Written by Lance Roberts, Clarity Financial
As with all things, there are always the unintended consequences of policies that are not well thought through and ignores basic economics.
After more than a decade of monetary interventions, the results are clear.
The “rich got vastly richer.”
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However, for the vast majority of Americans:
- Housing did not become more affordable.
- Wall Street converted wealth from the poor to the rich by buying properties at distressed prices (which they caused) and turning them into rentals.
- Many Americans, after a decade, are still unable to obtain financing.
- Wage growth has been nascent and has not kept up with the real costs of living.
- Lower corporate bond rates didn’t lead to more investment but instead increased share repurchases, which benefited “C-Suite” executives at the working class’s expense.
Instead, as discussed previously, the Fed’s policies led to a growing divergence between the stock market and the economy. To wit:
“The one lesson that we have clearly learned since the 2008 “Great Financial Crisis,” is that monetary and fiscal policy interventions do not lead to increased levels of economic wealth or prosperity. These programs acted as a wealth transfer system from the bottom 90% to the top 10%.
Since 2008 there have been rising calls for socialistic policies such as universal basic incomes, increased social welfare, and even a two-time candidate for President who an admitted socialist.
Such things would not occur if “prosperity” was flourishing within the economy. “
Such is simply because the stock market is not the economy.
Since It Didn’t Work, Do More.
The Fed’s interventions and suppressed interest rates have continued to have the opposite effect intended. I have shown the following chart below previously to illustrate this point.
From Jan 1st, 2009 through the end of 2020, the stock market rose by an astounding 200%, or roughly 18% annualized. With such a large gain in the financial markets, one would expect a proportional growth rate in the economy.
After bailouts, QE programs, interventions, monetary and fiscal programs totaling more than $37 billion, cumulative real economic growth was just 21.52%.
While monetary interventions are supposed to be supporting economic growth through increases in consumer confidence, the outcome has been quite different.
Low to zero interest rates have incentivized non-productive debt and exacerbated the wealth gap. The massive increases in debt have harmed growth by diverting consumptive spending to debt service.
However, the hope is that while it didn’t work over the last decade, maybe doing more will be “different this time.”
A Continuation Of Boom/Bust Cycles
While the Fed has found cover in its new “benchmarks” to continue monetary policy nearly without restriction, the outcomes are unlikely to be any different.
The Keynesian view that “more money in people’s pockets” will drive up consumer spending, with a boost to GDP being the result, has been wrong. It hasn’t happened in 40-years.
As Joseph Carson, former Chief Economist at Alliance Bernstein, concluded:
“Given the scale of fiscal stimulus, one would expect the Fed to be thinking of ‘leaning against the wind.’ But not this Fed – the Fed is using the same playbook from the Great Financial Recession, providing unneeded stimulus to a red-hot housing market.
What’s the economic and financial endgame? It’s hard to see anything but a ‘boom-bust’ scenario playing out with fast growth and rising market interest rates in 2021 and early 2022, followed by a bust in late 2022/23 when the fiscal stimulus/support dries up.
The US experienced mild recessions following the sharp drop in government military spending after the Korean and Vietnam wars – -and back then, the scale of military expenditures amounted between 2% and 4% of GDP. The ‘sugar-high’ today is unprecedented, raising the odds of a harder landing.
While mainstream economists believe more stimulus will create robust economic growth, no evidence supports the claim.
More importantly, while the Federal Reserve may not raise interest rates any time soon, the bond market may well take care of that problem for them. As shown below, that is a process already well underway with an adverse event likely closer than many expect.
The Fed’s problem comes when a burst of inflation and rising rates collide with the massive debt levels overhanging the economy.
As Joseph Carson notes, the next “boom/bust” cycle is likely already in the works.