While death and taxes may be the only certainties in life, change also stands out as an undeniable constant. Change is always unfolding around us.
Sometimes, change brings improvement; at other times, it presents challenges. Nevertheless, it’s an inevitability we should prepare for. With that in mind, let’s explore a perspective on what lies ahead.
“We should all brace ourselves for adjusting to a world that is more difficult,” stated Charles Munger last week in Los Angeles. Munger is known as Warren Buffett’s billionaire partner and a key figure in Berkshire Hathaway’s success. His comments followed a query regarding the Federal Reserve’s significant expansion of its balance sheet since the 2008 financial crisis.
“You can expect the purchasing power of money to decline over time,” Munger continued. “And you can almost guarantee that you’ll face more challenges in the next 50 years than you have in the last.” He further argued that the past half-century has been an exception to the norm…
“At my age, I’ve witnessed the most prosperous and easiest period in history — characterized by the lowest death rates, remarkable investment returns, and substantial improvements in living standards. If you’re dissatisfied with the last 50 years, you might be misjudging life.”
Running in Place
Change affects everyone. Consequently, it’s plausible that the next 50 years may not treat the average person as kindly as the previous half-century did, especially in light of recent monetary policies.
Let’s briefly revisit the events of autumn 2008, during which the Federal Reserve made a substantial error in judgment. Believing they were saving the world from itself, they entered a phase of dillweed economics. In essence, they embarked on a path of money degradation on a scale never seen before in documented history.
The long-term repercussions of the Fed’s decisions are why Munger anticipates greater economic hardship in the future. As the purchasing power of money diminishes, individuals experience an unfortunate reality: working harder, earning less, and feeling as if they are merely treading water.
Meanwhile, the sole fleeting success—the record stock market—generated by the Fed’s strategy of mass money debasement is quickly losing momentum. A series of miscalculations by the Fed has set the groundwork for a significant failure. Any attempt to rectify these errors will likely destabilize financial markets.
The longer the Fed holds back, the more severe the eventual repercussions will be. Yet, who would want to intentionally spark a massive financial crisis, especially when recent economic growth hasn’t returned to the robust levels seen in past post-recession recoveries?
Prepare for a Harder World
“The Fed’s in a tough spot,” concluded Peter Boockvar, chief market analyst at The Lindsey Group. “When the Fed had the option to raise rates, it hesitated. Now that it seeks to raise them, it may find itself unable to do so without causing considerable disruption in the very financial markets it aimed to stabilize.”
Once financial markets start to falter, it will become clear that the economic recovery was more of an illusion than reality. The substantial inflation of asset prices since 2009 will rapidly vanish, along with the paper gains enjoyed by investors.
We cannot predict whether the next significant market crash will occur next month or in the following year, but it is inevitable and will be astonishing in its impact. What then?
Of course, the Fed will likely respond with further measures to debase the currency. But will these actions be effective in averting financial panic?
They may work, as they have in the past, but we should not harbor any illusions about their ability to genuinely benefit the real economy. They won’t create well-paying jobs. However, they are likely to distort prices, widen the income gap, and lead to increasingly disruptive financial bubbles. If the Fed pushes too hard, it may eventually trigger a currency crisis.
The takeaway: Be prepared for change and anticipate a world that is tougher and less forgiving.
Sincerely,
MN Gordon
for Economic Prism
