Sometimes change is an improvement. Other times it’s an adversity. But it’s always happening…you can count on it. With this in mind, here’s one perspective of what’s coming down the turnpike…
“We should all be prepared for adjusting to a world that is harder,” were the gloomy words offered by Charles Munger last week in Los Angles. Munger, if you don’t recall, is Warren Buffett’s billionaire sidekick who helped build Berkshire Hathaway. His remark was made in response to a question about the Federal Reserve’s massive balance sheet expansion since the 2008 financial crisis.
“You can count on the purchasing power of money to go down over time,” added Munger. “And you can almost count that you’ll have more trouble in the next 50 years than the last.” In fact, Munger believes the last 50 years have been an anomaly…
“Somebody my age has lived through the best and easiest period that ever happened in the history of the world — the lowest death rates, the highest investment production, biggest increases in most people’s standards of living. If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life.”
Running in Place
All things change. Therefore it’s possible the next 50 years will not be as favorable to the average fellow as the last 50. Particularly, following the recent monetary policy shenanigans…
To review, in fall of 2008, under the faulty assumption that it was saving the world from itself, the Federal Reserve made a grave miscalculation. It moved the world into the land of dillweed economics. In short, it began degrading money at a scope and scale never before seen in recorded human history.
The long-term consequences of the Fed’s actions are why Munger believes prosperity in the years ahead will be harder. When the purchasing power of your money declines a very disadvantageous phenomenon is experienced. You work more. You earn less. You crank up the treadmill…only to run in place, or backslide.
In the meantime, the one temporary success – a record high stock market – of the Fed’s mass money debasement scheme is running on fumes. What’s more, a series of Fed miscalculations has set the stage for an epic failure. Any effort to correct these miscalculations will rapidly destabilize financial markets.
The longer the Fed waits the worse the ultimate blowback will be. But, at the same time, who in their right mind wants to intentionally trigger a massive financial crisis. Not when the economic growth never returned to the robust levels of other post-recession economic recoveries.
Prepare for a Harder World
‘“The Fed’s screwed, essentially,”’ was the technical conclusion Peter Boockvar, chief market analyst at The Lindsey Group recently reached. “The essential problem is this: When the Fed could have raised rates it didn’t want to. Now that it wants to raise rates, it may not be able to, at least not without causing substantial turmoil in the same financial markets it has sought so strenuously to soothe.”
Of course, once financial markets stumble and tumble it’ll be abundantly clear the economic recovery never really happened. The great asset price inflation since 2009 will quickly disappear. The paper gains investors have experienced will also disappear.
We don’t know if the next big crash will begin next month or next year. But it is coming…and it will be breathtaking. What then?
Naturally, the Fed will come to the rescue with more policies of mass money debasement. But will they work? Will they stem the financial panic?
Maybe they will. They have in the past. However, at this point there should be no illusion that they will actually help the real economy. They certainly won’t create good paying jobs. But there are plenty of things they will do…
They will distort prices. They will increase the income gap. They will create ever larger and ever more disruptive financial bubbles. If the Fed pushes hard enough they will eventually trigger a currency crisis.
The take away: Prepare for change…and a world that’s harder and less forgiving.
for Economic Prism