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I intended to post something on this days ago, but every day brings a new outrage that forces me to rewrite it. At this point, I’m simply stunned.
COVID-19 is not the fundamental cause of the stock market crash and the insane response to it of the Federal Reserve and the Federal Government. The fundamental cause is a nation that has not saved for a long time, lives on ever-expanding debt and cheap credit, and expects bailouts anytime something goes wrong. Such a system is extremely fragile, and what otherwise would be an inconvenient but manageable financial problem turns into an existential crisis. We are like the man with half a dozen maxed-out credit cards, living large as long as he can make the minimum payments, but has his life destroyed when he loses his job. Instead of having savings to tide him over until he finds the next job, he’s now homeless.
The financial system was already giving signs of falling apart before COVID-19 hit. The Federal Reserve’s plan to normalize interest rates came to screeching halt in Dec. 2018 after only reaching 2.5%. Since then it’s been slowly dropping them. They were also supposed to run off their balance sheet in a process that would be like “watching paint dry” in the words of Jerome Powell, but abruptly began expanding it again last Fall. Ominously, in September the Fed began intervening in the overnight bank lending market (the “repo market”) as banks suddenly decided lending to each other, even on a very short term basis, was too risky. The Fed has been supporting that market at increasing levels ever since. The virus was just the push that finally brought the house of cards down.
These past few weeks have brought Fed interventions that boggle the mind and snuff out whatever we had left of free-market price discovery. Zero percent interest rates (of course), daily intervention in the repo market to the tune of $1 trillion dollars, and QE Infinity. The latter finally ends the farce that the Fed was doing anything other than monetizing debt with its QE programs. And they are doing it with gusto, adding $586 billion to its balance sheet this past week, the equivalent of 7 months of its old QE3 program. The balance sheet is now $5.24 trillion and going parabolic.
The Fed traditionally manipulates interest rates by buying and selling U.S. Treasuries in the open market. Now they are buying everything in sight in a frenzy: Treasuries, corporate bonds, municipal bonds, stocks whatever, all with money created through a few strokes of the keyboard. Another name for “the Fed buying stocks” is the “nationalization of industry.” All this is 100 proof banana republic stuff. The result? Initial unemployment claims surge by 3.3 million and the stock market goes up! This is corporate socialism. Where is the outrage?
The Federal Government is doing its part with its grotesque $2 trillion “stimulus” package of payouts and bailouts. Do people realize that the Federal Government has no wealth and that any money it gives to anyone must come from either taxation or debt? How is a government $23 trillion in debt able to bailout anyone? We all know, of course, that this only works because the Federal Reserve’s printing press is behind it.
In a more sane world, people would have six months of expenses saved in case they lose their job or some other misfortune occurs. Things happen in this world. Corporations would similarly have cash reserves to fall back on. Instead, they spent their cash, and borrowed more at the Fed’s ridiculously low-interest rates, to buy back their own stock and goose the price to fatten year-end bonuses and stock options. Now, this has caught up to them and they are crying for a bailout. This is what you do in Bailout Nation.
We supposedly had the “greatest economy of all time” these past few years, but somehow it necessitated massive federal deficits and historically low-interest rates. The orthodox Keynesian idea is that the nation goes into debt and lowers interest rates during a recession, then pays down the debt and raises interest rates during the subsequent recovery. Orthodox Keynesianism is bad enough, but we’ve been lowering interest rates and ramping up debt even in the supposed recovery. What do we do now that a crisis has hit?
The only thing we know how to do: Bailout everyone in sight with yet more debt-funded by the printing press. I guess I understand it because we’ve been doing it so long that pulling back now would be too painful to contemplate. Given the absurd size of the interventions and the tepid response to them, it might be that we are finally at the end of the debt extravaganza.
The worst part of this is that it was authored by so-called “conservatives”, who pat themselves on the back because they prevented Nancy Pelosi’s woke priorities from being jammed through on the bill, completely oblivious to the socialist and even fascist aspects of this monstrosity.
The Tea Party is truly dead and buried. Its ghost isn’t even hanging around anymore. I’m simply stunned.Published in