Markets crash as monetary laughing gas fades
The main problem with economics is that there are two generations of market players who have only known expansionary policies. That’s why the most pressing question for investors is not where profits are going or what is the rate of change in economic growth, but when will central banks pivot.
The Federal Reserve and other major central banks caused a massive crisis. On the one hand, the balance sheets of the main central banks have remained intact in local currency in 2022, and the rate hike path is quite accommodative. Markets, on the other hand, are collapsing. How is it possible? Because central banks think their actions are of no consequence because there are a legion of economists out there who twist the facts to say there is no problem. However, the opposite is true. Markets and politicians are so used to easy money that the slightest normalization is wreaking havoc around the world.
The first problem is that the vast majority of the $90 trillion in global reserves is invested in carry trade against the US currency. The second is that negative nominal and real rates have zombified the corporate world and led governments to think that debt is not important. The third problem is much more serious. Investors and governments have been led to believe that announcements of rate hikes and liquidity cuts should be ignored because policymakers are ignoring them anyway.
All of this resulted in an overleveraged environment in which companies with weak strategies found enough cash to survive, and where multiple expansion across all sectors, from listed companies to private companies, was not an exception but the norm. . And this excess, which has been nurtured over the past 14 years by absurdly lax policies in booms and busts, has fostered a reliance on progressively more aggressive monetary operations. Governments, businesses, families and market participants are unhappy with a process of normalization that keeps central bank balance sheets abnormally high or interest rates well below inflation. They demand more, quickly and regularly.
We are taught that central banks must choose between recession and inflation. It is a logical error. The mandate of central banks is not to engineer inflated leveraged growth; rather, it is about maintaining price stability.
Recessions are not caused by interest rate hikes by central banks. They are the result of years of excessive debt, bad investments and reckless risk-taking.
Markets are collapsing because the seemingly unstoppable expansion of previous years was based on money illusion. Monetary laughing gas makes you smile but does not cure.
Many analysts and investors have warned for years of excessive complacency and unjustifiable valuations, only to be dismissed as pessimists because all you had to do was follow the Fed.
“Don’t fight central banks,” was the warning, and most of us took it to heart. When central banks claimed they had to stop printing money because they went over budget in 2020, a significant portion of the investor base dismissed the idea. Many people began to argue that central banks had nothing to do with inflation and that they should keep cutting rates and printing money (“injecting liquidity,” they argued). However, even though the DJ kept spinning records, the music stopped.
With a slight drop in the global money supply, no substantial reduction in central bank balance sheets and extremely gradual rate hikes announced for months, the markets collapsed. However, the markets cannot accept even minor changes. The junkie needs another fix, a major and ever-increasing fix.
With negative real and nominal interest rates, the economy does not improve. It’s in a worse situation. Negative real and nominal interest rates have resulted in a bloated, sluggish and unproductive economy in which the inefficient are bailed out while the efficient are penalized. When the velocity of money plummeted, productivity growth stagnated, and debt soared to all-time highs, hardly anyone seemed to notice. Why? Because markets were rising and even the world’s worst-run companies could get loans at negative real rates.
Some commentators are now worried that central banks are tightening too quickly, despite remaining silent during the strangest and most dramatic increase in the monetary base in recent history.
Those who championed a $20 trillion expansion in 2020 are partly responsible for the crash of 2022.
However, there is a more serious problem. The current crisis, which policy makers have fabricated and authorized, will harm even those who have not benefited or profited from the excess. Unsuspecting citizens who have no exposure to stocks or bonds and who have never seen private equity valuations soar will suffer from stagflation as their real wages and savings deposits disappear and some will lose their jobs.
The current global economic sinking demonstrates the deeply unethical nature of printing money and allowing central banks and governments to become lenders and providers of last resort. It hurts the middle class on its way in and destroys it on its way out.
The artificial creation of money is never neutral. It disproportionately favors the primary beneficiaries of the newly generated currency, the government and the indebted, while seriously undermining deposit savings and real wages.
The 2020 stimulus package was the greatest ruse ever played against humanity. It was pointless in the first place because all that happened was that governments locked us all down because of a health issue. There was no need to encourage debt, spending or money supply. He just established false bottlenecks in the stimulus chain, resulting in a worst-case scenario.
You received a check from a government that is now taking that amount and more through inflation—poor tax—and a higher tax burden. As a result, there is more inflation, less growth, negative real wage growth and now a market crash. The result has been bigger governments and poorer citizens.
No. I repeat. The Federal Reserve does not have to choose between recession and inflation. They must decide between logic and financial repression.
Those who complain that central banks are raising interest rates too quickly should have warned of the madness of 2020. Never mind that central banks are pivoting. The fallout from stimulus initiatives is already affecting economic growth and corporate profitability. Even if rate hikes had been slower, markets would have seen a reality check on valuations. Bubbles burst. Still. The only question that remains is when.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.