David Stockman recently expressed his concerns on The Daily Ticker, describing the Federal Reserve as a “wet blanket” suffocating the economy. He argues that their micromanagement will ultimately fail and drag down the private sector along with it.
Stockman, the former budget director under President Reagan and a seasoned private equity investor, has been actively promoting his latest book, The Great Deformation: The Corruption of Capitalism in America. He kicked off the week with a thought-provoking op-ed in the New York Times that touches on several themes explored in his book.
This op-ed is fairly extensive but well worth the read. You can check it out here.
Let’s highlight Stockman’s closing remarks:
“The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (with Japan recently joining in, while Brazil and China express anger, and the eurozone faces its own challenges) that will soon be too much to handle. When the current [stock market] bubble bursts, nothing will prevent a collapse. If it sounds like I’m advising you to exit the markets and stockpile cash, then it is.”
Should You Stockpile Cash?
Up to Stockman’s final statement, we largely resonate with his views. Indeed, it might be wise to exit the stock market right now, as after an extended upswing, a downturn is inevitable. However, converting everything into cash could be a risky move, akin to jumping from the frying pan into the fire.
At Economic Prism, we believe the Federal Reserve is too deeply entrenched in its current path to reverse course. If the stock market were to crash again, we can expect the Fed to initiate aggressive policies aimed at inflating the money supply once more. This is a certainty.
There’s no assurance that such measures would successfully re-inflate the market. It took four years and an injection of $2.5 trillion into the Fed’s balance sheet to revive the stock market after its fall in late 2008. Whether they could replicate this success is uncertain.
Imagine, for instance, that the Fed significantly inflates the money supply and the stock market still collapses dramatically. In this case, Stockman’s advice to hold cash might be beneficial for a time.
However, what if the true bubble poised to burst is one that’s colossal yet widely unrecognized? David Stockman himself may not regard it as such.
The Most Significant Bubble of All
We’re referring to the 40-year bubble in fiat currency, specifically in Federal Reserve Notes — commonly known as dollars. This is arguably the largest and most dangerous bubble of them all.
The Federal Reserve has egregiously misused its authority as the sole issuer of dollars, particularly since late 2008. Presently, the Fed is expanding the money supply at a staggering rate of $1 trillion each year, vowing to maintain this pace until unemployment falls below 6.5 percent.
Despite this massive influx of money, the Consumer Price Index (CPI) indicates that prices for goods and services are only rising at about 2 percent annually. This modest inflation rate leads the Fed to justify further money creation, suggesting they can support government deficits and the financial sector indefinitely without any negative repercussions.
Sadly, there will be repercussions. An increasing number of people are becoming aware of the Fed’s high-stakes maneuvers. Before long, confidence in Federal Reserve Notes will diminish, and the public will start to anticipate rising prices.
Such a shift would reduce demand for dollars, compelling people to spend rather than save. The enormous bubble in fiat currency will eventually burst, leading to a swift and catastrophic decline in wealth and savings for those who have hoarded cash.
Individuals holding paper money could find themselves with something practically worthless — only igniting materials and toilet paper might offer any real utility.
Best Regards,
MN Gordon
for Economic Prism
Return from The Biggest Baddest Bubble of All to Economic Prism
