What Comes After the Boom

Last week Fed Chair Janet Yellen opted to keep the Fed’s zero interest rate policy in place.  Wall Street cheered the news and bid stock prices up to near record levels.  After more than six years, and over $3 trillion of direct asset purchases, what could the Fed really do?

Sure they could have begun the difficult task of walking credit markets back from their policies of mad insanity.  But that would destroy something the Fed’s worked very hard to create.  In short, it would explode a financial H-bomb and crash the perilous stock market edifice it has constructed.

This real possibility has the Fed parsing its words out like Bill Clinton at a Congressional impeachment hearing.  “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient,” said Yellen.  Huh?  So they may raise rates soon…but not too soon?

By all accounts, this dither drabble is categorically worthless.  What’s more, it’s ludicrous that in the year 2015, in an era of indoor plumbing and tablet communications, the financial system rests upon the mixed utterances of a frail bureaucrat with a hair helmet.  Everything about this volatile arrangement is patently wrong.

We are reaping the fallows of early 20th century conceit.  The notion that centrally planned economies can bring abundance to the world has failed again and again.  The destructive idea that the business cycle can be ‘scientifically managed’ has wrought much disappointment and suffering.

Great Disparities

The main cause of the economic distortions has been the universal disregard of the rules of common sense in the handling of the money supply of the world.  Scientific management of the economy, via the monetary policy guesswork of the Fed and other central banks, has twisted and contorted things in ways that would’ve otherwise been impossible.

Rather than moderating the business cycle as advertised, monetary policy has exacerbated it.  Cheap credit is extended.  Asset prices rise.  Then more cheap credit is pumped to levitate asset prices when gravity starts pulling them back to earth.  The booms are bigger.  The busts are more pronounced.  All the while, the real economy flat lines.

“The reason the Fed is impaled in a monster trap is that history is closing in on it,” explains David Stockman, former Congressman and Director of the Office of Management and Budget under President Reagan.  “We have now had upwards of three decades of increasingly aggressive monetary inflation—-a corrosive trend culminating in what will be 80 months of zero money market rates and a massive monetization of debt claims that originally funded the consumption of real labor and capital resources.

“Needless to say, that has generated a dangerous and ever widening disconnect between the real main street economy and the nominal value of assets in the financial system.  This rupture has been called “financialization”, but it amounts to this: Fed attempts at monetary stimulus are now short-circuited; added liquidity essentially becomes sequestered within the financial system where it generates persistent inflation of existing asset values.  That is, stimulus never leaves the canyons of Wall Street.

“Accordingly, the financial system has ballooned dramatically faster than the real economy over recent decades—–even when measured by nominal GDP, including the latter’s considerable element of pure price inflation on a cumulative long-term basis.  The economic tether between the two, therefore, is now stretched like a rubber band to the breaking point.  The possibility it might snap and cause a drastic implosion of the financial system is what the monetary politburo fears, even if it fails to realize the full extend of the danger.”

What Comes After the Boom

Simply speaking, the world financial system and the economy are at great odds.  The yin and the yang of inflation and deflation have never pulled harder.  Signs the breaking point is near are practically everywhere you look…

Stock prices have risen to record highs yet real wages have declined.  Stock prices have outrun corporate earnings far beyond historical norms.  Market capitalization has outpaced gross domestic product by distances only seen at great market peaks.

Obviously, this doesn’t compute.  Wages and corporate earnings must rise or stock prices must come down.  Something has got to give.  At this point in the business cycle, it seems the likely adjustment will come from stock prices.

Make no mistake, time is running out on the central bank controlled fiat money system.  The main thing holding it together for now is an epic financial bubble.  The boom has come.  The bubble is here.  Next, however, is what comes after the boom…

To understand what that will be like, start with the 2008 Financial Crisis and Great Recession.  Consider the magnitude of the chaos to financial markets and destruction it resulted in for the economy.  Think about how the middleclass was shredded by these events.

Now contemplate something similar but an order of magnitude (i.e. 10X) worse.  If you can imagine this, then you have a good idea of what’s coming after the boom.

“Not only is this a problem for financial stability, it may also eventually become an even more potent challenge to political stability,” notes Stockman.  “Indeed, the 7X gap between mean household net worth of $300k and median net worth of $45k suggests that the day of pitchforks and torches may not be all that far down the road.”

Sincerely,

MN Gordon
for Economic Prism

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