The Fed’s Answer to the Ghastly Monster of its Creation

The launch angle of the U.S. stock market over the past decade has been steep and relentless.  The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent.  New highs continue to be reached practically every day.

Over this stretch, many investors have been conditioned to believe the stock market only goes up.  That blindly pumping money into an S&P 500 ETF is the key to investment riches.  In good time, this conditioning will be recalibrated with a rude awakening.  You can count on it.

In the interim, the bull market may continue a bit longer…or it may not.  But, to be clear, after a 370 percent run-up, buying the S&P 500 represents a speculation on price.  A gamble that the launch angle furthers its steep trajectory.  Here’s why…

Over the past decade, the U.S. economy, as measured by nominal gross domestic product (GDP), has increased about 50 percent.  This plots a GDP launch angle that is underwhelming when compared to the S&P 500.  Corporate earnings have fallen far short of share prices.

Hence, the bull market in stocks is not a function of a booming economy.  Rather, it’s a function of Fed madness.  And its existence becomes ever more perilous with each passing day.

Central planners at the Fed – like other major central banks – have taken monetary policy to a state of madness.  Zero interest rate policy, negative interest rate policy, quantitative easing, operation twist, quantitative tightening, reserve management, repo market intervention, not-QE, mass-asset purchases, and more.

These schemes have fostered massive growth in public and private debt with nothing but lackluster economic growth to show.  What’s more, these schemes have produced massive asset bubbles that have skyrocketed wealth inequality and inflamed countless variants of new populism.

Yet the clever fellows at the Fed are blind to the fact that they’re most responsible for fabricating this monster.  And now they want to rectify the ghastly deformities of their creation…

Higher Calling

Earlier this week, for example, Minneapolis Fed President Neel Kashkari remarked that:

“Monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials.” 

How exactly Mickey Mousing with credit markets could attain this objective is unclear.  But, like yield curve control (YCC), Kashkari wants to give it a go.  These sorts of amorphous meddling operations is how he answers his higher calling.

You see, Kashkari’s a man with crazy eyes.  But he’s also a man with even crazier ideas.  He’s an extreme economic interventionist – and a crackpot.  Though he wears his burdens on his sleeve.

If you recall, as federal bailout chief, Kashkari functioned as the highly visible hand of the market.  When the sky was falling in early-2009, he awoke each morning, put on his pants one leg at a time, drank his coffee, and rapidly funneled Treasury Secretary Hank Paulson’s $700 billion of TARP funds to the government’s preferred financial institutions.

Incidentally, the experience had an ill effect on Kaskkari’s mental health.  Soon after, he became a hermit, took to a cabin in the Sierra Nevada Mountains – near Donner Pass – and pursued his other life’s purpose of chopping wood.  We thought we’d seen the last of him.

But sadly, it’s impossible for true believers to amiably exit the trappings of public life for good.  After a failed California gubernatorial campaign in 2014, losing to retread Governor Jerry Moonbeam Brown, Kashkari resurfaced as Minneapolis Fed President in 2016.

We suppose this appointed position was his reward for the abuse heaped upon him from grandstanding Representatives – absolute losers like Barney Frank and Maxine Waters – while handing out vast quantities of taxpayer dollars to Wall Street banks.  Of course, for real public servants like Kashkari, appointed positions are the crème de la crème.

Strangely, lightning strikes twice for this guy.  Next year, roughly a month from today, Kashkari will be a voting member of the Federal Open Market Committee.  For the second time in 11 years, destiny will place him at the precise location where he can exact maximum destruction upon financial markets during a colossal crisis.

The Fed’s Answer to the Ghastly Monster of its Creation

As the economy stalls out in 2020, U.S. deficits are going to jump to over $2 trillion a year – and will stay there.  So, too, the national debt will run up towards $40 trillion over the next decade.  The Fed, through YCC or some other wild scheme, will take on the dirty deed of monetizing this debt.  They’ll create money from nothing and loan it to the Treasury.

Then, if Kashkari has his way, the Treasury will send out checks backed by the Fed’s funny money to William Jennings Bryan’s “struggling masses.”  All the while, the Fed will be oblivious to the fact that these are the same people who’ve been hollowed out by the Fed’s own policies of wealth inequality.  This is their solution to the ghastly monster of their making.

Still, the Fed and Kashkari are only the source of but some of the crazy ideas being burped about.  Moreover, an election year always provides a startling preview of the madness coming to Washington – regardless of who wins.  The styling may be different.  But the results are the same: bigger government, bigger deficits, and greater government control and encroachments upon individual freedom and liberty.

Right now, Presidential candidates are tripping over themselves to see who can make greater and crazier promises to coat the landscape in gravy for voters to sup off of.  You know what we’re talking about…

Economic patriotism.  Universal basic income.  Modern monetary theory.  Trade wars.  Green new deal.  Quantitative easing for the people.  Generous spending packages.  Free school.  Free drugs.  Canceling debt.  Wealth taxes.  Taxes on unrealized capital gains.  Outright currency destruction.  And much, much more.

The planners and schemers are queuing up these ridiculous plans for just the right moment.  That is, when the economy slows, credit market’s freeze, the stock market crashes, the sky falls, and all hell breaks loose.  Like TARP, or the Patriot Act, they’ll roll them out at the precise moment of maximum panic.

Alas, the monster will rampage in wild and unexpected ways.

Sincerely,

MN Gordon
for Economic Prism

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