Recently, the G20 finance ministers and central bankers convened in Sydney, Australia, to discuss strategies for economic growth. In a bold statement, they proclaimed their goal to enhance global GDP by over 2 percent within the next five years, adding more than $2 trillion in economic activity and millions of jobs. This ambitious agenda aims to spur growth in a rapidly changing global economy.
“We are putting a number to it for the first time — putting a real number to what we are trying to achieve,” announced Australian Treasurer Joe Hockey. “We want to add over $2 trillion more in economic activity and tens of millions of new jobs.”
While these aspirations sound promising, we should approach them with caution. German Finance Minister Wolfgang Schaeuble offered a sobering perspective: “What growth rates can be achieved is a result of a very complicated process. The results of this process cannot be guaranteed by politicians.”
In essence, economic prosperity cannot be simply decreed; it requires a more nuanced understanding of market dynamics. However, this is often overlooked by policymakers.
Creating Massive Asset Bubbles
Is it feasible to inject “over $2 trillion more in economic activity and tens of millions of new jobs” into the economy? Indeed, it is conceivable—and perhaps achievable.
However, credit for this growth should not be attributed to the G20 attendees; they often act as a hindrance rather than a help. The most beneficial action they could take would be to stop manipulating the money supply and credit.
Another critical step would be to minimize the avalanche of regulations imposed by lawmakers that stifle economic potential. When individuals are free to reap the rewards of their hard work—including money and property—they are motivated to innovate, be industrious, and take calculated risks. Why would anyone strive for success if they face penalties for their achievements?
Inflationary policies, perpetuated by central bankers and finance ministers, unfairly penalize diligent savers while disproportionately benefiting the wealthy, who can afford to invest in assets. As inflation escalates asset prices, the wealthy see their fortunes swell.
This mechanism is key to understanding why the income gap has widened dramatically in recent years. The Federal Reserve’s aggressive money creation strategies were supposed to stimulate job creation and economic progress, yet they instead fostered substantial asset bubbles and enriched the ultra-wealthy.
Shattering the Fed’s Hall of Mirrors
Eventually, asset prices—including stocks—will inevitably deflate. Though the timeline remains uncertain, it’s surprising that the current price surge has persisted for as long as it has.
However, the influx of easy money that has propped up stock prices over recent years cannot last indefinitely. This unsustainable momentum could falter either due to the tapering of quantitative easing or a shift away from zero interest rate policy (ZIRP), leading to higher Federal Funds rates.
The collective acknowledgment that the stock market is overvalued and that economic performance is influenced by factors beyond mere weather could serve as the catalyst that deflates the asset bubble. Yet, this timing remains unpredictable. Ultimately, a sustained decline in stock prices is inevitable.
Still skeptical? Consider the insight from Jim Grant, founder and editor of Grant’s Interest Rate Observer, who expressed his concerns on CNBC’s Squawk Box: “My fear is because interest rates are suppressed, therefore earnings are inflated. So when rates go up … the ‘hall of mirrors’ is shattered, and we look at each other and see what actually is real rather than what the Fed wants us to believe.”
Yet, perhaps more alarming than the potential for plummeting stock values is the question: What actions will the Fed be compelled to take once their illusions collapse?
Unfortunately, we may soon face these challenges head-on.
Sincerely,
MN Gordon
for Economic Prism
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