The debt-driven monetary system continues to function as anticipated. The Federal Reserve provides unlimited credit, allowing both public and private sectors to borrow and spend without restraint.
A prevailing illusion in modern society is the belief that this borrowed money will never need to be repaid. While there is no solid rationale supporting this idea, it remains widespread among the general public.
Nonetheless, the bills come due, accumulating steadily like abandoned cars on the 405 freeway. Over the past three decades, these financial obligations have surpassed what the economy can realistically sustain.
The tipping point occurred in 2008, and we now find ourselves in a phase of suspended disbelief, with many reluctant to accept the hard realities of our situation. This outcome was far from what many had anticipated.
The Federal Reserve’s scientific management of the economy was intended to gradually diminish each generation’s debts. The aim was to inflate the value of money just enough so that a 30-year mortgage would feel like a mere car payment, and student loans could be repaid casually over a career.
Disillusionment in Progress
Politicians have actively nurtured this fallacy. With the Fed’s backing, they could increase spending without raising taxes, funding programs like Social Security, Medicare, Medicaid, and defense initiatives. These grand promises of free benefits became essential campaign tools, enabling them to secure votes repeatedly.
Just this past week, Congress approved additional funding for government functions. The most recent estimate shows the U.S. federal government is $18.4 trillion in debt. The pressing question remains: how will taxpayers repay this? For now, it seems irrelevant, as the Fed will continue to support government debt without hesitation, allowing the national debt to grow endlessly.
Additionally, there’s a belief that the Fed will create wealth for all investors. A strategic injection of monetary liquidity at the right moments would supposedly inflate asset prices to an enduring high. All one needs to do is contribute to a 401k, and after two decades, financial independence will be at hand.
The rules sound simple: buy and hold, dollar-cost average every two weeks, invest in growth mutual funds. The narrative suggests that getting rich is straightforward; you just have to participate in the market.
Yet, these misconceptions are slowly unraveling. One by one, they are disappearing like the dodo bird. The scientific management approach to the economy is increasingly seen as a failure, and here is some of the latest evidence…
A Black Swan Awakens
Recently, the extreme fluctuations in the stock market have garnered significant attention. However, if this is the sole market you’re monitoring, you’re overlooking the real action elsewhere. For a deeper understanding, turn your focus to the 10-year Treasury yield, which recently dipped to 2.01 percent.
Even more revealing is the widening gap between Treasuries and corporate debt. This trend might signal an impending recession and the emergence of the next debt crisis. According to The Wall Street Journal:
“Spreads in investment-grade corporate bonds—debt from companies rated triple-B-minus or higher—are on track to widen for the second consecutive year, according to data from Barclays. This would be a first since the financial crisis of 2007 and 2008, and the previous instances occurred in 1997 and 1998 amid turmoil in Asian markets, just before the dot-com bubble burst in the U.S.”
“Investors and analysts are keeping a close eye on these developments to assess whether another crisis is brewing. There is growing concern over companies’ capabilities to manage the considerable debt they have amassed in recent years, spurred on by the ultra-low interest rates that encouraged record bond sales.”
Indeed, the Fed played a pivotal role in pushing interest rates to historic lows, believing this would stimulate economic growth. Instead, they may have inadvertently set the stage for the next debt crisis.
Unquestionably, somewhere, a black swan is taking its first flaps to fly. Soon, it will leave its nest and venture into the unknown.
Sincerely,
MN Gordon
for Economic Prism
Return from Black Swan Fledgling – The Debt Crisis Takes Flight to Economic Prism
