This article is the first of a four-part series on the vectors driving future economic growth. Forthcoming articles will tackle Depression, Demographics, and De-globalization.
Part 1: Debt
The discussions about economic recovery and the path ahead are ongoing. The shape it will take will defy the simplistic “V”, “W”, and “L” expressions being used by forecasters. One thing, however, is certain. Every bazooka, tank, and A-bomb of stimulus is being used to combat the downturn.
The question, so few seem to ask, is at what cost?
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” 5/29/2020 Jerome Powell Peterson Institute of International Economics.
As we will explain, what is best for economic growth and prosperity is not what Powell’s Fed is doing. Power, influence, and intellectual elitism may be winning today’s battle, but they are losing the war. The evidence is compelling.
Yardeni et al.
In a recent Grant’s Current Yield podcast, guest Ed Yardeni, said: “I find too many investors…act like preachers. They judge the Fed, good or bad, a moralistic approach. My approach, as an investment strategist is bullish or bearish.”
Yardeni’s only concern appears to be whether Fed actions are good or bad for his portfolio. Specifically, good or bad for his career.
Like all investors, we also need to understand whether Fed actions are bullish or bearish. However, we have a conscience and care about what is best and right. Yardeni’s comments remind us of the Niemoller prose, “First they came…”.
Yardeni’s view represents the epitome of expedience over principle. His perspective is not a one-off, in fact, far from it. It is a consensus among financial and political insiders. It runs through the veins of Wall Street, Congress, and the White House.
The United States is in the midst of an unprecedented third asset bubble in twenty years. The recent crisis is being blamed on COVID. We disagree, COVID is the pin that pricked the bubble.
To help visualize this, we quote from our article The COVID 19 Tripwire:
“There is a popular game called Jenga in which a tower of rectangular blocks is arranged to form a sturdy tower. The objective of the game is to take turns removing blocks without causing the tower to fall. At first, the task is as easy as the structure is stable. However, as more blocks are removed, the structure weakens. At some point, a key block is pulled, and the tower collapses. Yes, the collapse is a direct cause of the last block being removed, but piece by piece the structure became increasingly unstable. The last block was the catalyst, but the turns played leading up to that point had just as much to do with the collapse. It was bound to happen; the only question was, which block would cause the tower to give way?”
The real catalysts include the following:
- Accumulated leverage
- Poor use of cash for stock buybacks
- Fragile financial infrastructure
- Lack of productive investment
- Overzealous speculation
- Unfettered government spending
- Preference for consumption over savings
In sum, capital has been grossly misallocated towards speculation and away from productive investment. These outcomes are, in large part, a result of prior and current Fed policy.
Like households and corporations, the government also reacts to the “signals” being sent through the market. When interest rates are manipulated, strange things happen and ripple throughout an economy. When that currency is the global reserve currency, the word “strange” takes on a new definition.
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