Economist Herbert Stein's old adage that “If something cannot go on forever, it will stop", puts our current predicament into perspective perfectly.
Our economy has been distorted irreparably by negligent monetary and fiscal policy that is reaching an “end-of-life” of sorts, losing effectiveness, revealing consequences and providing yet another painful lesson in the deficiencies of top-down central planning.
While the mere existence of the Federal Reserve System or any other system of central banks or centralized monetary control for that matter, represents an experiment in financial engineering (… actually there have been a series of failed experiments), our current trial of command-and-control monetary scheming, while long running, has proved to be nothing short of ruinous.
For the last 50 years, the Federal Government and Federal Reserve, working in tandem, essentially debased our economic system, starting with the final abandonment of the “gold standard” in 1971 (providing the full flexibility of a fake fiat money system) and leading to the present day, after 10 years of post-Great Recession reckless fiscal and monetary policy and 2+years of truly outlandish pandemic-era schemes that saw the Federal Government’s total public debt soar roughly $20 trillion to stand at just over $30 trillion while the Federal Reserve’s total assets (mostly U. S. Treasury securities, about $5.7 trillion, and Federal agency debt and mortgage-backed securities of about $2.7 trillion) bloat by roughly $8 trillion over the same period.
In the intervening years there were various other lesser "moral hazard" inducing episodes (e.g. Greenspan-era responses to the Crash of 87, LTCM, Dotcom Crash), but what initially set us on our current course of persistent inflation and oncoming economic calamity was the unprecedented and reckless overreaction to the 2007/08 national housing bubble bust which was the moment that fiscal and monetary authorities “crossed the Rubicon” on a one-way escapade that eventually set up the truly distorted and insane response to the COVID-19 pandemic panic.
In the face of the fear of the consequences of the bursting of the national housing bubble, the Federal Government and Federal Reserve “blinked”, and in a supposed noble attempt to blunt the severity of the oncoming “Great Recession”, “kicked the can down the road” by propping and pumping and bailing using every conceivable means at their disposal and even inventing a number of novel fiscal and monetary schemes as well.
Never before had the Federal Reserve attempted such a colossal bail out of the entirety of the economic system acting as the apex-lender of last resort, backstopping both troubled financial firms holding illiquid mortgage-backed assets as well as bailing out the Federal Government itself, by stepping up to fill in as an immense direct buyer of government treasury and agency debt securities thereby singlehandedly financing large portions of government policy.
On the fiscal side of the equation, the Federal Government sought a number of irrational goals; From sanctioning and even assisting failed homeowners in breaking the contractual obligations of their home loans to creating the first never-ending unemployment benefits program, a “clunker” automobile buy-back boondoggle and even bailing out various auto manufactures; from TARP and TANF and HARP to HAMP, the Federal Government left no stone unturned when providing an endless array of unearned “benefits” so long as all efforts appeared to “reinvest” in America and the American Recovery.
Taken together, these efforts by the Federal Reserve and Federal Government did work to induce confidence in the population, putting a floor under the stock market in March of 2009 (an outcome expressly desired by then Fed Chair Ben Bernanke in 2011) and generally dulling the pain of this epic financial meltdown, but at the cost of the fidelity of our economic system and a future more fundamental reckoning as we are all eventually forced to square off against an inevitable harsh reality.
Despite much intellectual hand-wringing waving with regard to the Feds post-2008 activities and its effect on the presence or absence of velocity of money; to gain a sense of the scale of their activities, it is important to note that it has been estimated that roughly 30% of the overall U.S. mortgage market is directly financed by the Federal Reserve.
This means, more specifically, that even to the present day (obviously well beyond the 2007/08 housing collapse), for 30% of all home sale transactions involving a mortgage (i.e. specifically, the transactions involving Fannie Mae, Freddie Mac or Ginnie Mae guaranteed MBS) the mortgage lender is the Federal Reserve itself.
Where does the Fed get the “money” to provide for all these loans? It just creates it from thin air, a series of bits on their digital balance sheet.
To put this in perspective, just the roughly $2.7 trillion minted by the Fed expressly for lending through Fannie, Freddie and Ginnie, is equivalent to the total lifetime earnings of over one million U.S. households.
This level of extensive money creation combined with the “moral hazard” of continuous crisis-politics driven Federal policy has worked to debase our money system as well as our population’s common sense and basic recognition of risk, breeding outsized expectations for the role of government and a lack of respect (domestically at least) for the dollar.
Taken together, this resulted in a kindling of sorts, laying-in a blanket of potential high energy “money” awaiting a spark to set off a conflagration of pernicious and persistent inflation and ultimately leading to the dreaded wage-price spiral.
It appears that the COVID-19 panic and the associated period of utter insanity worked to provide that spark, driving authorities to their furthest excursion into fiscal and monetary “la la land” doubling down on all prior malfeasance and radically influencing American’s sense of value leading to epic levels of speculation in stocks, housing and digital tokens and other speculative assets.
Now, after 13 years of reckless economic mismanagement, we again find ourselves holding the can.
Our authorities naturally will want nothing more than to stride back and give it another good kick, but this time they won’t because they can’t.
This approach could not go on forever, so now, finally, it will stop.
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