This week, the seamless transfer of wealth from workers and savers to governments and large financial institutions continued diligently, almost mechanically. In the U.S., the sophistication of this ongoing process often goes unnoticed.
While the American audience is captivated by NFL football, EBT card use at Del Taco, and Adam Schiff’s impeachment saga, these trivial distractions offer endless opportunities for people to frolic in the wild goose chase of daily life.
Meanwhile, debts accumulate silently, resembling deadwood in Sequoia National Forest. Both public and private debts have reached staggering heights and remain unlikely to be repaid. As noted by the IMF, global debt has surged to an unprecedented $188 trillion, approximately 230 percent of the world’s economic output.
It’s likely that a significant portion of this private debt will default during the next economic downturn. However, governments will go to great lengths to avoid outright defaults on public debt. Central banks ramp up their printing operations, attempting to ease the burden through inflation.
After President Nixon temporarily suspended the Bretton Woods Agreement in 1971, there were no longer technical limitations on expanding the money supply. This allowed the government to issue new debt to cover expenditures that exceed tax revenues. Since then, inflation of the money supply has become the norm in the U.S. and many other countries.
A Disgraceful Reality
Increasing the money supply erodes the value of currency, allowing governments—who are first to spend this newly printed money—an underhanded access to your savings. Without imposing new taxes, they draw from your wealth and potential earnings, leaving you with currency that buys less.
As money dwindles in value, prices for goods and services appear to rise. This apparent increase in prices is more a reflection of currency devaluation, mainly propelled by government deficit spending.
When deficits are financed by the printing of money, something truly alarming is occurring. Unfortunately, this disgraceful practice has become commonplace in the U.S. and many parts of the globe. This is the reality we face.
Recall that the Fed recently initiated quantitative easing again (though it’s avoiding that terminology). In this latest phase, the Fed is purchasing Treasury bills at a rate of up to $60 billion per month through at least the second quarter of 2020. At this rate, the Fed’s balance sheet is set to reach a record high of over $4.5 trillion.
This means the Fed is purchasing tens of billions of dollars in government debt monthly, paid for with newly minted dollars. These dollars end up in the accounts of major commercial banks, and the government does something remarkable with this created wealth: They spend it!
Moreover, as money loses its value, the processes of earning, saving, and accumulating wealth are similarly compromised. Soon, it devolves into mere gambling and speculation. Yet, many who are caught up in this speculative frenzy fail to recognize the reality of their situation.
Every Bubble Eventually Finds Its Pin
Last week, passive investors had much to celebrate as they gathered around their Thanksgiving tables. S&P 500 ETFs had risen by 27 percent year-to-date, and a Santa Claus rally seemed poised to keep spirits high through the year’s end. If such trends continue for another year or two, these savvy indexers may be able to retire a decade ahead of schedule.
The surge in apparent wealth has created a false sense of security, masking increasing risk and fragility. Speculating in the market, while projecting current trends to pinpoint retirement dates, feels far more rewarding than sacrificing short-term gains to safeguard against catastrophic losses. Why be concerned when the “Powell put” is firmly in place to cushion any market tumbles?
After enjoying a decade-long bull market, U.S. investors have grown complacent. A glance at the S&P 500 price chart over the past 40 years reveals a steady upward trajectory for stocks in the long term. Popular—yet misguided—justifications for continued prosperity abound…
In this mindset, the stock market is not perceived as a bubble; instead, it is simply climbing a wall of worry. Bull markets, it is argued, don’t expire from old age, and they won’t end until the last bear capitulates.
However, what if the stock market is not, in fact, surmounting a wall of worry? What if it’s a colossal bubble fully embraced by index investors? What force will ultimately deflate it?
Ultimately, it makes little difference what sparks the collapse. Every bubble eventually identifies its pin. When this bubble bursts, as all bubbles eventually do, the remaining wealth of workers and savers—encouraged into the market by Washington’s policies of rampant dollar devaluation—will meet a devastating end.
Undoubtedly, navigating the impending fallout will be a daunting task.
Sincerely,
MN Gordon
for Economic Prism
Return from Every Bubble Eventually Finds its Pin to Economic Prism
