Forget what the Federal Reserve says about inflation being nonexistent. That is a blatant lie – one in a series of many aimed to obscure the fact that the Federal Reserve’s only policy is one of permanent inflation in a new era of socialism for the rich.
The central bank’s recent reversal on monetary normalization to target ever higher stock market prices reveals the true nature of the Fed’s inflationary mandate – that the Federal Reserve will never normalize interest rates, or its balance sheet, and future credit expansion in greater proportions is effectively guaranteed.
Weeks ago, the stock market traded at another all time high, with the S&P 500 Index reaching 2,945 on April 29, 2019. Today it trades at 2,881. The Schiller P/E Ratio stands at 30.37, which means current stock prices are nearly the most expensive in stock market history, with today’s valuations only being exceeded during the peaks of 2000 and 1929.
Schiller P/E Ratio
(The Schiller P/E Ratio is a price-to-earnings ratio based on average inflation-adjusted earnings of the S&P 500 from the previous 10 years.)
Since the Great Financial Crisis, rich folks have been bailed out by the central bank’s easy credit policies, while inequality has materially worsened. By holding the benchmark rate of interest at zero for a decade, the Federal Reserve has inflated the prices of all financial assets to record levels. While the values of asset held by the wealthy have recovered since the last crisis, Main Street has largely been left behind.
Skyrocketing real estate prices mean rental costs today are 37% higher than they were in 2008, while stagnant wages have hardly kept pace with a higher cost of living.
It’s no wonder younger generations are clinging to socialist ideals. What’s the point of being pro-capitalist if you have no capital, or worse, if through inflation, the central bank prices you out of the middle class?
While younger generations may be starting to shout “death to the capitalists”, it is the entrenched group of monetary monopolists who are the true anti free-market class.
What everyone needs to refuse is socialism for the rich.
A small group of political elite maintain centralized control of the cost of credit, and only this group of individuals has the ability to manipulate financial markets – to prop up asset prices – to bail out favored firms, at the expense of the many. Compared to monetary monopoly, nothing else in an economy matters.
In the wake of the last recession, words like “extraordinary” and “temporary” were used by policy makers to justify unprecedented bank bailouts and toxic asset purchases at 100 cents on the dollar. Central bankers lead everyone to believe the world was going to collapse, and therefore socializing the losses of bad Wall Street bets was necessary, “just this once”.
But in the ten years following the Great Financial Crisis, the Federal Reserve has failed to normalize interest rates or its balance sheet. Policies that were deemed temporary became permanent.
Chief Monetary Czar, Jerome Powell attempted monetary “normalization”, that is, until equity prices cratered. The Fed Funds Rate was raised to a paltry 1.95% by Sept 2018 before the stock market began to collapse. On September 17, 2019 the S&P 500 reached a peak of 2,929 only to fall by ~20% in the three months that followed. (Asset prices, which go up with a lower cost of credit, must come down when the cost of credit becomes more dear.)
A sudden drop in stock prices spurred President Orange to call for further rate cuts and openly criticize the Fed on Twitter.
Unfortunately, President Turnip doesn’t condemn the fraudulent nature of the Fed’s monetary monopoly. Instead, he simply laments that credit conditions aren’t easy enough.
Trump understands that lower interest rates fuel higher stock prices, since a zero cost of capital makes any investment with a nominal yield attractive. Naturally, he favors any policy that keeps asset prices elevated, which will allow him to take credit for the “HUGE” economic recovery during his reelection campaign – the inevitable bust be damned.
Entertaining monetary criticisms from the King of Bankruptcy is beyond foolish, so naturally the Federal Reserve capitulated and abandoned policy normalization altogether.
The Federal Reserve’s reversal on normalization serves to demonstrate that no matter the language used to justify its policies, once the supply of credit is expanded, a central bank never reverses its inflation.
Unlimited credit expansion is unquestionably the permanent policy of the Federal Reserve.
To better understand the future course of monetary policy, one must dismiss any false confidence placed in the Fed. In reality, the central bank has one mandate – unlimited credit expansion, ad infinitum. In pursuit of this objective, the central bank has never failed.
In Fed Speak, “temporary” is permanent and “extraordinary” is conventional.
Ultimately, the free money game the Fed is playing will mean lower stock market returns moving forward and a greater risk of a significant and abrupt market crash. Through monetary interventionism the Federal Reserve is succeeding in destroying the American middle class. Worst of all, the central bank misleads the individuals who are harmed most by its policies.
Artificially low rates only favor wealthy individuals who own financial assets, at the expense of savers and the working class, who are robbed of the ability to invest in assets at satisfactory yields.
To solve this inequity, socialists like Bernie Sanders, Elizabeth Warren and AOC are proposing a myriad of spread the wealth schemes. More importantly, they are paving the way for Modern Monetary Theory (MMT), which is a nice euphemism for pure, unencumbered inflation. MMT advocates falsely believe that debt monetization can continue indefinitely without impairing the purchasing power of a currency.
Economic history demonstrates that every central bank that embarks on the path of unlimited credit expansion ultimately destroys the value of its currency and erodes economic prosperity. The American central bank will be no exception to this economic law.
During the next recession, after interest rates are reduced once again to zero, or even negative territory, and economic conditions have materially worsened further, Modern Monetary Theory will soon follow, and the real crack up boom will begin.