Socialist central planning has been elevated to a new art form based on control of the economy from the commanding heights of finance.
Central banks were once in the money business, in the sense of securing its availability, liquidity, and stable value. But the contemporary Fed never says a peep about the place where money arises and dwells — the financial markets — while gumming endlessly about the Main Street economy and the condition of and its targets for the components and constituents of GDP.
During the last 43 years, total financial assets held by the household sector have increased by a staggering $100 trillion. And that’s just a proxy for the massive levels of bank deposits, money market funds, bonds, publicly traded shares, and private equities that flow through the warp and woof of the nation’s $21 trillion GDP.
Total Household Financial Assets, 1977–2020
The Fed spent the last 13 years capping and smothering the money market rate.
That’s socialism by any other name.
Ironically, it’s leading to the same outcome as in the old Soviet Union: a failing economy for the masses and a concentration of wealth and privilege among the few elites who are close to the levers of control.
The chart below shows the real federal funds rate, calculated by subtracting the year-over-year trimmed mean-CPI increase from the Fed’s target rate. During the last 169 months (since March 2008) the rate has been deeply negative for 96% of the time and just a tad positive for a grand total of 7 months, all in 2019. And now, after last year’s money-printing orgy, the real federal funds rate stands at –2.37%, nearly the deepest level ever.
Never in a million years would participants in voluntary exchange on the free market lend money — even overnight — at a negative real rate. It defies economic logic and sanity itself.
Real Federal Funds Rate, 2008–2021
But these new mechanisms of socialist control — just like in the old Soviet Union — were not remotely up to the task. Among the manifold failings and ills in the latter, was the fact that central planning tended to produce enormous unintended malign effects owing to erroneous incentives and price signals.
For instance, Soviet nail factory managers got measured and rewarded by the tonnage produced. The story goes that one enterprising chap massively exceeded his quota by producing only ten-ton nails!
Effectively, that’s what is happening in the financial markets today. The central bankers are aiming at the personal consumption expenditure deflator and the U-3 unemployment rate, but the enormous injections of liquidity designed to keep the interest rate control dial on target never really leave the canyons of Wall Street.
Instead, they radically inflate the price of financial assets and deflate the carry cost of debt, thereby causing economic actors to copy the Soviet nail factory manager.
For instance, the C-suites foolishly cripple their balance sheets by allocating trillions to financial engineering maneuvers such as stock buybacks and uneconomic M&A deals.
The chart below shows the net equity flow into the US business economy since 1994, as tracked by the Federal Reserve. During that 26-year period, there was but a single year (2002) when nonfinancial corporations raised a positive amount of net equity, while liquidating a total of $8 trillion of book equity over the period.
Stated differently for the better part of the last three decades the C-suites of corporate America have liquidated an average of $310 billion of corporate equity per year.
Effectively, they are running glorified hedge funds, not Main Street businesses.
Net Corporate Equity Raised or Liquidated, 1094–2020
There is no mystery as to where all the corporate cash used to buy back shares and buy out other companies went: the top 1% and 10%, who own 40% and 71% of the stock, respectively, and the top 20%, who own 93% of the total.
When it comes to the task that the free market, not the central banking branch of the state, is suited for — generating rising living standards and real, sustainable wealth — the Fed — like the Soviet planners—is producing a lot of useless 10-ton nails.
Editor’s Note: The Fed has already pumped enormous distortions into the economy and inflated an “everything bubble.” The next round of money printing is likely to bring the situation to a breaking point.
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