Sometimes I wonder if I’m ever going to run out of new things to say about the economy. Nothing interesting has happened in a long time.
Our liquidity-drunk “markets” remain over-priced due to the chronic intervention of the global central banking cartel, which has demonstrated over and over again that it won’t tolerate even the slightest drop in asset prices.
Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular — or even recognizable — feature.
It’s destined to fail. What more can be said about such a flawed system?
Well, a lot as it turns out.
And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful.
The Beginning of the End
It’s been a long 7 years for those of us who believe fundamentals matter. For quite some time they have not.
So we reality-based fundamentalists have largely been reduced to pointing at the parade of policy failures and ham-fisted market manipulations and saying, essentially, That’s just dumb.
But ‘dumb’ mistakes have become ‘stupid’, and ‘stupid’ became ‘idiotic’, and now ‘idiotic’ mistakes are piling up, accumulating into a mountain of stored potential energy that will someday topple destructively across the global markets. We’ve all known, deep down, that money printing is not the same as capital formation, and that prosperity never truly results from redistributing wealth from one group to another. And yet, far too many have been willing to play along and place their trust in the central banks.
Well, we’ve finally reached the beginning of the end.
The global experiment with our current flawed economic and monetary models are drawing to a close. The fetish worship of central banks, bankers, and banking is over.
Belief in central bank omnipotence is being chipped away at daily, as it’s becoming increasingly clear that the easing policies of the past seven years have only served to kick a can down the road — a can that can longer be kicked any further.
Once the illusion of central bank control is fully lost, the financial markets will implode in a deflationary wave that has been held at bay for far too long. Asset prices will collapse, companies will fail, and millions of jobs will be lost. People will re-discover that partying too hard for too long earns a massive hangover.
In short: There will be hell to pay.
I’m still not able to predict whether we’re a week away from this or five years. Such is the uncertain fate of living within a nested set of complex systems run by fallible humans. Complexity complicates prediction.
Though while we cannot predict exactly what will happen, to what degree it will manifest, or precisely when, we can track the ‘fingers of instability’ in the system and note that these are growing longer, and steeper. For instance, total worldwide debt is more than $60 trillion larger than it was before the 2008 financial crisis. So we can make conclusions like “larger” and “sooner” about the probability of the coming correction.
The final remaining bulwark that needs to give way before we a full-blown correction occurs is central bank credibility. The public perception of an “all-knowing, all-powerful” entity needs to be replaced by a more realistic view of what central banks actually have done, and realistically ever can do, which is a whole heck of a lot less than most currently ascribe to them.
Drop Dead, Fed
It helps to start by looking at the actual track record of the central banks over the past 20 years.
By the numbers, central banks have been little more than serial bubble blowers, which is not actually a very impressive trick at all. Dump a bunch of cheap, thin-air money into the markets and that’s pretty much what you get every time: a bubble. Or bubbles, plural (which is what we’re living with now across stocks, bonds, real estate and nearly every other financial asset class)
What the central banks claimed they were after – rapid GDP growth, a set rate of inflation and rising incomes – has not materialized in the way they hoped. After more than tripling their collective balance sheets since 2008 (an increase of nearly $12 trillion) to stimulate the world economy, global GDP growth is still stumbling along at an uninspiring 2.5% — and showing signs of slowing.
As I said: not an impressive track record. But lots of people still treat the Federal Reserve, and ECB, BoJ, BoE, etc., as if they’re doing something terribly sophisticated, important, and worthy of our admiration.
But what have they really done besides flooding the world with cheap and abundant money?
Well, for starters, they’ve created the largest wealth and income gaps on record, over-inflating financial assets and creating conditions ripe for aggressive financial engineering by corporations, both of which reward the top 1% preferentially.
In this first chart we can see the effect of three serial bubbles blown by the Fed on household income broken out by income level.
The top 1% has gotten all the gains in each of these bubbles. The only defense the Fed has is to claim that “Well, things would have been even worse for the lower 99% if we had done anything different”. But this rings as hollowly as any prove-a-negative defense.
We cannot know how things would have been different for the bottom 99% if the Fed had done things differently. But we can know, with 100% certainty, that if the Fed had not dumped money into the financial system and had not targeted rising asset prices that the incomes of the top 1% would not have skyrocketed like this.
It’s really simple: when you financialize an economy, those with the most direct access to the money in that system — which is by definition a tiny elite — are going to benefit the most.
This next chart shows the impact of the Fed’s efforts on household wealth. The bubbles are immediately obvious and I’ve labeled them as ‘unfair’ in varying proportions because nearly all of this ‘wealth’ is financial wealth held in wildly disproportionate amounts with super-heavy concentration in the very upper-most wealthy households:
And it’s not the 1% we’re talking about here, but the 0.1%. The more financialized the system, the more highly concentrated the wealth becomes.
This is not some mysterious process. Nor is it new to our era. I wrote about it in the Crash Course back in 2008 saying:
Given this tremendous [wealth] disparity, I’m reminded that Plutarch once cautioned that an imbalance between rich and poor is the oldest and most fatal ailment of all republics.
More immediately, this helps us understand why the great credit crisis of 2008 worse than expected. Just as was true of the wealth gap in the late 1920s before the onset of the great depression, the severity of a crisis does not depend on average wealth, but the distribution of the wealth.
If a large swath of the population lacks the means to weather the storm, then the storm will be longer, and harsher than otherwise would be the case.
So what does it mean that 80% of our population possesses a meager 11% of the total wealth? For one