POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog:

[O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears. “Momentum” stocks like Tesla, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue. We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets. […] Once the hopeful souls who’ve driven bellwethers such as Tesla and Amazon into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

Bent and Distorted

If you believe the newspapers, the Fed has begun a “tightening cycle.” It is on course to raise its key interest rate, little by little, in quarter-point increments.

It must know that this is a perilous thing to do. After so much market manipulation over such a long period, prices all up and down the capital structure – from junk bonds to quality stocks and solid real estate – have been bent and distorted.

After all, that was the idea: drive up the price of stocks and bonds by driving down interest rates. People would be forced to spend or invest their money rather than save it. And higher financial asset prices would make the rich feel even richer.

Walking down the street, the dollars would overflow from their pockets like turnips rolling off the back of a produce truck.

They’d feel so flush, they’d buy, buy, buy… sending the plain people into a flurry of trucking, toting, and busting their humps to provide them with goods and services.

Then, after the rich were fully satiated (after all, how many martinis can the 1% drink?), they’d have to invest.

Cash would flow into money-losing startups like Tesla and Snapchat. Headline acquisitions, such as Amazon’s purchase of Whole Foods, would keep stock prices bubbling higher. And trillions of dollars in stock buybacks would make the rich even richer still!

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Money Mirage

But the feds could only work this miracle by buying bonds. And the feds didn’t have any money. What could they do?

No problem! They used their fake money, the post-1971 credit dollars – trillions of them… money they could create at will.

From the post-crash bottom in 2009 to today’s top, U.S. stocks and bonds registered a cumulative increase of about $21 trillion. And upon that mirage now rest the hopes, dreams, and contentment of millions of people all over the planet.

One has planned his retirement based on his gains over the last eight years. Another has taken out a loan against his stocks to fund his business. Still another – a major player on Wall Street – has a billion-dollar hedge fund portfolio… a leveraged bet on “low vol,” which depends on further support from the Fed.

And look at super investor Warren Buffett…

The latest headline news tells us his gifts to charities now top $27 billion. The money is to be used to fight illness and poverty worldwide. But the gifts came in the form of Berkshire stock – not cash. Imagine how the halt and the hungry will suffer if the stock goes down!

Classic Credit Bubble

Which brings us back to our question: How dumb is the Fed?

As you can see from the foregoing, the boom of 2009–17 was wrought by the Fed and paid for with fake money. It is a classic credit bubble, in other words – not genuine prosperity.

Almost all the new jobs created during this period were low-wage or part-time jobs in health care or government, not high-value jobs in manufacturing. That’s why real earnings, per family, have scarcely improved… and real employment (as a percentage of the available workforce) has gone down.

All the bubbly action, in other words, is in the financial markets, not the real Main Street economy. And as the Austrian School economists tell us, every boom not financed on real savings must end in a bust.

Nothing comes from nothing. Fake money produces fake prosperity. Take away the fake money… and the fake prosperity goes “poof,” too.

Which is why the Fed will never, voluntarily, stop manipulating prices. It can’t let the markets return to “normal” price discovery.

Because the markets are likely to discover prices a lot lower than Dow 20,000.

“Normal” may be a lot higher than a 2% yield on a 10-year Treasury yield, too.

“Normal” may mean a deep depression as the economy shakes off the foolish investments and misallocations of the last eight years. “Normal” would also mean the disgrace of Janet Yellen and Ben Bernanke, who are largely responsible for this bubble.

But “normal” won’t stop there. The crisis of 2008–09 was a repudiation of the Fed’s fake-money debt bubble. The stock market crashed as the bubble deflated, just as it normally does. But then central banks went back to work, doubling down on their error with more hot air than ever before.

Federal debt alone almost doubled from about $10 trillion to about $20 trillion. Worldwide, $68 trillion in debt has been added since 2007 – a 45% increase – bringing the debt-to-GDP ratio to 327%.

All of this debt now hangs on the feeble reed of more ultra-low interest rate policies.

The Fed says it is going to return its interest rate policy back to normal…

No chance. It’s not that dumb.

Regards,

Bill

Editor’s Note: Last April, our research team sent a memo to the White House revealing the dire situation the American economy faces. We just released that memo to the public, so readers can be aware of the looming crisis 30 years in the making. Read it for yourself right here.

Market Insight: Credit Card Debt Nears 2008 Peak

BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners

Another sign of trouble on the horizon: Credit card debt is approaching its 2008 peak.

As you can see from today’s chart, the last time Americans ran up so much money on their cards and spent so much on bank overdrafts was in 2008.

That peak coincided with the last U.S. recession, the shaded area on the chart.

— Chris Lowe

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Mailbag

In today’s mailbag, last Friday’s Diary, “No ‘Trump Bump’ for the Economy,” has gotten some readers thinking…

I think your “Trump Bump” essay casts its net a bit too narrowly. The “Feds” are a subset of the problem – it extends at least down to the municipal level, and probably into any organization which has a “Human Resources” department. There are people who create wealth and those who pillage that creativity for control and power. The first two chapters of Gwynne Dyer’s book War give a nice description of the rise of government with agriculture. It is a “Protection Racket” and your “Deep State” is a modern manifestation. – Robert T.

Governments don’t know how to write business contracts, so the taxpayers get screwed. It doesn’t matter whether the system is capitalist or communist. Either could work if the will is honest. It is greed and corruption which strangles societies and forces them to collapse in disarray. – Andy C.

A good friend and follower of Mises correctly describes the monetary machinations of government as such: “The monetary policy of funding pet projects is no different than taking a bucket of water out of the deep end of the swimming pool, and carrying it to the shallow end while spilling the contents on the way, and then dumping the now partially filled bucket into the shallow end of the pool.” While this activity provides comfort to the masses, Alfred Montapert was correct in his caveat “Never confuse motion with progress.” – Leland B.

Meanwhile, readers consider the feud between Donald Trump and the mainstream media…

Maybe “The Donald” has a more strategic plan than you give him credit for. “The Donald” has always had a battle with the mainstream media. He made this clear right from the beginning of his run for the White House. When one is in a war, one must cut off the supply lines. The supply line for the Deep State is the mainstream media. They feed the low informed voter. The low informed voter keeps putting in the same ole cronies and swamp rats back into the government. War with the deep state media is a hard and nasty battle, with many casualties on both sides. I would be willing to bet that “The Donald” understands that if the mainstream media is not brought down, the war against the swamp critters will just continue to grow. – Richard Q.

The way things are going for CNN it may be on the auction block soon. If it does, why don’t you and your friends buy it and reorganize it to reflect the facts and the voices of middle class America, or what’s left of it? Jeff Bezos bought The Washington Post and is promoting his leftist/globalist propaganda. Now he’s looking at buying DirecTV so he can do the same on TV. Someone ought to push back. What do you say? – Helga N.

I was thinking of media bias recently and something occurred to me… The press, purely as a part of their jobs, and especially the national press, is around people in positions of importance literally all the time. They are constantly interviewing leaders in politics, academia, and business. As a result of being so well informed themselves, they naturally begin to see themselves as among the smartest of the smart. It is then a short trip to making judgments about both the issues themselves and about who among their guests are also the smartest of the smart. And from there, it requires no effort to wish for a world where those truly smart people are in positions to make the hardest and most far reaching decisions – never realizing that they have made a fundamental assumption that those decisions must be made at a high level in the first place. – Bill T.

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