The Fed’s Socialist Monetary Policies And What Comes Next
The comments below are an edited and abridged synopsis of an article by David Stockman
Since 1978, total financial assets held by the household sector have increased by $100 trillion. That’s just a proxy for the massive levels of bank deposits, money market funds, bonds, publicly traded shares and private equities that flow through America’s $21 trillion GDP.
The Fed spent the last 13 years smothering the money market rate. That’s socialism by any other name. Ironically, it’s leading to the same outcome as in the old Soviet Union: A failing economy for the masses and a concentration of wealth and privilege among the few elites who are close to the levers of control.
Since March 2008, the real federal funds rate has been deeply negative for 96% of the time and just a tad positive for a grand total of 7 months in 2019. Now, after last year’s money-printing orgy, the real federal funds rate stands at minus 2.37%, nearly the deepest level ever.
Never would participants in voluntary exchange on the free market lend money—even overnight—at a negative real rate. It defies economic logic.
Today, central bankers are aiming at the personal consumption expenditure deflator and the U-3 unemployment rate, but the enormous injections of liquidity designed to keep the interest rate control dial on target never really leave Wall Street Instead, they radically inflate the price of financial assets and deflate the carry cost of debt.
The C-suites cripple their balance sheets by allocating trillions to financial engineering maneuvers such as stock buybacks and uneconomic M&A deals.
A chart shows the net equity flow into the US business economy since 1994. During that 26-year period, there was a single year (2002) when nonfinancial corporations raised a positive amount of net equity, while liquidating a total of $8 trillion of book equity over the period.
So for the better part of the last three decades, the C-suites of corporate America have liquidated an average of $310 billion of corporate equity per year. They are running glorified hedge funds, not Main Street businesses.
When it comes to the task that the free market, not the central banking branch of the state, is suited for—generating rising living standards and real, sustainable wealth—the Fed is producing nothing of value.