michal Pillsbury and Gen. Rob Spencer), it was largely unnoticed. Except in China–the CCP rewarded the authors handsomely: Qiao Liang retired as a major general in the PLA and Wang Xiangsui is a professor at Beihang University in Beijing following his retirement as a senior Colonel in the PLA (OF-5).

The point of both the 1998 fatwa and Unrestricted Warfare is that no one paid attention. We know where that got us with bin Ladin, there are movies about it.

Fast forward to May 14, 2019, the CCP government declared a “people’s war” against the United States as reported in the Pravda of China, the Global Times operated by Xinhua News Agency (the cabinet-level “news” agency run by the CCP):

“The most important thing is that in the China-US trade war, the US side fights for greed and arrogance … and morale will break at any point…The Chinese side is fighting back to protect its legitimate interests. The trade war in the US is the creation of one person and one administration, but it affects that country’s entire population…In China, the entire country and all its people are being threatened. For us, this is a real ‘people’s war.'”

What is the “people’s war”? It is an old Maoist phrase (remembering that Xi Jinping’s father fought with Mao during the revolution). It has a very specific meaning in the history of the Chinese Communist Party according to Wikipedia:

People’s war, also called protracted people’s war, is a Maoist military strategy. First developed by the Chinese communist revolutionary leader Mao Zedong (1893–1976), the basic concept behind people’s war is to maintain the support of the population and draw the enemy deep into the countryside (stretching their supply lines) where the population will bleed them dry through a mix of mobile warfare and guerrilla warfare. 

So in the dimension of unrestricted warfare, what end state would the CCP like to see? Bearing in mind that they will avoid a shooting war in favor of the various other dimensions of civil-military fusion and following Sun Tzu’s admonishment o subdue the enemy without fighting. One way would be to impose economic damage on the United States (and really the West) but to do so in a way that does not damage China’s economy or not as much.


One way to do that would be by fully or partially displacing the U.S. dollar as the world’s prime reserve currency. And it helps if you think of the U.S. or France the way China does, as a market for Chinese goods. Forget the iconography of the White House or the Élysée Palace; try thinking of the presidents of the U.S. and France as the regional VPs of sales for China, Inc. with Xi Jinping as the Chairman of the Board. That may well be how Xi thinks.

What is all this talk of breaking morale, people’s war, economic warfare? You mean aside from a few key chapters in Unrestricted Warfare, the manual for the CCP’s hegemony?

First, let’s take an example of the world as it existed on February 8, 2022. And let’s say you are the President of Steppestan, a Central Asian country and CCP buffer state with two natural resources in abundance located a stone’s throw from China’s border: large oil fields and cobalt deposits.

Prior to February 8, 2022 if you wanted to sell your oil, you would almost certainly need to fulfill those trades in U.S. dollars, also called the petrodollar. (President Nixon took us off the gold standard and effectively pegged the dollar to the price of oil when Nurse Ratched wasn’t looking in return for protecting the security of Saudi (see United States-Saudi Arabian Joint Commission on Economic Cooperation.)

So that means that you as President of Steppestan need to find another country, let’s say China, that has dollars to close these oil trades. You’re in luck–China has a bottomless pit of dollars. Well…not bottomless as we will see, but it looks bottomless in February 2022. So Steppestan and China enter into a private “output” deal, a long term contract for Steppestan to provide China with oil for about 30 or 40 years. This contract will require the trades to be closed in dollars unless both sides agree on a different currency. Because Steppestan and China are not going to be pushed around by the American neo-imperialists forever, right? See “people’s war” above.

And since this is an output deal and Steppestan is essentially providing all the oil China can buy, the price of oil will be discounted so that China is protected from price fluctuations imposed by OPEC+ (OPEC plus Russia…ahem…and some of the other stans). That means that if OPEC+ decided something, oh say, for example, to cut production and increase the price of gasoline at the pump before a U.S. Presidential election, it won’t affect China at all to the extent of its output deals like they have with Iran.

For the moment, then Steppestan and China agree to denominate their deal in U.S. dollars, which provides you the dollars to do all kinds of other business that also are denominated in dollars. And of course, it’s not just these deals; the Bank for International Settlements shows 90% of these transactions were dollar denominated. This is what it means to be the prime reserve currency. It means that your money is good everywhere and everyone wants to hold dollars. It also means that there may be an audience of people who are tired of holding dollars given the trainwreck at the Federal Reserve, bank failures, and other alarming events.

Why is the Dollar the King?

There are a few reasons why the dollar is the currency of choice for all countries in the world. The U.S. financial industry is pretty well regulated (aside from the 2008 financial crisis, several recent bank failures, massive deficits and high inflation), we have rule of law so don’t have riots in the streets (ahem…), and we our currency is stable (aside from devaluing the dollar due to high inflation, high interest rates, and giving up on our manufacturing base despite Mike Rowe’s best efforts).

