Under pretence of governing they have divided their nations into two classes, wolves and sheep. I do not exaggerate. This is a true picture of Europe. Cherish, therefore, the spirit of our people, and keep alive their attention. Do not be too severe upon their errors but reclaim them by enlightening them. If once they become inattentive to the public affairs, you and I, and congress, and assemblies, judges and governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions; and experience declares that man is the only animal which devours his own kind, for I can apply no milder term to the governments of Europe, and to the general prey of the rich on the poor.
– Thomas Jefferson, “Letter to Edward Carrington,” January 16, 1787
Alan Greenspan led the Federal Reserve down the rabbit hole of total surveillance of all the components of gross domestic product (GDP). He redefined the central bank’s mission, from tight focus on “Money” to plenary concern with “Economy.”
And he’s served his Acela Corridor masters well.
Today, Imperial Washington defines “Economy” purely in terms of Wall Street and the 1%. We’re talking about a stock-index-based simulacrum of prosperity that rests on a foundation of easy money.
The Fed’s balance sheet grew from $200 billion in August 1987 to $4.5 trillion at the peak of “quantitative easing” in October 2014. That’s growth of 22.5 times – and it contrasts dramatically with the 3.8 times rise in nominal GDP during the same 27-year period.
Before Greenspan, it amounted to 4.1% of GDP, consistent with a ratio that had prevailed for decades. In 1955, it was about 5% of GDP. In 1971, it was still 5.5%.
During the heyday of American prosperity – between 1953 and 1973 – it grew from $24 billion to $80 billion. That’s 3.3 times. Meanwhile, nominal GDP grew from $385 billion to $1.48 trillion. That’s 3.8 times.
Real GDP grew at an average annual rate of 3.5%. And the real standard of living of U.S. families rose dramatically.
The Fed’s balance sheet grew more slowly than national income over these two decades. And prosperity was no worse for the wear.
Real median family income of $59,600 in 1973 was 73% higher than the $34,200 of 1953. The average annual growth rate was a robust 2.8%.
That’s why they called it the American Dream.
By 2014, the Fed’s balance sheet had grown to 25% of GDP. And credit was unleashed like never before. From 1987 to 2014, total credit-market debt outstanding – household, business, financial, and government – soared from $10 trillion to $62 trillion. That’s 6.2 times. But GDP only grew by 3.7 times.
That marked a true pivot point in U.S. economic history. Since 2000, the annual growth rate for real GDP has averaged only 1.8%. That’s 46% of the growth rate from 1953 to 1973.
And real family income has been dead in the water, creeping up at an average annual rate of 0.17%.
The truth is the actual living standard of the median American family – when the actual cost of living is properly accounted – has been shrinking for the entire 21st century.
When monetary central planners became focused on “Economy” rather than “Money,” the U.S. economy rapidly transformed. It’s been “financialized.” And it’s weighed down by debt.
Even as the Fed pumps up incremental demand, benefits flow to accounts of foreign suppliers. What was simple leakage has become a flood over the last couple decades.
Domestic consumption of durable goods increased by 61%. But domestic production of durables rose by only 32%. The difference, of course, went into the coffers of foreign producers.
The Fed’s defenders say it doesn’t matter. They say it’s just a partial view of international flows. They say everything comes out in the wash. They say foreigners offset the gargantuan U.S. trade deficit with inflows to the U.S. economy in the form of loans and investments.
What they won’t say is, over long enough horizon, it amounts to going hopelessly into hock.
“Wealth effects” groupthink has the Fed claiming to macro-manage and micro-tune U.S. GDP by the year, by the quarter, and, sometimes, even by the month. Even if it could generate honest incremental demand, a lot of it would flow right out of the bathtub through the mechanism of America’s massive global trade deficit.
When it comes to the Fed’s 2% inflation target, the leakage is all the more massive. That’s especially so since the Fed can no longer hit any of its targets.
Yet it continues to find ways to inflate bubbles for Wall Street.
It’s the Maestro’s new order of monetary central planning…
When This Bubble Bursts…
Desperate times call for… “common sense” measures.
And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.
We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.
I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”
All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…
To common sense,