“We’re a creature of Congress, we’re not in the Constitution.” – Fed Chair Jerome Powell, December 4, 2024
Chasing the Wild Goose
The relentless transfer of wealth from workers and savers to the government and major banks continues with striking efficiency. This process, both methodical and understated, often escapes scrutiny in the United States.
In the midst of NFL games, holiday BOGO promotions, and political dramas — like Trump’s cabinet selections or Hunter Biden’s pardons — the American public finds endless distractions, chasing after things that hold little substance.
Yet, while the nation is preoccupied, debts accumulate like fallen branches in Angeles National Forest. Both public and private debts have grown to levels that far exceed what the economy can realistically support.
The national debt has soared past $36.1 trillion, but this is merely a fraction of the overall financial picture. Unfunded liabilities, which include Social Security, Medicare, and federal employee benefits, exceed an astonishing $221.4 trillion. For each U.S. citizen, this equates to a staggering burden of over $645,322.
The combined household and business debts in non-financial sectors have crossed $41.6 trillion. It’s inevitable that some of this private debt will face defaults during the next economic downturn. Meanwhile, Washington is committed to preventing any outright public debt defaults at all costs.
In response, the Federal Reserve has initiated cuts to the federal funds rate, hoping to alleviate the Treasury’s borrowing expenses. However, these rate cuts have yet to yield any positive results; since the cuts began on September 18, the yield on the 10-Year Treasury has risen by 47 basis points.
If Treasury rates continue to defy the Fed’s expectations, we should brace for another round of quantitative easing, aimed at artificially suppressing Treasury rates and depreciating the dollar.
Shrinkage
When Nixon temporarily suspended the Bretton Woods Agreement in 1971, it opened the floodgates for increasing the money supply without any physical constraints. This meant that the government could issue new debts to cover expenditures that exceeded tax revenue. Since then, inflation driven by government policies has become standard practice in the U.S. and globally.
As the money supply grows, the value of currency diminishes, which enables governments — first in line to spend this newly minted money — to indirectly access your wealth. This method allows them to extract from your future earnings while leaving you with currency that buys less and less over time.
The toll of this hidden extraction is reflected in the significant unfunded liabilities each citizen must bear. Most people only notice the consequences when they reach the checkout counter and find that even basic items have soared in price.
Over the past four years, consumer prices have risen by more than 22 percent, an increase politicians frequently attribute to corporate greed. In reality, the rise is a direct consequence of the dollar’s devaluation.
As the currency weakens, it appears that prices are climbing. This increase is primarily driven by persistent deficit spending.
The Fed continuously works to fund these unprecedented deficits…
Rolling the Dice
Financing deficits through central bank credit creation raises serious ethical concerns. This practice has unfortunately become standard policy both in the U.S. and across much of the world.
It is anticipated that the Fed may further reduce rates by an additional 25 basis points following the next FOMC meeting on December 18, marking a total reduction of 100 basis points during this cycle, all occurring while consumer price inflation remains considerably above the Fed’s targeted 2 percent.
Effectively, the Fed is facilitating annual deficits nearing $2 trillion, which Washington then injects into the economy for a range of expenditures, from military funding to food assistance programs. As a result, the value of dollars in your bank account and income suffers as they are systematically devalued.
This diminishment of the dollar makes earning, saving, and accumulating wealth increasingly problematic, reducing it to a mere game of chance and speculation. Many who engage in this risky behavior do not recognize it for what it is.
Now, as the late-stage bull market reaches its zenith, countless retirement accounts, including 401(k)s and IRAs, hinge on favorable outcomes akin to rolling dice.
So far this year, passive investors are experiencing a surge, with the S&P 500 climbing over 28 percent. A likely Santa Claus rally promises to maintain this positive momentum as the year draws to a close.
If this trend continues for another year or two, those diligent index investors might find themselves retiring a decade ahead of schedule.
Are You Unknowingly on a Suicide Mission?
The surge in paper wealth, fueled by inflated stock market indices, provides a deceptive shield for rising risk and fragility. Betting on the market while ignoring potential large, portfolio-wrecking losses is currently deemed more lucrative than sacrificing short-term profits for long-term stability.
Why stress when the “Powell put” seems to assure market stability, even when issues arise?
After a fifteen-year bull market with minimal corrections, U.S. investors have grown complacent. A glance at the S&P 500’s performance over the last 40 years clearly shows an upward trend.
If stocks are generally on an upward trajectory over the long term, is there really any risk in betting retirement savings on the S&P 500 index? Provided you don’t need immediate access to your funds, can’t you simply ride the wave? Most of the time, the answer is ‘yes.’ However, there are instances when the potential risks massively outweigh the immediate rewards.
Take the summer of 1929, for example. In those final months before a catastrophic 89 percent market crash, investors would have been wise to withdraw their funds. Those who remained invested had to wait 25 years to recoup their losses, and many passed away before their investments ever recovered.
Similarly, at the dawn of the new millennium in 2000, investors felt secure until a prolonged downturn caused the NASDAQ to plummet 78 percent over the subsequent two and a half years, leading to a grueling 13-year recovery period.
It’s notable that right before the bubbles burst in 1929 and 2000, the CAPE ratios stood at 31.48 and 44.19, respectively. Presently, the CAPE ratio is at 38.81.
While valuations may not effectively signal timing, they do present a clear view of what lies ahead.
Essentially, unless you’re willing to risk your wealth in a “suicide mission,” now might be a prudent time to reassess your position.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published a special report titled, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If you’re intrigued by how this little-known aspect of American history can lead to wealth, I encourage you to get a copy. It’s available for less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
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