We have argued that the Federal Reserve has no exit strategy from this extraordinary monetary policy.
In fact, he has never been able to extricate himself from the extraordinary monetary policy he launched during the Great Recession.
Today we are just seeing the same hyperdrive policy. And there is still no way out.
After exploding its balance sheet to over $ 4 trillion during the Great Recession, the Fed tried to pull out. Thanks to quantitative tightening, the Fed managed to bring it down to just over $ 3.7 trillion before the stock market collapsed at the end of 2018 and the central bank abandoned its normalization plan. of monetary policy. At that point, he ended the reduction in the balance sheet and cut interest rates three times the following year. Not only that, he revived quantitative easing, even as central bankers continued to insist it was not QE.
Most people assume the Fed has started ramping up its balance sheet again as an emergency measure in response to the COVID-19 pandemic. But the toll was already back at over $ 4 trillion before the coronavirus even reared its ugly head. The pandemic has pushed the easy money accelerator to the floor and today the Fed’s balance sheet exceeds $ 7 trillion
Since 2008, the Federal Reserve and the US government have injected more than $ 36 trillion into the US economy. But they have “bought” very little in terms of economic growth with all this massive “investment”. The Fed injected about $ 12 in liquidity for every dollar of economic growth.
You see this cycle more clearly if you go back to 1999 at the height of the dot-com bubble. Every boom created by the Fed’s monetary intervention has failed to reach the level of economic growth seen previously. In other words, as the level of money printing increases with each crisis, the level of growth of the previous boom decreases. Just as the addict experiences diminishing returns and needs more and more of his drug to get him high, the economy needs more and more stimulus just to keep the current level of economic growth lukewarm.
And now that we’re in this cycle, there really is no way out. As economist Mohammed El-Erian put it, “they’re increasingly on what I call a no-exit paradigm.”
Easy money leads to increased debt levels. The United States’ national debt has soared to over $ 27 trillion. Meanwhile, the Federal Reserve recently issued a warning about rising levels of corporate debt.
Former Fed Governor Randall Kroszner recently summed it up this way.
The heavy debts that governments are accumulating will make it difficult for central banks to raise rates when they feel the need to, as it will increase borrowing costs.
Rising interest rates would be the last nail in the coffin of an economy built on piles of debt. He must continue to lower interest rates to prevent the bursting of the debt bubble.
Meanwhile, the markets are totally dependent on the Fed. El-Erian said central banks have “conditioned” the markets to the point that whenever the Fed tries to “step back” and normalize monetary policy, the market “forces them to come back by selling and tightening. financial conditions”.
This is exactly what happened at the end of 2018. The stock market went into crisis when the Fed pushed rates up and downsized its balance sheet. Powel immediately reversed course, as already noted.
So here’s the $ 64,000 question: if the Fed couldn’t get out then, how is it now with an additional $ 3 trillion on its balance sheet (and rising)?
In short, the Fed is grappling with a permanent stimulus. As an article from Real Investment Advice puts it:
The trap the Federal Reserve has fallen into is that it continues to require more intervention to maintain lower economic growth rates. Every time the Fed withdraws its interventions, economic growth collapses.
So the Fed is stuck between proverbial rock and a hard place. He cannot withdraw “emergency” monetary policy. But continuing it forever comes with its own risks, because Bloomberg recently noted.
If the Fed and other central banks are forced to cut emergency stimulus measures, the continued flow of liquidity could cause asset bubbles and even inflation too fast.
So the Fed is damned if it does and damned if it doesn’t. It really looks like there is no way out.
Alex Jones delivers his most powerful speech to hundreds of thousands of Patriots who support President Trump at the United States Supreme Court.
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