This is getting just plain sick, and not in the good sense as the millennials use the term. With gold, the Dow and home prices at all-time highs, other US equity indices and cryptos near all-times highs, and a bubble in Mag 7 stocks more extreme that the 1999-2000 Dotcom Bubble ever was, the Fed is actually fixing to cut rates at its next meeting.
Giddy-Up! Or as the astute folks at Northman Traderdinged,
The Great Money Bubble...
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Now that our ‘restrictive’ monetary policy has brought asset prices back to 200% market cap to GDP and home prices are at their highest price levels ever let’s begin the next easing cycle and loosen financial conditions so we can safely embark onto the next asset bubble.
The very prospect of restarting the printing presses is testimony to both the Fed’s unremitting arrogance and its utter servility—witting or not—to the speculators, gamblers and entitled greedmeisters of Hedge Fund Land.
Of course, the impending September cut is supposedly a preemptive move to “get ahead of the curve” with respect to a softening labor market and economy. Yet that’s just the arrogance of it.
When has the Eccles Building ever been ahead of the curve? When has it ever had the clairvoyance to see more than a few weeks down the road or to even actually comprehend where the blooming, buzzing $28 trillion mass of the US economy, and the even more opaque $105 trillion global economy in which it is inextricably enmeshed, actually stood…..last week, last month or even last quarter?
A cogent testimony to the Fed’s inability to time its interest rate machinations was recently provided by Ryan McMaken. Almost without exception the recessions which inexorably follow the Fed’s exercises in “stimulus” are almost always underway when it belatedly begins one of its perennial rate-cutting cycles.
In fact, if anything, the fact that the Fed now plans to start cutting rates is one of the strongest recession signals we can get.
If we look back at the relationship between rate cuts and recessions, we see that in almost every case that recessions begin shortly after the Fed starts a cycle of rate cuts. The fed started cutting the Fed funds rate in 1989. Then we got the recession of the early 90s. In late 2000, the fed started the rate cuts again. We got a recession in 2001. The Fed did it again in late 2007. The recession began in December 2007, followed by a financial crisis several months later. This relationship even holds for the 2020 recession because even without COVID there would have been a recession in late 2020. The Fed had begun to ease the target rate in summer 2019.
Besides, why in the hell do they think that lowering the money market rates by a mere 100 or 200 basis points over the next six months in the context of an economy that is mired in nearly $100 trillion of public and private debt will make any difference at all with respect to output, jobs and sustainable income growth?
Do they really want over-extended businesses, households and governments all over America to borrow even more money and to increase their already extended leverage burdens even further?
Have they ever looked at the chart of combined US public and private debt below, and not become bothered about the relentless “direction of travel”, to appropriate Powell’s phrase at Jackson Hole.
Well, the “direction” of debt travel, and more importantly, the leverage ratio to national income (GDP) has been relentlessly skyward since Nixon did the dirty deed in August 1971. At the time, the total public and private debt stood at just $1.7 trillion (black line) and amounted to147% of GDP (purple line). The latter comprised a healthy, sustainable ratio that had more or less hovered around that level since 1870.
After 53 years of purely fiat central bank money and what Jim Grant calls the “PhD Standard, however, the total US debt today is up nearly 6o-fold to $99.2 trillion and the leverage ratio has soared to 351% of GDP.
Nor is the latter ratio just a case of gee wiz financial math. The 150% debt/GDP ratio on the eve of the Fed’s extended foray into bad money had previously prevailed through a century of economic thick and thin, wars, crises and numerous short-lived recessions prior to 1914. But growth and prosperity never got side-tracked or diluted, averaging more than 3.5% per annum for 100 years— even after you average in all the pre-1971 recessions and depressions, including the “Great Depression”.
Perchance there was some magic, therefore, in a financial arrangement that kept debt— especially government and household debt—tightly in check. Yet at the time-tested 150% of GDP standard, the total public and private US debt today would be just $42 trillion, not $99 trillion.
And that yields a number that no Fed head and Wall Street Keynesian cheerleader has ever even heard before—let alone ruminated about its implications. To wit, the US economy is now burdened with $57 trillion of excess debt relative to what would have prevailed under the gold-based sound money regime prior to August 1971.
As the man said, do ya think that might make a difference? Might that not help explain why productive investment, economic growth and living standard gains have slowed sharply, decade after decade in recent times?