Now as President of Steppestan, you need to spend those U.S. dollars you got from China. You can buy stuff made in America or American assets like real estate or stocks of U.S. companies. You can spend the dollars as fast as you make them, but if you just want to put a little aside, now what? You’ve got a pile of dollars in your central bank that needs to get invested, so where do you put these “reserves” (as in “prime reserve currency” as opposed to “transaction currency”).

Where will you invest your country’s dollar reserves? Well, you want a well-regulated financial system, rule of law, low inflation, all the same things your grandparents wanted with your college fund. But unlike grands, you will want that investment to be liquid, so you can move your money around from instrument to instrument, or raise cash as needed. Plus there’s never been a question that the U.S. would pay its bills and would not refuse to pay if you held those treasury bonds to maturity or pay interest on the debt obligations for any reason. Like if the U.S. government decided Steppestan was a bunch of bad people–it doesn’t only have to do with being able to pay, it could be purposely refusing to pay in a form of sanction.

For decades, really in the post-WWII era, many countries have chosen U.S. treasury debt, not solely because Hitler was dumb enough to get into a bombing campaign with a country his bombers couldn’t reach, but really because the U.S. ticked all the boxes as a good investment. One could also say that a significant reason was because nobody tried to challenge King Dollar as the world’s prime reserve currency. That was because nobody wanted to make unrestricted warfare against the U.S. in the economic dimension or declare a people’s war in that dimension.

When Sanctions Backfire

And until February 8, 2022, the U.S. hadn’t really gone after another country the way it went after Russia–which may have a direct effect on the ability of the US to finance deficits. Now remember–due to fiscal dominance by the appropriators, there has never been an effective limit on what Congress could spend because if Congress could pass it, the Federal Reserve would find the money somehow, even if they had to buy toxic assets and print money to buy bonds they couldn’t sell to people like Steppestan or China.

So you could say that the leverage that these other countries have is not just that they hold U.S. debt, it’s that they are willing to buy U.S. debt, even during the Federal Reserve’s Zero Interest Rate Policy (or “ZIRP” which sounds like something General Zog might say). In other words, there were people willing to buy U.S. treasury obligations that paid no interest, and that helped Congress drive up the price of all assets.

You’ll often hear that U.S. treasury debt is backed by the “full faith and credit of the United States”. That’s true. But what does it mean? It sounds like a latter day Nicene Creed or something but there’s actually a very simple secular explanation for this “full faith and credit” thing. Look in the mirror and there it is. The full faith and credit of the United States is you and me and generations yet unborn,

What this does is allow the U.S. to borrow unbelievable amounts of money. When you hear “Congress spent” take a closer look and you’ll see that a good chunk of the dollar figure that follows “spent” was borrowed. Imagine if journalists got fact checked into saying “Congress borrowed”? Do you think that would be a different reaction?

The End State of Economic Warfare

At the moment, emphasis on “moment”, that is all working out, but you can see what would happen if a country wanted to engage in economic warfare against the U.S., or more broadly, the West. All they’d have to do is offer better terms on the transactional currency, like say allowing transactions to close in renminbi (another name for China’s “yuan” which is a unit of renminbi, like sterling and pound).

Those terms could be actual cash terms, or it could be investing in a country like China has done with its Belt and Road Initiative involving debt forgiveness in return for access to a port, train line, or strategic mineral rights like say Steppestan’s other natural resource, cobalt. Never mind that Steppestan mines cobalt using children who get very sick in terrible work conditions like in the Congo. China’s not worried about that as you can see from the vast amount of pollution and slave labor owned by the CCP. In that way, the sleaze factor in CCP business is right at home in Steppestan, just like they were in Afghanistan after the U.S. abandoned the post.

As if by magic, the Steppestan deals with China are denominated in renminbi, which is part of thousands of transactions, including oil deals with Saudi that are now denominated in the China currency. Every time this happens, it gets closer and closer to shifting the world reserve currency to renminbi and away from dollars.

Let’s say that Steppestan does something that angers the current American presidential administration, and all of Steppestan’s dollar denominated reserve accounts are frozen by order of the President. Steppestan is denied access to their own money because they are blocked from the SWIFT system. Steppestan says wait, we bought all that U.S. debt because rule of law, etc., etc., and now you’re just going to take it away from us because you can?

The price you pay for being the world’s prime reserve currency is that you don’t do things like freeze sovereign reserve accounts. You can be offended, and there are many, many ways that a country like the U.S. can express that offense and even anger. One of them is called SEAL Teams, another is Delta. And there’s a lot of diplomatic steps that don’t cost the blood of our treasure. But is it worth getting knocked off as the prime reserve currency and becoming Argentina? If you think 5% inflation is bad, you ain’t seen nothing yet.

And here’s why. Steppestan is saying, I don’t want to play this game anymore and I don’t need to because I can get almost anything I need from China in renminbi and what I can’t get from them, I can get from somebody else who America has cheesed using renminbi or some other currency or even good old fashioned barter. This is called “sanction proofing”.

