Stagflation, declining labor productivity, exorbitant levels of public and private debt, and a fractured real estate market—all are symptoms of an economy that resembles a rundown Cutlass Supreme, sputtering and primed for a breakdown.
There’s little hope that central planners can repair this situation. No strategies or blueprints will get this weary vehicle running smoothly again. One repair leads to another issue, exacerbating an already dire circumstance.
Eventually, some things are beyond repair. In such cases, the sensible choice is to scrap the old vehicle entirely.
In parallel, the same must be said for the central planners accountable for this chaotic economic landscape. They have fostered a toxic environment that may take generations to rectify.
It is time to eliminate the corruption and acknowledge past mistakes. A thorough cleansing of the accumulated economic distortions is essential. But first, let us provide some context.
Over the past four decades, there has been a trend of heavy-handed central economic planning fueled by interventionist monetary policies. The last 14 years, especially after Ben Shalom Bernanke unleashed quantitative easing (QE), have seen an escalation of these interventions.
Since the collapse of Lehman Brothers, through the Great Recession, and during the pandemic, the Federal Reserve has manufactured more than $8 trillion in credit out of thin air. The economy and financial markets have grown reliant on this influx.
Yet, the Fed now finds itself constrained by soaring consumer price inflation, making immediate relief through money creation impossible.
Simultaneously, financial markets are undergoing a protracted downturn. For instance, the Dow Jones Industrial Average (DJIA) peaked at 36,675 on January 4 but has since plummeted to 30,333, reflecting a drop of over 17 percent.
In our view, the stock market still has significant ground to lose, perhaps reaching its nadir by Q1 2024. Unfortunately, more discomfort lies ahead.
Half Measures Avail Nothing
The drop in the DJIA is not a smooth descent. It’s more like a rubber ball ricocheting down a set of stairs. Attempting to short this market could lead to significant losses during a bear market squeeze.
However, the real turmoil isn’t taking place in the stock market. It’s centered in the bond market, where the yield on the 10-Year Treasury note has surged to 4.24 percent, a 15-year high. At the start of the year, it was just 1.76 percent.
Is it feasible for borrowing costs to increase so dramatically in such a brief period without wreaking havoc on the economy and financial markets?
To clarify, the goal of the Federal Reserve’s interest rate hikes is to cause disruption as a means of addressing past mismanagement.
Half measures will achieve nothing. The Fed must fully commit to its course of action.
Take, for instance, the current consumer price inflation rate, which stands at an annualized 8.2 percent. In contrast, the federal funds rate hovers between 3.00 and 3.25 percent. Curtailing rate hikes now would allow inflation to spiral uncontrollably.
Undoubtedly, Fed Chair Powell hesitated in 2021 as inflation emerged due to extensive money printing during the pandemic. The Fed, working in tandem with the Treasury and Congress, is responsible for this predicament.
Currently, however, the Powell-led Fed is seemingly unwavering in its commitment to combat inflation.
Disunited Front
Imagining a breakfast of bacon and eggs highlights two kinds of commitment. The chicken participates by laying eggs, while the pig is fully invested—its life is sacrificed for bacon.
This metaphor applies to Fed Chair Powell’s commitment to further interest rate hikes. Similarly, the Bank of England and the European Central Bank have little choice but to follow suit.
Globalists at the United Nations have expressed discontent with this course of action. Recently, the United Nations Conference on Trade and Development (UNCTAD) issued its annual report, urging the Fed and other central banks to halt interest rate increases.
UNCTAD’s planners argue that raising interest rates would undermine pandemic promises aimed at fostering a more sustainable and inclusive world.
This perspective is laughable. Their alternative solutions—such as strategic price controls and income support for vulnerable groups—are more troubling. Price controls do not lower inflation; they can lead to supply shortages and exacerbate inflationary pressures by discouraging production.
Why would farmers produce more wheat if production costs exceed the controlled selling price? Why would oil producers maintain output if they are forced to sell at a loss?
Ultimately, price controls contradict economic reality. However, UNCTAD’s central planners seem enamored with this approach, reminiscent of Marxist ideologies.
Operation Break Stuff
The Fed’s interest rate hikes will undoubtedly have destructive consequences, as this is their intended outcome. This process is necessary to clear away the remnants of previous excesses.
It may be uncomfortable, but it is essential. Furthermore, half measures will exacerbate the situation rather than resolve it. Here’s why…
“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system,” advised Treasury Secretary Andrew Mellon at the onset of the Great Depression.
“High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
It’s unfortunate that President Hoover and later President Roosevelt ignored Mellon’s straightforward advice. Their rescue efforts—confiscating gold, debasing the dollar, imposing price controls, and enacting stimulus plans—turned a manageable downturn into a decade-long economic depression.
We may not like it, but we cannot deny it: Significant discomfort is unavoidable.
The dilemma boils down to accepting minor pain now by permitting interest rate hikes to take effect or risking a catastrophic societal collapse from hyperinflation in the near future.
A collapse of markets—including currency exchanges, debt markets, stock markets, real estate, and beyond—will cleanse the system. This is the purpose of “operation break stuff.”
As it stands, the DJIA is down over 17 percent for the year. Treasuries are under significant strain, with the 10-Year note yield at a 15-year high. Existing U.S. home sales have plummeted to an 8-year low…
…and the impact of “operation break stuff” has only just commenced.
[Editor’s note: We have provided ample warnings and strategies for our readers to prepare for the impending changes. If you are interested in learning more about unconventional investment tactics to protect your wealth and financial privacy, consider reviewing the Financial First Aid Kit.]
Sincerely,
MN Gordon
for Economic Prism
