In the past decade, following the 2008-09 debt crisis, something remarkable has transpired. The widespread affliction of excessive debt has seemingly been treated with even greater doses of debt. This ironic twist showcases not only the absurdities of our financial system but also the complexities of modern economic management.
How can piling on more debt solve the problem of being over-leveraged? Is it akin to suggesting that more alcohol can cure a drinking problem? In both cases, while there might be temporary relief, the long-term consequences are often disastrous.
Undoubtedly, we stand on the brink of a significant shift, one that will clearly delineate the present from the future—much like the Patriot Act transitioned society into a new reality. Before we delve into what lies ahead, let’s provide some context.
The current monetary system—relying heavily on debt-backed currency and artificially set interest rates—creates cycles of economic booms and busts that become increasingly extreme with each iteration. In this century alone, we’ve witnessed two significant cycles: the dot-com bubble and the housing market crash.
It’s important to recognize that these economic fluctuations are no ordinary cycles. The fingerprints of the Federal Reserve are evident through both the booms and the busts, initiated by misguided monetary policies.
Anatomy of a Mishap
Currently, we are approaching the conclusion of a decade-long economic boom accompanied by a bull market in stocks. This upswing, much like the mid-2000s boom, has unfolded during a period marked by monetary policy errors—specifically, the Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) from 2009 to 2015, which distorted financial markets and negatively impacted economic integrity.
The last few years have hinted at a transition in monetary policy. The Fed has gradually reduced its QE initiatives, begun to lower its balance sheet, and incrementally raised the federal funds rate.
These tightening efforts, while carefully managed, do not eliminate the risk of a monetary misstep and the ensuing crisis. Often, the critical transition to a policy error doesn’t become clear until long after it occurs. In fact, this precarious point may have already arrived without our realization.
Suddenly, just as everything appears to be proceeding smoothly, an emerging market may find itself engulfed in a debt crisis, collapsing with alarming speed. In the chaos that ensues, additional markets could likewise falter.
In such a scenario, Fed Chair Powell may reassure the public—much like Bernanke did at the onset of the subprime mortgage crisis—claiming that the situation is under control. However, this comfort will be short-lived, as the contagion may already be spreading throughout the financial system.
Then, much to Wall Street’s shock, a major financial institution could face collapse—drawing parallels to Lehman Brothers a decade ago—resulting in a credit crunch that would bring the economy to a standstill.
Honest Work for Dishonest Pay
The looming crisis, exacerbated by ongoing currency and trade wars, will prompt a flurry of state-sponsored proposals aimed at rescuing the economy. These concepts, ranging from the impractical to the outright absurd, will be evaluated based on two key criteria: they must uphold the status quo and further concentrate wealth among a select few.
One particularly alarming suggestion put forth by former IMF chief economist Olivier Blanchard advocates for the Fed to address potential recessions by purchasing stocks, funding government deficits, and directly buying goods. Blanchard’s credentials as an MIT Professor of Economics lend a veneer of respectability to his proposals.
However, Blanchard neglects to address a crucial detail: the Fed would need to create money out of thin air to implement such measures. While these sweeping financial interventions might prop up asset prices, they would obliterate the last remnants of market-driven pricing, ultimately perpetuating an unsustainable economic landscape.
Furthermore, these actions would shift public companies’ ownership—and taxpayer responsibilities—directly into the hands of the Fed. The potential consequences of this arrangement are vast, none of which seem promising.
One likely outcome of Blanchard’s strategy is that taxpayers and their employers would effectively become cash cows—not for the federal government, but for private bankers—culminating in a scheme that extracts wealth on behalf of central bankers.
Yet, with a touch of optimism, we view the potential for resilience amid these challenges. At the Economic Prism, we believe in the glass being half full, transforming adversity into opportunity. Even as we serve as financial sustenance for private bankers, we remain hopeful and committed to finding satisfaction—doing an honest day’s work for a dishonest day’s pay.
Sincerely,
MN Gordon
for Economic Prism