Total US Public and Private Debt Outstanding And % Of GDP, 1954 to 2024
Apparently, when you have an open-ended remit to peg and manipulate money market interest rates at will, rate cuts become just like the proverbial carpenter’s hammer. That is, everything looks like a nail, and besides, cheap, cheaper and even cheaper money is cost free at the Eccles Building because it can be printed from thin air, as opposed to being derived from real money savings extracted from hard earned income.
In short, it’s so damn easy to print money and then deny, temporize and rationalize any resulting episodic inflation breakouts that contemporary Keynesian central bankers never have to wrestle with the three damning truths which undergird their destructive regime of monetary central planning. To wit—
- They are not adding to long-term growth and societal living standards, but subtracting from it by fostering dead-weight economic loss due to speculation, bubbles, malinvestments and deeply falsified pricing signals in the financial system.
- They do not smooth and ameliorate the business cycle booms and busts, but actually cause them by fueling credit-based financial bubbles on Wall Street which go bust and excess demand on main street which causes goods and services prices to rise artificially.
- They are not needed to supply “reserves” to the banking system because mandatory reserve requirements were completely abolished in March 2020. In basic respects, therefore, the Fed is the monetary appendix of the modern economy—it is a nearly vestigial organ.
Accordingly, the monetary elephant in the room ought to be damn obvious by now. In fact, history will someday show that via a breathtaking leap in mission creep, the tiny cabal of bankers, economists, Keynesians (we do not repeat ourselves), Wall Street wannabe’s and government apparatchiks who comprise the Federal Reserve Board, staff and regional branches insist on recklessly pursuing Mission Impossible.
That is to say, with the traditional “banker’s bank” functions of supplying reserves to member banks now long gone, they have arrogated to themselves the macro-managementmof the entire GDP by the week, month, quarter and even year. But that can’t be done, and does not need to be done.
When it comes to employment, incomes, business investment, housing starts and all the other dimensions of the GDP, the free market can do the job with alacrity. Twelve self-important fools sitting on the FOMC can’t even remotely hold a candle to the awesome capacities of free men (and women and theys) operating on the free market.
The Great Deformation:...
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By contrast, the FOMC can’t even begin to fathom the moving forces and endless, intricate feedback loops which are dense-packed into the fully integrated $105 trillion global economy. Indeed, in today’s world the FOMC resembles nothing so much as a race-car driver roaring down the track with his windshield painted black.
So while the Fed accomplishes nothing useful or constructive, its recurring attempts to improve upon the free market’s level of employment and output or forestall recessionary contractions which its own actions have caused, does have one utterly baleful impact. To wit, it causes relentless inflation of financial assets, but most especially so-called “risk assets” traded in the stock market as either individual stocks, index funds or now thousands of sector ETFs, which have no economic purpose other than to provide the Wall Street casino with another line of slot machines.
In any event, upwards of 88% of risk assets are now held by the top 10% of households— a figure which has been rising inexorably ever since Greenspan fired up the printing presses in the basement of the Eccles Building during the infamous 24% stock market meltdown on Black Monday, October 19, 1987.
So if you want to know who the Fed is really working for, it is the 13 million wealthiest households depicted by the purple area in the chart below. But most especially it bestows its gift of asset inflation upon the 130,000 ultra-wealthy households which comprise the top 0.1%, as depicted in the black area, and which own nearly 25% of all equities and related risk assets.
Share of Corporate Equities And Mutual Find Shares Held By The Top 10% and Top 0.1% Of Households
Needless to say, when it comes to the Fed’s real job, it do get the job done. Since Greenspan launched the modern era of hybrid Keynesian/wealth effects based central banking in the late 1980s, the average net worth of households in the top 0.1% has risen from a bountiful $17 million in 1989 to a typical UN nation-sized $155 million as of Q1 2024.
That’s right. The real wages and net worth of the bottom 50% of households has been essentially stagnant since the late 1980s. But Greenspan, Bernanke, Yellen and now Powell have seen fit to inflate the bejesus out of financial securities and risk assets, thereby causing wealth accretions at the tippy-top of the economic ladder that are literally unspeakable.
So did we say that the Fed resembles a vestigial organ?
Yes, we did, and one that is in dire need of a legislative surgeon.
Net Worth Per Household of The Top 0.1%, 1989 to 2024
Reprinted with permission from David Stockman’s Contra Corner.
