The four mistakes that will sink the economy
From Bill Bonner, Editor, Bill Bonner’s Diary:
GUALFIN, ARGENTINA – Another miracle! It rained.
“We got 200 millimeters (about 8 inches) this year,” reported the capataz, Gustavo.
After two years of drought, finally, the fields, mountains, and pastures are green. And the river that separates the house from the rest of the ranch – usually dry – is running fast.
“Yes, everybody’s happy now,” Gustavo continued. “Water was all we needed.”
Off to the Races
Meanwhile, stocks dropped another 420 points on the Dow yesterday.
Bond yields rose to 2.8%. Investors thought Fed chief Powell seemed serious in his drive to destroy some $2 trillion worth of the very stuff on which stock and bond prices float – liquidity.
Over the last 30-some years, the U.S. economy has been “financialized.”
Finance generally, and liquidity in particular, played a larger and larger role, while actual business – providing products and services – declined.
Main Street went down. Wall Street went up. Debt increased. And gradually, the whole economy became misshapen by false price signals and too much debt.
Behind this trend, of course, is money itself.
You could say its source is the introduction of fake money by President Nixon in 1971.
Or you could focus on the 30-year period after Alan Greenspan removed the last impediment to runaway finance by backing the stock market with Fed policy.
Since then, it has been off to the races, with debt rising three to six times faster than income. U.S. government debt rose eight times. The stock market rose 11 times. And the economy that supports both of them only went up four times.
As we will show next week, investors in the U.S. stock market thought they were profiting from the Great American Enterprise Machine.
Instead, they were unwitting accomplices to a huge fraud… in which most citizens were robbed to transfer money to the elite.
A Soft Landing
But today, we’re focusing – again – on the heist itself, and trying to understand if, when, and how the money goes back to its rightful owners.
As we showed you yesterday, Fed policy always consists of three mistakes.
(1) It keeps rates too low for too long. (2) It raises them, causing a serious allergic reaction on Wall Street… which it then medicates (3) with more low rates.
The Fed – benighted as always, bewitched by power, and vainly besotted by its own image – is now making Mistake 2.
That is, it is trying to recover from Mistake 1 in time to be able to gather up some interest rates so as to make Mistake 3 again.
Having put the whole world head over heels in debt (the world total is around $230 trillion), it now believes it can increase the cost of carrying that debt without crashing the whole system. A “soft landing” is what it is aiming for.
It intends to sell or let expire nearly $2 trillion of its cache of bonds by 2021.
This it will be doing over the same period that the U.S. government is borrowing $3.5 trillion in bonds, just to keep up with current spending and tax cuts.
Together, they will absorb $5.5 trillion worth of liquidity.
There is no way this can happen without sharp increases in interest rates to entice savers to stump up more liquidity of their own.
But real savings are not the same as Fed-provided fake money. When savings increase, it takes money out of the economy.
Higher rates and more savings will mean, at a minimum, a very serious recession and a long, deep sell-off in the stock market.
Most likely, stock prices will be cut in half… and not bounce back, in real terms, during our lifetimes.
But the future we are describing will not happen. As we’ve been saying for months, the Fed will never really “normalize” interest rates and its asset pile – not willingly.
So far, the Fed has only cut $21 billion out of its bond portfolio, a tiny sliver of the $2 trillion it intends to cut, and less than half of the $50 billion it was scheduled to unload.
Yet this small amount, and the anticipation of more to come, seems to be what provoked the 10% correction last month.
The Fed did not take this sitting down. Instead, it rushed to REVERSE Mistake 2 (raising rates), resorting to Mistake 3 (lowering them again, after they’ve triggered a crash/recession), with a $14 billion increase in its bond portfolio.
That is, it abandoned QT in a panic and returned to QE.
Reports the financial blog, Seeking Alpha:
The Fed more recently started “quantitative tightening” (QT) that involves normalizing (reducing) the Fed balance sheet by slowly letting securities mature/roll-off the same (plan announced September 2017).
Curiously, last week it appears that $14.1 billion in assets were added back onto the Fed’s balance sheet. This raises the question whether it is possible the Fed may have fired-up the money printing press again in response to the recent acute stock market correction.
And come the next stock market correction – which could well be accompanied by a recession – the Fed will immediately swing around again.
But this time, it won’t be able to implement Mistake 3 as it did in 1987, 2000, and 2008; it will lack the firepower. It has already shot its monetary wad.
With no choice, it will team up with the White House and Congress to resort to Mistake 4.
The pols will propose wasteful, unproductive, and unneeded spending programs, to be financed with money they haven’t got. The Fed will “print” the fake money with which to pay for them.
Crux note: As Bill mentioned, when the next crisis hit, the Fed, Congress, or even President Trump won’t be able to stop it. But there are things you can do today to protect your wealth and your family. To get the details, go right here.