Subduing without Fighting

So when you see stories about countries doing deals with China in renminbi, this is what it means. Will the collapse happen tomorrow? Probably not, but it’s the kind of thing that happens gradually and then suddenly. Along the way one possible outcome is that when the U.S. goes to borrow the hundreds of billions of dollars it needs to keep paying these deficits and say, finance the transfer from fossil fuels to electric along with all the grid upgrades, charging stations and the like that must be acquired, the price won’t be the same because we may have to pay sweeteners to get people to take our debt. (We may have to start doing this now because of inflation, set aside the Federal Reserve quantitative tightening and interest rate rises.)

If it happens, it will happen gradually and then suddenly in the words of Mike Campbell in The Sun Also Rises. It will be hyper inflationary. And it’s a very good reason to keep fighting for cost of living adjustments in any government payment like the statutory mechanical royalty. Will the depression that inevitably will come with hyper inflation be sufficient to break the morale of the American people or subdue them into a surrender?

Are Songwriters and Artists Financing Inflation With Their Credit Cards?

Recent data suggests that songwriters and artists are financing the necessities in the face of persistent inflation the same way as everyone else–with their credit cards. This can lead to a very deep hole, particularly if it turns out that this inflation is actually the leading edge of stagflation (that I predicted in October of 2021).

According to the first data release for the US Census Bureau’s recent Household Plus survey, over 1/3 of Americans are using credit cards to finance necessities at an average interest rate of 19%. Credit card balances show an increase that maps the spike in inflation CPI over the same time period. This spike results in a current debt balance of $16.51 trillion (including credit cards). There’s nothing “transitory” about credit card debt no matter the helping of word salad from the Treasury Department. Going into the Christmas season (a bit after this chart) U.S. credit card debt increased to the highest rate in 20 years

According to the Federal Reserve Bank of New York:

These balance increases, being practically across the board, are not surprising given the strong levels of nominal consumption we have seen. With prices more than 8 percent higher than they were a year ago, it is perhaps unsurprising that balances are increasing. Notably, credit card balances have grown at nearly double that rate since last year. The real test, of course, will be to follow whether these borrowers will be able to continue to make the payments on their credit cards. Below, we show the flow into delinquency (30+ days late) grouped by zip code-income. Here, it’s clear—delinquency rates have begun increasing, albeit from the unusually low levels that we saw through the pandemic recession. But they remain low in comparison to the levels we saw through the Great Recession and even through the period of economic growth in the ten years preceding the pandemic. For borrowers in the highest-income areas, delinquency rates remain well below historical trends. It will be important to monitor the path of these delinquency rates going forward: Is this simply a reversion to earlier levels, with forbearances ending and stimulus savings drying up, or is this a sign of trouble ahead?

What does it mean for artists and songwriters? It is more important than ever that creators work is valued and compensated. When it comes to government-mandated royalty rates like webcasting for artists and streaming for songwriters, due to the long-term nature of these government rates, it is crucial that creators be protected by a cost of living adjustment. (Remember, a cost of living adjustment or “COLA” is simply an increase in a government rate based on the rise of the Consumer Price Index, also set by the government.)

Thankfully, the webcasting rates (set in “Web V”) are protected by the benchmark cost of living adjustment, as are the mechanical royalty rates paid to songwriters for physical and download.

The odd man out, though, is the streaming mechanical rate which has no cost of living adjustment protection. This is troubling and exposes songwriters to the ravages and rot of inflation in what we continue to be told is the most important income stream for songwriters. If it’s the most important royalty, why shouldn’t it also have the most protection from inflation?

The Central Bank Dilemma and Songwriter Cost of Living Increases

As readers will recall, I’ve been beating the drum about inflation and stagflation coming home to roost for many months, nearly a year now. These posts are in the context of the compelling need for a cost of living adjustment for songwriters’ statutory rates and the absurdity of a frozen mechanical for the booming vinyl and CD configurations which thankfully has now been rejected by the Copyright Royalty Board once and for all.

When you force songwriters to license and also force them into accepting a government rate for mechanical licensing set by a little intellectual elite in a far-distant capitol, the last thing that’s fair or reasonable is to unilaterally freeze those rates when songwriters are staring down the worst inflation in 40 years. This is particularly galling when rampant inflation was all entirely predictable and the smart people and the economists they supposedly consult with just missed the boat.

Why do I say that the current inflation was entirely predictable? I’ve promised a few times to discuss quantitative easing so here it is. As you read this post, remember that both the current story on inflation and the need to index the statutory mechanical rate started in 2008 with the Great Recession and has been coming for at least fourteen years–plenty of time to recognize that the answer to inflationary destruction of a rate songwriters are forced to accept was not to freeze the rate to make the inflationary destruction even worse. Rather, the answer was to index the rates to inflation at a minimum. Indexing would at least preserve purchasing power if the government was not willing to provide an actual increase based on value. The central bank policy known as “quantitative easing” and its corresponding zero interest rate policy guaranteed the rot of inflation was inevitable.

