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.
(Source) http://blogs.wsj.com/economics/2015/01/01/wha...y-in-14-charts/
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:
(Source) target="_blank" http://www.zerohedge.com/news/2016-09-21/1...ave-dance-floor
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.
(Source – N target="_blank"YT) http://economix.blogs.nytimes.com/2014/...owing-too/?_r=0
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 thing it means that the recent efforts by the
Fed to provide massive amounts of liquidity support to the biggest and
wealthiest banks at the inflationary expense of the lower classes were not
only misguided, but they were cruel and unusual.
This leads to an easy prediction to make: The wealth gap in
the US will hamper our recovery and deepen the downturn.