In today’s world, misguided ideas abound, much like the numerous lobbyists in Washington. It can feel almost impossible to look around without encountering an array of questionable beliefs. Paradoxically, the more flawed an idea is, the more it tends to gain traction.
Consider Mickey’s Fine Malt Liquor; its destructive potential rivals that of prescription pain medications, yet people consume it as if their well-being depends on it.
Then there is the phenomenon of central banking. Has any concept ever siphoned off more wealth from the average worker? The Federal Reserve’s indirect taxation has taken advantage of diligent, hardworking Americans for over a century.
What explains the appeal of such misguided ideas? Perhaps it’s their promise of gain without effort; the belief that one can thrive on the enforced generosity of others or receive more from retirement savings than what was initially contributed.
These enticing promises of effortless rewards serve as a political tool, easily luring voters. How can extravagance and minimal taxation, financed through increasing debt, be deemed sensible?
From a sound fiscal and monetary perspective, this is patently unwise. A strategy focused on reduced spending and taxation would be far more prudent. Yet, for politicians, the allure of promising the impossible often takes precedence over economic realities.
Politicians recognize that Americans frequently act contrary to their stated beliefs. While they may publicly oppose an expanding government, they often vote selfishly, especially when they think they can benefit without consequence.
Voters are drawn to promises of government benefits, especially when they believe they won’t face the bill.
Popular Delusions
Misguided ideas also manifest as what 19th-century author Charles Mackay referred to as “extraordinary popular delusions and the madness of crowds.” En masse, people often rally around ludicrous fads, only to abandon them just as swiftly.
One moment it’s Beanie Babies; the next it’s Dogecoin.
Illusions of quick wealth obstruct clear and rational thinking. This past spring, a widely held belief was that a significant economic boom was imminent, bolstered by a first-quarter gross domestic product (GDP) growth of 6.4 percent. Prosperity seemed within reach.
The rationale? The economy was reopening, businesses were hiring, summer was approaching, and a confluence of pent-up demand and excess stimulus cash was igniting a consumption frenzy.
Stocks and cryptocurrencies fluctuated dramatically, driven upwards by the euphoria of the crowd. Yet, simultaneously, inflation—boosted by rampant money printing—began affecting everything from grapefruits to gasoline, compounded by supply chain disruptions leading to shortages of items like computer chips and chicken wings.
Is it possible that the market’s anticipation of an economic renaissance is merely a collective illusion?
As Mackay insightfully noted:
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”
This week, it seemed that people were starting to regain their rationality—if only for a fleeting moment. Stocks and cryptocurrencies danced like a roller coaster.
But if individuals truly awaken to reality, there’s still a considerable decline ahead. Following a record intraday high of 14,211 on April 29, the NASDAQ is down just 4.75 percent, while the S&P 500 is off by a mere 1.86 percent from its peak.
What can we conclude from this?
Financial Repression 101
Intuition suggests that stocks should be lower a year hence. But what if the opposite occurs?
Stranger outcomes are conceivable. We previously thought the Treasury bond bubble had burst long ago, yet, through aggressive credit market interventions, yields continued to drop significantly into 2020.
While the 10-year Treasury yield has been gradually rising over the last nine months, real interest rates—adjusted for inflation—remain at historic lows. In fact, Mish‘s analysis indicates that real interest rates stand at -4.09 percent. When considering national housing prices in the inflation calculations, the real rate plunges to -5.47 percent.
Such negative real interest rates arise from the Federal Reserve’s aggressive market interventions. This phenomenon is what financial experts term financial repression 101.
Essentially, Washington utilizes policies of financial repression—such as keeping short-term interest rates below inflation—to siphon off wealth from your savings and future earnings, indirectly alleviating public debt. The government effectively diminishes economic growth through zero interest rates and unchecked money printing, aiming to inflate away its debt.
Quite a clever maneuver, wouldn’t you agree?
Unfortunately, these practices lead to economic bubbles and crashes, creating chaos in the financial landscape.
The presence of real negative interest rates, coupled with extraordinary popular delusions, fuels the rampant inflation we now see in both asset and consumer prices.
So, what’s happening in the stock market? Is it on the brink of collapse, or might this merely be a minor adjustment before a further upsurge?
In the realm of monetary and fiscal policymaking, unpredictability reigns; devaluation of your hard-earned dollars is an ever-present threat.
…and that’s the crux of the matter you need to keep in your sights.
This is a pivotal juncture defined by relentless printing of money, a process continuously unfolding before our eyes and likely to persist for years to come.
It’s time to acclimatize to the prevailing insanity.
Sincerely,
MN Gordon
for Economic Prism
