We wonder if it has dawned on most investors that the Fed, without a single vote being cast by the electorate, has pushed the U.S. economy much further down the socialist path. Socialist nations do not typically get high multiples put on local stocks. This makes the next step, stock buying by the Fed, a doozy, Jay. Go ahead. We double dare you. Japan has shown such promise after having done that in recent years. Not. It will not inspire confidence here. It will only cement the death of capitalism by monetary policy malpractice.
We have warned for the last decade that the Fed was heading in this direction. The Fed acts like stock buying is some powerful card that it holds in reserve when it is really an admission of the abject failure that it has become. It is for flunky central banks and nations that buried themselves in debt through government largesse. Nationalizing Apple or Amazon will not help a bit, Jay. It will only confirm that the U.S. has adopted socialism more completely.
Why would the Fed ever abandon or lose its current command and control position? Other than being rightly perceived as aligning itself against the forces of capitalism, current strategies do cause future problems for the Fed. The dollar could come under intense pressure and inflation could spin out of control, making it difficult to keep interest rates from rising. That is not likely because of the reserve status of the dollar, but entirely possible.
The most likely problem is the same old problem becoming more acute. Enabling the buildup of enormous amounts of new debt from here like this year’s $1 trillion in corporate bond issuance and $3 trillion in government debt will push growth closer to zero over the long-term because the debt only brings demand forward or buys time and then must be serviced. It is an enormous weight. At some point it might become obvious to even the true believers that the Fed, though privately owned, is just another quasi-governmental bureaucracy that shuffles paper around for the Treasury through accounting maneuvers.
The more the Fed becomes involved, the more it must become involved. Eventually it will become clear that it is running the U.S. economy to a degree that is untenable. Where will the Fed hide then? Importantly, social unrest is to a large degree about the wealth inequality created by Fed policies. The population may figure that out one day. The Fed might be “cancelled” or see its outsized role greatly reduced with as little forethought or due process as so many other vestiges of times past have been in recent months.
Other possibilities include the Fed simply becoming a consistent funding source of basic incomes for millions of people and less openly supportive of Wall Street for political reasons. It’s already buying government debt that comes from mailing checks to those out of work. Why not make it a regular benefit? Some economists are already making the case for that in some form or fashion as repugnant as that concept may be. We see this as a sign that the current Fed construct is running into limits. It has reached pure lunacy.
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