As we navigate the complexities of today’s economic landscape, both domestically and internationally, it’s clear that we are experiencing a significant reset. What began as a mere tremor at the dawn of the millennium has intensified into a real and pressing concern. The evidence is overwhelming: the status quo is untenable.
Debt levels are surging while GDP growth remains stagnant. Stock prices are climbing despite plummeting earnings. Meanwhile, wage growth has stagnated for the majority of workers, contrasting sharply with the income surge enjoyed by the wealthiest 1%. Additionally, a staggering $13 trillion in negative-yielding debt looms over the financial system.
In light of these challenges, it is increasingly evident that no governmental directive or monetary adjustment can effectively reverse this trajectory. Executive orders, policy changes, and congressional stimulus packages appear impotent in the face of this growing crisis.
At this stage, even the most well-meaning government initiatives risk exacerbating the impending economic collapse. The depth of the crisis has already exceeded the possibility of recovery through traditional means.
In essence, the economic paradigms of the latter half of the 20th century have collapsed. Increased debt issuance no longer equates to heightened economic growth; instead, we see erratic asset price fluctuations, rampant speculation, and monumental financial bubbles followed by stark busts. Yet, policymakers cling to outdated solutions with unyielding confidence.
Bird-Dogging the Fed
The influential figures in the realm of monetary policy are currently convening in Jackson Hole, Wyoming for their annual gathering. During this meeting, they will likely discuss the merits of a flexible currency and the wonders of centrally planned economies.
Will they provide any insights on how long they plan to maintain the federal funds rate close to zero? Given their track record over the past eight years, this seems an optimistic expectation. They have not yet fulfilled their policy objectives, raising doubts about whether they ever will.
On Friday, Fed Chair Janet Yellen is set to deliver a keynote address. Some speculate she might aim to communicate clearer guidance to investors. However, we remain skeptical.
The buzz around the symposium suggests the theme is “Designing Resilient Monetary Policy Frameworks for the Future.” This assessment left us puzzled. It might indicate that stock market investors are closely monitoring the Fed, complicating their decision-making process. So far, Yellen and her colleagues appear reluctant to take any steps that might upset the markets.
To create a resilient monetary policy, the Fed would have to alter its approach drastically from the methods employed since the Greenspan era, which began after the October 1987 market crash. They would need to reduce liquidity precisely when it runs counter to the interests of over-leveraged investors.
This means accepting the inevitability of a market crash and accompanying economic contraction in pursuit of regaining credibility. It has been decades since the Fed was willing to take such bold measures.
The Number One Factor Influencing Fed Monetary Policy
This might be an opportune moment for Yellen to make a significant announcement. She could potentially acknowledge the vast wealth destruction that the Fed has perpetuated over the last century. Perhaps she might even propose abolishing the Fed, discontinuing Federal Reserve notes, and reinstating the gold standard.
However, such bold actions remain unlikely. In reality, these ideas seem far-fetched, but that doesn’t diminish the importance of discussing them.
The crux of the issue is that for over a decade, we have consistently underestimated the primary factor driving Fed monetary policy. Specifically, we have failed to recognize the grip of the dumbass factor on the central bank’s policy-making. Jeffery Miller from StockResearch sheds light on this.
“Central banks keep reloading and doing dumber and dumber things, and since their stupidity seems to know no bounds, I’m willing to say that I don’t know how dumb things will get before they stop. What I do know is that locking in a guaranteed loss on bonds that are held to maturity is not a good way for investors to meet their long-term liabilities. Think pension plans and insurance companies for example. Central banks are eviscerating them. How insolvent pension systems and life insurance companies can be good for the global economy is beyond my pay grade, but then again, I don’t have a Ph.D. in economics.”
Here at Economic Prism, we share the confusion. Realistically, we expect Yellen to continue down a misguided path. Like her predecessors, she is likely to undermine retirement accounts and pension funds, convinced that liquidity trap theories justify her actions.
This approach is nothing short of misguided.
Sincerely,
MN Gordon
for Economic Prism
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