I wanted to discuss the powerful, ridiculous, and rampant economic absurdities and financial insanities we are now observing in the world as BAU draws to a close and the noose gets tighter.
A quick note on sources: I have provided none. I believe all of this is true and easily verifiable with google. If any of it is not, challenge me! I’ll try and prove myself right while you try and prove me wrong. Eventually one of us will realize they are wrong, insult the other, and life will continue.
Massive Money Printing and Crazy Policy
After the financial crisis of 07/08, central banks responded by engaging in massive rounds of what I like to call “financial experimentation”. The two biggest plays included quantitative easing (QE, AKA printing a lot of money) and zero interest-rate policy (ZIRP). Both of these have played out in rather interesting and unexpected ways, and both have ramifications that are, shall we say, “startling”.
QE pushed massive liquidity into markets. In fact, the US money supply increased from around 1.4 trillion in 2008 to 3.6 trillion today. Performing the division, we see that in a period of 10 years (2008 to 2018) the US money supply increased by a factor of 2.57. That’s a 257% increase in 10 years, or around 25% per year. You can see why when QE started economists were scared of inflation, or even hyperinflation.
However, as far as we can tell, inflation did not happen. In fact, inflation has been stubbornly low despite the Fed’s efforts to raise it. How is this possible? There are many proposed solutions to the paradox. It has been noted that the velocity of money, a measure of how fast money is changing hands, has precipitously decreased. So even though there is a greater supply of money, it is changing hands less often, making the bidding war that leads to price inflation less potent. Another (and in my opinion more likely) explanation is that rather than moving into the hands of the general populace, that money has been flowing from banks of the wealthy beneficiaries of financial stimulus directly into asset markets. And in fact, despite a very slowly growing economy, the asset markets are on a tear, increasing wildly in value during one of the longest bull runs in history.
We might call this asset hyperinflation, and it’s truly scary for anyone nearing retirement age. The fact is, despite the monetary markers being good, there is not that much value in the asset markets. This is setting the next market correction up to be a doozy. No one knows when it will happen, but when it does I recommend ducking for cover. There are some indications, such as the Fed’s (absolutely moronic) plan to unload its portfolio and increase interest rates, that this correction is coming soon, but who knows? This is the era of can kicking, and I for one hope that our governments have strong legs.
ZIRP is a pretty crazy policy. With a federal funds rate of 1.5% just introduced, and an inflation rate hovering at around 1.26%, the Fed has only just recently stopped paying people to borrow money. That’s… well, that’s fucking nuts. The economy is so weak the only way to keep the show running has been paying people to interact economically. Whew.
Of course, with so much money supply and interest rates so low, the Fed is getting pretty nervous. That’s because they know that, statistically speaking, we are late in the business cycle. If history is any guide, then a market correction is on the way. And if that hits with interest rates still near zero, and a decade of QE leaving the US with 2.5 times the money supply we used to have, and a massive Fed balance sheet… well, if the correction comes soon the Fed won’t have any moves left to play. Except, of course, for the now seriously proposed negative interest rate policy, in which central banks pay others to keep the economy moving a bit longer.
Bubbles and Mass Psychosis
It’s being called the “Everything Bubble”. Every asset, from houses, to bonds, to stocks, to cryptocurrency (more on that below) is going up in value. And not just small rises. Rises so big we are actually asked to believe that the asset value of the US economy is over twice as large as it was in 2008. Seriously! Anyone with a brain can look at that statement and know it’s not true. And yet, that is the narrative. And the bubbles in the economy, fueled by cheap money and deregulation, are doing a lot to aid that narrative, at least for the time being.
Isn’t this some sign of global psychosis? The denial is reaching levels that are truly staggering. What do these people think is gonna happen when people try to cash out of the (hyperinflated!) asset markets? We now have a generation of baby boomers who, thanks to this “recovery” believe that their retirements are assured. The next generation of savers and investors are learning their first lessons from the cryptocurrency, house, stock, and bond bubbles being fueled by cheap money. How disappointed they will be. How devastating psychologically will it be to slowly realize, over the course of decades, that they’ve been fed (pun not intended) a lie about a financially stable and prosperous future that cannot exist?
The bubble economy is the result of instability and lack of growth. Desperate for returns of any kind on investment, capital flows in to asset markets. The inflow of capital propels the markets to stunning new heights, meanwhile the nearly stagnant real economy provides no backing to the perceived value. The distorted markets tell us we are fine at the precise moment we should be most worried, their value indicators nothing more than digital numbers. Unfortunately for civic peace, that illusion will be dashed when people realize that we cannot eat money, and paper is not a sufficient fuel to move an automobile.
Cryptocurrency might be the best single example of the mass hysteria that is ongoing in world asset markets. Crypto-enthusiasts, as they lovingly call themselves and as others ironically call them, have set a new standard for the insanity inherent to asset bubbles. Some believe that cryptocurrency can take over the financial system, despite all the evidence that crypto does not scale well, consumes massive amounts of energy, is almost universally controlled by a few wealthy majority owners, and the most damning of all, that with its massive military and legal might, the US government has not done a damn thing to stop them. We can only conclude from this that those in power in government have decided that cryptocurrency is not a threat, and I’m quite certain they had good reasons for this judgement call.
And yet, despite all evidence to the contrary, the mania rages on. Crypto alone displays a market capitalization equal to one half the size of the dot-com boom(correction, equal to one half of the losses from the dot-com bubble bursting), and this ignores all tertiary value tied up in crypto ventures. Self-styled “investors” bounce from one pump-and-dump scheme to the next, trying to get in before the hype inevitably wears off and the value of that particular crypto-holding declines. Getting burned, rather than cooling the bubble, simply increases the drive to get on the rich train before it leaves the station. Of course, it already did some time ago. “You missed it” is not something the new entrants to the crypto space will hear.
So this is the financial backdrop of the current world. This is what we expect in a world in which our markers of value (currency) are becoming increasingly divorced from real value (primarily, energy and resources). World output is flat or barely growing. World output per capita is declining. And yet, the amount of money, whether in the form of dollars or the financial measurements of asset values, continues to increase exponentially. The yardsticks we use to assess the world are being distorted and degraded each day, losing the meaning they once had. But people have not yet realized this, creating a perfect storm of financial instability.
I do not know when this will end, or what form it will take, or what the ultimate trigger will be. But it will end, and the result will not be pretty.