Printing Too Much Money

Start with the definition of inflation we all have probably heard: Too much money chasing too few goods. When you hear this, some people think of the transaction on the consumer level, as in too much consumer money chasing goods in a productivity decline, aggregate inventory mismatch or raw supply shortage.

But that’s not the fundamental question–how do you get “too much money” in the aggregate across the entire economy at the same time? The way you always do; the government increases the money supply by putting too much money into circulation. The old fashioned way of doing this was literally printing paper money, but the terribly modern digital way of doing it is called “quantitative easing” which has the same inflationary effect because it is effectively the same thing as printing paper money. (The powers that be also refer to it as “QE” like it’s a cute little puppy or a Star Wars android. It’s not so we won’t.)

The difference between old school and new school is that instead of printing money that ends up in bank accounts of those guarantors of the full faith and credit of the United States–that guarantor is the person you see in the mirror–the Federal Reserve created digital money and they gave it a Fedspeak name that conveyed no information about what was really going on. They called it “quantitative easing” which is right up there with “Department of Defense” and “late fee program” in Orwellness. It’s quantitative because it digitally creates money on the books of the Federal Reserve and it’s easing because easy money. The Fed also cut interest rates to near zero (the “lower bound”) and some would argue they essentially created negative interest rates, all in the name of financial stimulus that Congress–i.e., elected officials we vote for–didn’t vote for.

This quantitative easing started out in 2008 to be an emergency method of propping up the economy after the last time that Wall Street screwed things up on a grand scale in the 2008 financial crisis.

What was supposed to be a short term fix is still going on to this day 14 years later. So the unelected smart people who deal with the Copyright Royalty Board (also not elected) must have known this was coming and that the last thing you would want to do was freeze rates when the watchword in the general economy was “stimulus”.

The combination of the Fed’s quantitative easing and the Fed’s zero interest rate policy caused one of the greatest asset bubbles in the history of mankind. And when you hear that the Fed is now increasing interest rates and simultaneously “reducing its balance sheet” by selling about $1 trillion of government and corporate bonds, this is what they are talking about. Many think that the only way of getting out of this bubble is to either raise taxes–fat chance–or raise interest rates and reduce the money supply. The truth is, the U.S. has never been in this exact situation before so no one really knows what will work, but we do know what has worked before. And wage and price controls such as freezing the statutory rate does not work (as President Nixon discovered in 1971). Of course if you wanted to fix the problem by properly aligning incentives, songwriters could have told their publishers that for every 1% increase in inflation, they could reduce the salaries of the smart people by 1% until the freeze comes off. That’s called incenting the wrong people to do the right thing. Like that will happen.

So time for charts. Back to the “too much money”, let’s look at the basic money supply often called “M1” and remember–inflation is not a cause of the growth in the money supply, it is a symptom of the government printing too much money. Because you have to have money to chase goods, right? And the money only comes from one place.

As you’ll see in this snapshot of the growth of M1 since 2008, there’s fairly steady growth until it hockey sticks in 2020 and continues after the $1.9 trillion American Rescue Plan passed in March of 2021. More on economist Steve Rattner’s take on that coincidence later.

Remember, the U.S. central bank (called the “Federal Reserve” or “the Fed”) has two tasks in its mission:  Keep inflation and unemployment low.  The Fed historically has two “weapons” to control the economy to accomplish its mission: interest rates (especially a targeted “federal funds rate”) and the money supply.  

The money supply is going to be our focus in this post, but it wasn’t much of an issue at the Fed until the financial crisis of 2008 when the Fed introduced “quantitative easing.”  The growth of the money supply has become a significant issue since COVID and especially since 2021.  

How the Fed Injects Too Much Money in the Economy

The way the Fed typically increased the money supply before quantitative easing was by buying Treasury notes or other liquid assets in the open market or by actually printing more currency which was distributed in the real economy through retail banks.  (Remember we separated banks between retail and commercial during the New Deal in the Glass Steagall legislation.  Read up on that separately, beyond our scope here.)  Most of the Fed activity before 2008 has been focused on tinkering with the interest rates that the Fed controls, often the “Federal funds rate”.

Increasing the money supply before quantitative easing typically lowered interest rates, put more money in the hands of the consumer and stimulated business activity—including loaning money to other retail banks–through an increase in aggregate demand.  Lowering interest rates expands the economy by making money cheaper; raising interest rates contracts the economy by making money more expensive.  The Fed can decrease the money supply by selling Treasuries in the open market which is another way to control inflation, or try to anyway.  This is also called reducing the Fed’s “balance sheet” (securities held by the Fed) and tends to raise interest rates. If you follow the financial press, you’ll hear a lot about that currently.

