“This feels very sustainable.” – Federal Reserve Chairman Jerome Powell, October 8, 2019
Under the Influence
This week, the themes of conflict and contradiction reverberated throughout the realm of centralized monetary planning.
For instance, on Tuesday, a new and perplexing term—“reserve management purposes”—was introduced by Fed Chair Jay Powell. To grasp the full extent of this contradiction, we must first explore the underlying conflict.
In a scenario devoid of government interference, the economy and financial markets would naturally gravitate towards a stable equilibrium characterized by low volatility. While occasional extremes might emerge, they would quickly be rectified, restoring balance to the normal distribution curve.
Without governmental intervention, a sense of stability would prevail. This phenomenon can even be observed in remote areas, untouched by the heavy hands of Washington, Beijing, and Brussels. For example, in isolated villages, every community has its share of eccentricities; similarly, every oddity has its own village.
In such settings, an almost perfect harmony is maintained, illustrating how the world is ideally meant to function.
However, the divide between how the world ought to operate and how it actually does is vast. As of 2019, the reality is one deeply influenced by central planning. Various programs, policies, and procedures distort the expected equilibrium, skewing the bell curve.
When compounded by the relentless creation of artificial credit by central banks, things become unbalanced to a staggering degree. This incessant issuance of credit overwhelms the natural correction processes, leading to an accumulation of pressure that ultimately could result in a catastrophic collapse.
The End is Nigh
Over the past twenty years, we have conducted our own observations regarding the effects of artificial credit creation by central banks. Our approach is straightforward: we examine our surroundings—both positive and negative. When something unusual comes into view, we scrutinize it more closely.
By keeping a vigilant watch and asking two critical questions—Where is the money coming from? Where is it going?—we can begin to make sense of some of these anomalies…
Examples include million-dollar shanties, fantastical valuations for companies receiving “unicorn” funding, the S&P 500 nearing 3,000, and much more. Other instances include sky-high face tattoos, ghost towns, shale oil companies losing significant capital, junk bonds yielding negative returns, and seemingly infinite sovereign debt. The list extends to trillion-dollar deficits, and various public figures ranging from Donald Trump to Bernie Sanders and beyond.
All of these are products of the extensive monetary debasement orchestrated by central banks. While some of these oddities might still exist in a world with more transparent monetary policies, their impact would likely be less exaggerated and destructive.
Herein lie the conclusions of our observations:
Central banks’ creation of artificial credit has skewed capital markets and, by extension, the entire economic and cultural landscape, to such an extent that these distortions are often overlooked. Unprecedented debt bubbles and reckless behavior are now perceived as the norm.
However, it’s crucial to note that these extreme distortions are anything but normal and they cannot persist indefinitely. Indeed, a reckoning is approaching…
Fed Chair Powell’s Inescapable Contradiction
Central banks are failing, and the debt structure is collapsing. A devastating crash and ensuing economic depression are unavoidable. The impending outcomes may coincide with the 2020 election, and they promise to be particularly catastrophic.
Yet, Fed Chair Powell is ensnared in a contradiction.
On Monday, the Bank for International Settlements (BIS) released a new report that articulated a point well-understood by anyone willing to consider it critically: the unprecedented expansion of central banks’ balance sheets since the financial crisis has negatively affected the functioning of financial markets.
The Financial Times summarized it succinctly:
“The unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function.”
It seems Fed Chair Powell might not have fully absorbed the contents of the BIS report. The very next day, during his address at the annual meeting of the National Association of Business Economics, Powell announced that the Fed would soon resume actions that the BIS report indicated could harm financial markets:
“…my colleagues and I will soon announce measures to add to the supply of reserves over time.”
Oddly enough, Powell does not categorize this increase in the balance sheet as quantitative easing (QE):
“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.”
The reality is that any growth in the balance sheet constitutes quantitative easing, regardless of Powell’s intentions to label it as “reserve management.” Furthermore, despite the detrimental effects it has on financial markets, he feels compelled to expand the Fed’s balance sheet further. If he halts this expansion now, the financial system risks collapse.
Do you see the dilemma?
Powell is forced to impair future credit markets in order to sustain the present ones. He must sacrifice the integrity of credit markets to preserve their functionality. In essence, we’re heading towards a dire future.
Sincerely,
MN Gordon
for Economic Prism
Return from Fed Chair Powell’s Inescapable Contradiction to Economic Prism
