The Status of The Everything Bubble Created by The Fed

The comments below are an edited and abridged synopsis of an article by David Stockman

The Wall Street Journal recently reported that the Fed is hurting housing and the consumer too much, likely due to years and years of ultra-low mortgage rates engineered by it that were unnatural, uneconomic and unsustainable.

The Status of The Everything Bubble Created by The Fed - BullionBuzz - Nick's Top Six
Soap bubble with a question mark on blurred background of stock quotes. Waiting for economic bubbles. 3d illustration

For most of the last three decades, the Fed drove the after-inflation (real) interest rate on 30-year mortgages steadily lower until it turned negative.

In other words, the unfolding recession is a long overdue and necessary purge of artificial economic activity stimulated and subsidized by the Fed’s own financial repression policies.

The Fed’s attempt to normalize interest rates is not to deliberately cause economic resources to be idled; rather, it’s a belated attempt to unshackle markets from the excesses, bubbles, malinvestments, inefficiencies and unsustainabilities that resulted from decades of reckless money-printing.

One of the many bubbles created by the Fed’s relentless monetary expansion of recent years is the labour bubble, the madcap hiring undertaken by corporate HR departments in the aftermath of the Covid lockdown disruption.

Of course, the re-opening and stimulation boom didn’t last, notwithstanding the Fed’s massive money-pumping and monetization of the public debt issued to finance the $6 trillion of Covid bailouts.

Since the spring of 2021, a number has been done on the business economy. First, the normal business inventory-to-sales ratio exploded during the initial lockdowns and spending collapse, and then plunged as the stimulation-fueled boom in Amazon orders drained the system of its working inventories.

Since reaching bottom in October 2021, inventories have been rebuilt, but that’s the problem. The GDP gain reflected in the inventory rebuild is a case of one and done. With the cost of carrying inventories rising rapidly, the business sector restocking is likely over.

Needless to say, none of this madness would have happened without the enabling hand of the Fed.

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