When demand is high, i.e., economic activity heats up, the Fed typically raises interest rates to avoid high demand becoming hyper inflationary.  (People often use post WWI Germany as an example of hyperinflation when workers were paid a few times a day to avoid their money losing value by the time they got off work–yeah. Think on that when you buy gasoline or groceries this week.) The Fed also may largely leave the money supply alone.  When demand is low or collapses, as has happened in various financial crises such as the Great Recession, the Fed may lower interest rates to encourage demand with debt-driven economic activity by consumers and firms—and, of course the government.  We’ll come back to the government part.

The Fed historically has let the money supply grow at a relatively steady rate.  The growth of the M1 (M0 plus demand deposits less reserves) looks something like this which makes that 2020-2022 hockey stick look even more pronounced:

What do we remember most about the financial crisis?  I don’t know about you, but the event I remember most was the first time I heard one of the newsreaders utter the word “trillion” as a modifier for “dollars.”  I remember that like I remember where I was on 9/11.  And I also remember what I thought at that moment—these numbskulls are going to bankrupt the lot of us because it’s the government.  When it comes to a trillion dollars, it’s betcha can’t spend just one. (Fast forward a few years to the Speaker of the House saying with a straight face, “if they come up a trillion, we’ll come down a trillion.”  And they give you that look like they just said something smart. Insane.)

But I digress.  Quantitative easing was a workaround to get more cash into the financial markets.  Not in your bank account, but into Wall Street.  How so?

Some Mechanics on Quantitative Easing

Remember, the Federal Reserve is responsible for controlling the money supply.  The civics class version of this story is that the Treasury Department prints the money.  When the Federal Reserve actually prints currency, it submits an order to the Treasury Department’s Bureau of Engraving and Printing then distributes that newly printed currency to the thousands of banks, savings and loans and credit unions in the banking system.  But you see the problem there?  Someone at the Federal Reserve Board of Governors has to submit an order (which must be voted on) to the BEP, and then all those bankers know what’s going on.

Does that sound easy?  Does that sound like a politically costless transaction? Why no, it does not.  And that may be why that process is called printing money.  So it’s not quantitative easing.

When the U.S. Government spends money—and it spends lots of money—it does it in two ways at a high level.  It either takes in money in what are euphemistically called “revenues” or it borrows the money backed by the full faith and credit of the United States. Which means you and me.  “Revenues” are also called “taxes,” paid by you and me.  Borrowing means that you and I promise to pay interest and principal on U.S. Treasury bonds.  But that means someone has to buy the bonds.

And therein lies the rub.

If the U.S. Government needs to sell $X in bonds but only has buyers for say 2/3 $X, what happens?  Does the government say, I better cut that spending by 1/3?  Oh, no, no, no.  It doesn’t do that.  What happens is that indirectly, the Federal Reserve buys the bonds that the government can’t sell to unrelated third parties.

Wait you say—do you mean that the Government is borrowing from itself?  How can that be legal?  Good question.

And here is where we need to understand an entity called a “primary dealer.”  According to Wikipedia (because why not):

“A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities…. In the United States, a primary dealer is a bank or securities broker-dealer that is permitted to trade directly with the Federal Reserve…. The relationship between the Fed and the primary dealers is governed by the Primary Dealers Act of 1988 and the Fed’s operating policy “Administration of Relationships with Primary Dealers.” Primary dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public.”

The Federal Reserve Bank of New York says in Fedspeak:

Primary dealers are trading counterparties of the New York Fed in its implementation of monetary policy. They are also expected to make markets for the New York Fed on behalf of its official accountholders as needed, and to bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices.

Any guesses about which banks might be “primary dealers”?  That’s right.  Wall Street banks, like JP Morgan Chase (or JP Morgan Securities, more precisely), and that would not be the First Bank of Your Town.

Let’s say the New York Federal Reserve Bank has some treasury bonds to sell.  A trader at the Fed calls a trader at JP Morgan to place an order to buy the treasuries for say $1 billion.  (It will be a lot more but humor my dread of the “T” word.)  The Fed then futzes with the JP Morgan reserve accounts and presto-changeo JP Morgan has more of this digital money to buy the bonds the government can’t sell.

Printing money? I think it is, but people will quibble about it, particularly people who could get blamed for that whole hyperinflation thing. And then there’s that whole Constitutional speed bump, but let’s not worry about that. I’m sure there’s no legal problems with the authority for quantitative easing. The smart people in the Imperial City said so and that must be true. Remember, the Federal Reserve isn’t directly elected by anyone.

