The abundant but declining currency printed by Central Banks around the world, starting with the 2020 pandemic crisis, has fed the monster of inflation, which threatens to choke economies and the world.
The tightening of credit conditions in an environment of geopolitical tensions has not yet led the economies to recession but has changed the balances. And now the monetary authorities are changing policy.
According to the dominant narrative, the Fed is especially busy planning monetary easing – although zero interest rate policy is on the downside of the S-Curve.
However, it is worth summarizing what the Federal Reserve and Chairman Jerome Powell have accomplished since they began their interventions to control volatility, risk, bond yields, interest rates, the mortgage market, bank subsidies, and liquidity, which can be summarized as the cost of credit capital, which is the capital borrowed against some form of collateral or income stream.
By artificially lowering the cost of capital to levels below inflation, the FED achieved:
- Fatal distortion of the economy.
- The enrichment, to a large extent, of the rich at the expense of 90% of the world’s citizens.
- The crushing of the middle class and the transformation of 90% of the citizens into serfs.
How is the distortion achieved?
Here it is worth looking at how the FED distorts the economy by reducing the cost of capital to levels below inflation.
Remember that the FED crammed ZIRP – zero interest rate policy – down the throat of the economy from 2009 to 2020, while official inflation increased the purchasing power of the dollar by 22%.
Inflation has never been 0%, so the cost of capital for companies and financiers has actually been negative, i.e. less than inflation.
The reduction in the cost of capital had multiple distorting effects. A useful indicator is the critical role of ‘keystone species’ in maintaining healthy, diverse ecosystems.
Risk and competition are the vital forces in shaping a diverse natural ecosystem. Once the fundamental predators (wolves, etc.) are eliminated, the species freed from danger and competition overwhelm the ecosystem and crowd out healthy diversity.
These species end up destroying the ecosystem through overgrazing, deforestation, etc. The analogy is obvious. The same dynamic imposed by the FED has deregulated the US economy and consequently the world economy.
Artificial euphoria
Companies and financiers with near-unlimited access to near-zero-cost capital were left to buy hundreds of their smaller competitors, make trillion-dollar buybacks of their own stock to enrich already wealthy managers and large shareholders, who leveraged their assets and cash flows. to Debt Empires that could be sold or taken public (WeWork, et al) at huge profits – profits that were not available to wage earners and those who didn’t have the opportunity to own assets before ZIRP inflated the bubble of everything.
It is estimated that to a large extent the rise of the barometer index of the American stock market S&P 500 from 667 points. in 2009 to current levels, i.e. around 4,700 units, was solely the result of corporate repurchases that reduced the number of shares.
This artificially boosted revenue and earnings per share. (Takeovers were once illegal, for good reason.) All those trillions in near-zero-cost capital flowed in to manipulate, profit, and reduce competition, not to boost productivity, efficiency, or innovation.
The net result of FED’s ZIRP is an economy stripped of diversity, one dominated by bloated monopolies, cartels and platforms that produce low-quality goods and services that reduce productivity on multiple fronts.
The reduction in the cost of capital to near zero has also changed the incentives of corporate and banking leaders. The huge profits came not from developing higher quality products and services or improving customer service, but from manipulating markets with near-zero-cost capital, borrowing assets against corporate commercial real estate, and distributing profits to shareholders and managers.
Near-zero-cost capital rewarded speculators and CEOs who leveraged financial games, not those who invested with a long-term horizon.
Reducing the cost of capital to zero also skews the balance between labor and capital in favor of capital, as the already rich, i.e. those who already had collateral and cash flow, could increase their assets and income to borrow huge sums at almost zero interest to acquire income producing assets.
Ordinary wage earners could not compete with them and so wealth and income flowed to the top 0.01%, the top 1% and the top 10%.
This concentration of wealth and income came at the expense of the middle class, whose share of wealth plummeted. The suppression of the cost of capital also encouraged over-lending and a dramatic expansion of debt as interest payments became very cheap.
This in turn fueled global carry trades and a dramatic expansion of both public and private sector debt—loads of debt that are increasingly crushing as interest rates slowly return to historical standards.
In fact, in the US, for example, they have borrowed $3.50 to earn a $1 – $3.50 GDP expansion that will accrue interest until it is repaid, which never happens in public debt and rarely happens in corporate / commercial real estate debt. Instead of being repaid, the debt simply turns into new debt.
The fatal flaws
The Fed’s cover stories brought demand forward and defined the wealth effect: lowering interest rates to near zero encouraged businesses, organizations and households to borrow and spend money now rather than in the future, and falling interest rates inflated asset bubbles, making the already rich feel even richer.
The fatal flaws in these policies are obvious. The demand push eventually absorbs all disposable income, over-recovers assets such as commercial real estate, and increases inflation as unlimited capital chases limited goods and materials.
As for the wealth effect, only the top 10% who own 90% of all assets and earn 50% of all income felt the wealth effect.
Everyone else just dug a deeper hole of debt, what is known as debt slavery. The mainstream argues that the Fed is busy planning a return to the glory days of zero interest rates, but ZIRP is on the downside of the S-Curve. It’s over, it’s gone, it’s the past.
Higher interest rates have been embedded in an economy stripped of risk, competition and diversity because of the Fed’s fatal distortions.