The Fed’s Balance Sheet

But that’s not the only thing the Fed has been doing during this 14 year period of quantitative easing. In addition to government bonds, the Fed has also been buying mortgage backed securities and other corporate debt in the open market. (That’s right–mortgage backed securities as in The Big Short. Feeling nauseated yet?) The Fed’s balance sheet since 2008 has looked like this:

The Fed actually publishes its balance sheet so that the taxpayers who can do little to nothing to affect the Fed’s decisions can at least see where the Fed spends the full faith and credit of the United States. A recent balance sheet looks like this:

After 14 years of quantitative easing, cutting interest rates to 1/4% (aka the “lower bound”) and buying securities we still have extraordinary inflation at rates not seen in 40 years. All of this was predictable as soon as the Fed started the quantitative easing program after the Great Recession and did not stop.

Various COVID relief spending programs compounded the inflationary effects as Steve Rattner stated in a widely-read op ed (Rattner was an Obama Treasury official and is a frequent go-to for the New York Times, Morning Joe and other programs):

[The Biden Administration] can’t say they weren’t warned — notably by Larry Summers, a former Treasury secretary and my former boss in the Obama administration, and less notably by many others, including me. We worried that shoveling an unprecedented amount of spending into an economy already on the road to recovery would mean too much money chasing too few goods….

The original sin was the $1.9 trillion American Rescue Plan, passed in March. The bill — almost completely unfunded — sought to counter the effects of the Covid pandemic by focusing on demand-side stimulus rather than on investment. That has contributed materially to today’s inflation levels.

Focused on the demand side, even most pessimists — me included — missed a pressing problem. Supply-chain bottlenecks have led to shortages of many goods, a crisis that has been exacerbated by the reluctance of Americans to return to work. The worker shortage has also hurt the service sector. Many restaurants, for example, remain closed because they can’t find workers. Both also spark higher prices.

Now, between the government payments and underspending during the pandemic, American consumers are sitting on an estimated $2.3 trillion more in their bank accounts than projected by the prepandemic trend. As they emerge from seclusion, Americans are eager to spend on everything from postponed vacations to clothing. But the supply chain breakdown has turned the simple act of spending money into a challenge.

Mr. Rattner was writing in November 2021 before the onslaught of inflation in the first few months of this year and before Russia invaded Ukraine. The most recent inflation rate, a lagging indicator, tells the story (and notice the higher lows and higher highs over time):

The Easy Money Tax Comes to the Kitchen Table

After inflating asset prices (like stocks and real estate) through quantitative easing, the easy money bubble is now coming to consumer goods. And what happens to consumers when there is a sudden price shock for consumer goods? They have to cover those goods in the short run in one of two ways–take on more debt (usually credit card debt) or spend their savings (called “dis-saving”). And a couple last charts:

12-month view of personal savings

Savings shot up in March 2021 coincidentally at the time of the American Rescue Plan passing in March 2021 and have decreased ever since, and the saving’s rate is headed toward zero or at least the lower lows that it hit in the recession.

2008-present view of personal savings

And of course when savings decline to zero, out comes the credit card. What else does the Fed tell us will be happening starting this month? Interest rates will increase, which means that credit card interest rates will may well trend higher interest rates just at the moment that consumers will be increasing debt.

Remember, savings deposits were made in historical dollars but are spent on goods and services in inflated dollars, so there is essentially a implied tax on dis-saving. The same is true of running high credit card balances on inflated goods, particularly at a time of higher credit card interest rates. A good example of paying higher interest on inflated prices is filling up the van with $5-$7 gas for a tour and financing shows on the credit card.

To be continued…

Do I Feel Lucky: Increasing Economic Justifications for Abandoning Frozen Mechanical Rates at the Copyright Royalty Board

We hear from an increasing number of songwriters who are learning about what is going on in the current rate fixing movements at the Copyright Royalty Board, some for the first time. In a nutshell, the Copyright Royalty Board rate fixing is a hugely expensive process that puts generations of children through university among the participating lawyers and lobbyists. By the time the money gets through the snake, so to speak, that process results in what are, frankly, scraps delivered to the kitchen tables of songwriters at the end of the day.

The rate fixing proceeding sets the statutory rate for certain times of song uses that are mandated by the federal government. There are two main categories of statutory rates under that compulsory mechanical license: physical (sometimes called “Subpart B” rates) typically paid by record companies, and interactive streaming (sometimes called “Subpart C” rates) typically paid by services like Spotify. (At least theoretically paid–often not judging by the size of the $424 million black box that is still just sitting under the collective’s five year plan.)

We all know that songwriters have been crushed by the failure of streaming mechanical rates to keep pace with streaming’s cannibalization of physical carriers. What many songwriters do not know is that one reason why their mechanical royalty income has dropped is due to an agreement among the major players to freeze the physical mechanical rates at the 2006 level of a minimum rate of $0.091 (currently worth approximately $0.06), and then to extend that freeze several more times for a total of 15 years so far. (The freeze essentially codified the controlled compositions rate but applied to all songwriters in the world.) There is a current proceeding at the Copyright Royalty Board in which the major players have reached an agreement to extend that 2006 freeze for another five years starting in 2023 and running to 2027. Shocking, I know.

In fact, the majors have now got themselves boxed into a corner on the interactive streaming rates that they are trying to increase. Why boxed? Obviously because the services are not stupid and if they see physical mechanical rates frozen when the record companies are paying, they ask why should the streaming rates increase when the services are paying? (And before you ask, this bid rigging is “legal” because everyone gets an antitrust exemption (17 USC §115(c)(1)(D). Cute.)

There is, of course, an unholy connection between statutory rates, controlled compositions clauses in record deals and mechanical royalties–see this post for the history. Let’s just say for this post that a page of history is worth a volume of logic.

The point I want to make to you in this post is that time is going by and no progress is being made in the current proceeding (styled “Phonorecords IV“) just like there’s no progress being made in the last proceeding (styled “Phonorecords III“); some people ask why these rates and appeals were not resolved in the giveaway that was part of Title I of the Music Modernization Act (aka the Harry Fox Preservation Act) which created the Mechanical Licensing Collective. If you’re going to make a major change to collectivize songwriters and vastly expand the scope of the compulsory mechanical license, shouldn’t you have gotten something for it? I’d count myself in the group that’s asking those questions so you know my bias. In a recent comment, I called the Copyright Royalty Board the “cornucopia of chaos,” which it is at least on the mismanaged mechanical royalty rates.

Inflation and Mechanicals

One thing that everyone should be able to agree on is that inflation is a major factor in determining any statutory royalty rate. This is certainly standard with the webcasting rates negotiated by SoundExchange with the same Copyright Royalty Board. It seems that if someone just asked for “indexing” the rates to inflation, the CRB just might give it. But no one is pushing on that open door except the songwriters and publishers who commented on the majors proposed settlement but who cannot afford to be part of the Phonorecords IV proceeding itself.

So leaving aside an increase in all of the actual rates that would reflect the value of songs, it does seem that we must accept the thinking of many economists that inflation is here to stay for a while and will surely extend into the 2023-27 rate period of Phonorecords IV. I’ve posted about these indicators before, but here’s some additional information. A cost of living adjustment seems like it should be a pro forma request–it only increases the rates if there is an actual increase in the cost of living as measured by an objective standard, typically the CPI-U (Consumer Price Index-Urban) measured by the government’s Bureau of Labor Statistics.

Since we are projecting at least two years into the future, let’s consider a few metrics that measure two years into the past. What is the trend line for inflation? Up and to the right, as they say.

US Inflation Rate

Equity Markets

We normally don’t spill much ink on the stock market because markets go up and down, can’t pick a top and can’t pick a bottom. But–stock markets are often a leading indicator of the direction of growth in the broader economy so let’s look at what’s been happening in a few different measures. Remember–the conventional wisdom is that a 20% correction to the downside is the definition of a bear market.

I have been beating the stagflation war tocsin for quite some time now (since May 2021), and unfortunately I think the markets are waking up to the true-1970s style stagflationary environment we may be entering. This means lower growth combined with surging prices for consumers and producers. And that is truely bad news bears. (If you don’t know about 1970s stagflation, take a few minutes and read up on it. And even if you don’t, the negotiators of the statutory mechanical rates really should know. Some of them may have lived through it the first time around.)

The tech-heavy NASDAQ index has dropped about 14% since November, returning to February 2021 levels with no end in sight.

The broader Russell 2000 is more revealing with a 19% decline over a few weeks as more inflation/stagflation confirmation data comes in:

This broader decline is confirmed by the S&P 500:

And if you were looking for confirmation of declining retail sales as a measure of growth, consider Amazon’s stock performance:

A little closer to home, consider Spotify’s recent stock performance which shows its pandemic-fueled riches coming back to reality (although not so good for any employees who got a stock option grant in the last 18 months or so):

Bond Yields

Remember, the bond market is exponentially larger than the stock market. We’ll come back to this, but consider what is happening in the bond market and think about this question: what could cause both the stock market and the bond market to decline?

US Savings Rate

The savings rate shows a couple of anomalies where the savings rate spiked to unnatural highs of 34% in a lockdown era and again to 27% after government stimulus, but–the savings rate has sharply declined to pre-pandemic 2018-ish levels Why? I would speculate that this is partly due to rising prices of goods to consumers, particularly energy, rent and food and the decline of “real” wages (nominal wages less inflation).


Consider a couple of inputs–there are many–but note for our purposes that these commodity prices are at or near recent highs, or are retracing recent highs. The trend line is up and to the right, which suggests that these prices are likely to continue upward into at least the first year of the Phonorecords IV rate period (2023) and potentially beyond.


However you feel about fossil fuels, the reality for singer/songwriters or bands is that the way they try to supplement their declining songwriting income is by touring and for almost everyone, touring means gasoline. I don’t have to tell you what gasoline prices are doing–you know whenever you fill up the van. This chart is a measure of gasoline futures, which is the bet that the commodity traders are making on the future price of gasoline (not the price at the pump where you live). Again, the trend line is up and to the right.

And of course if you’re going to make it to the gig or the writer room you’ll need to avoid that freezing to death thing and you’ll care about heating oil prices, up 70% year over year:

To take it a step back, crude oil is closing in on $100 a barrel due in part to exogenous supply side shocks and contractions. If crude goes over $100, we are in a whole new world that we have not seen since 2014.


So you get the idea, right? This is all evidence supporting a cost of living adjustment for mechanical royalties. When the stock market declines, particularly declines sharply as it is currently performing, that is largely to do an expectation of slower growth in the economy as a whole. They’ve been wrong before, but the market is actually a pretty good leading indicator of the direction of growth.

Declining stock prices foreshadow declining earnings which foreshadows declining economic growth. What happens when growth decreases? Inventories may drop, and supply declines (which is already happening and you know that if you’ve been to the grocery store lately). GDP may also decline.

Remember the stagflation three point play? In this chart, Y1 GDP declines in Y2.

Lower growth or economic stagnation is the “stag” part of stagflation.

When bond prices go down, typically interest rates are trending up, which signals an inflationary outlook. If current bond prices decline because interest rates are increasing (or are anticipated to increase), that is most likely anticipating the Federal Reserve’s announced rate increases in 2022. The number of rate increases is anticipated to be somewhere between three and five (some say even six) in 2022. The Fed increases interest rates to tamp down inflation, so you can say that lower bond prices (which vary inversely to interest rates) is anticipating the “inflation” part of 1970s-style stagflation. Just to be clear, this is all readily available public information.

It’s becoming more obvious that we are watching a slow moving train wreck (cynics like me might say we’re beginning to get hit with the balloon payment for 2008 after 15 years of quantitative easing, but that’s a story for another day). The slower the train wreck, the more likely the wreck will occur during the Phonorecords IV rate period. Since the Federal Reserve is still busily printing money, these metrics are all leading indicators of how much blood will be left on the floor starting around March 2022 or so. And we haven’t even talked about what the announced Federal Reserve rate hikes will do to the housing market even if each one is a relatively small increase.

You don’t need an expert economist to produce any original research on this for the CRB–the question for songwriters is why don’t we already have a government rate indexed to inflation? The indexed rate is only paid if you actually get an increase in the CPI, which even then only preserves the value of whatever nominal rate you do have–it’s not a “real” rate increase. So why not at least try to get a cost of living adjustment? There’s no reason not to at least try to get indexing on every statutory rate which was the standard approach on mechanicals for many years after 1978 until the 2006 freeze. Unless your bonus is tied to a big percentage increase in the headline rate rather than the less obvious indexing that would actually protect the value of songs.

Which all seems to be to be so obvious that if you don’t have it you’d have to ask yourself, do I feel lucky? The odds are all on the house.

Decline in GDP Projection Increases the Importance of Inflation Adjustments in Government Song Pricing #IRespectMusic

God gave Noah the rainbow sign, no more water, the fire next time.

James Baldwin, The Fire Next Time

Remember the stagflation three point play? Supply contracts, prices go up due to those supply side shocks and real gross domestic product contracts. Stagflation also results in higher unemployment. Stagflation can take a long time to shake out of an economy once it sets in.

Stagflation’s three point play

We can learn from the economic history of stagflation, particularly in Japan and the U.S. Japan had a stagflationary period started by the economic shock of the collapse of Japan’s real estate market (not unlike what is happening in China with Evergrand and Sinic) and the follow on effect of a 60% decline in Japan’s stock market. The U.S. had a stagflationary period in the 1970s brought on by a dependence on foreign oil and predatory pricing largely by OPEC. That led to skyrocketing oil prices and gas lines. Both countries experienced a “Lost Decade” due to stagflation.

The Federal Reserve Bank of Atlanta announced this week that it projects real GDP grown in the third quarter of 2021 to fall to 0.5% with some caveats:

The Federal Reserve Bank of St. Louis gives a longer term chart of GDPNow:

The point of these graphs is to emphasize that the US economy appears to be heading to a contraction and inflation brought on by a combination of supply side shocks (cost-push inflation) and demand caused in part by government actions (demand-pull inflation) combined with sharp increases in gasoline prices among other commodities. Gasoline prices ratchet through many products in the economy and have been sharply higher over the last 12 months as the U.S. became more dependent on OPEC production.

All the indications are that the U.S. may be headed into a prolonged period of stagflation which is inflation combined with a stagnating economy. It seems less and less likely that inflation is “transitory” and more likely that it will last well into 2023 and possibly 2024.

How does this affect songwriters? Remember that the mechanical rates set in the current Copyright Royalty Board rate proceeding will fix prices until 2027, so it appears that there will be considerable overlap between the inflation cycle and the royalty rates–all the more reason to seek the same inflation indexing for songs as the CRB recently granted for sound recordings.