For years, I have been warning that during the age of permanent stimulus (which began in earnest with the Federal Reserve’s reaction to the dotcom crash of 2000), each successive economic contraction would have to be met with ever larger, increasingly ineffective, doses of monetary and fiscal stimulus to keep the economy from spiraling into depression. I have also said that the enormity of the asset price gains over the last 10 years had increased the danger because reflating the bloated stock, real estate, and public and private debt markets would bring on doses of stimulus that could prove lethal for the economy. But even though I expected that the next financial crisis would be catastrophic, I thought that it would come into the world in the usual way, as a credit crisis triggered by over-leverage. But the Coronavirus ripped up those stage notes, and instead ushered in a threat that is faster and deeper than I imagined, and I imagined a lot. It’s a perfect storm, a black swan with teeth.
Federal Reserve Chairman Jerome Powell went negative in a webcast speech on Wednesday, May 13.
I’m not talking about negative interest rates, although that could be coming down the pike as well. Powell went negative on the prospects of a quick economic recovery.
He’s right about the prospects for the economy, but he’s wrong about the solution. That’s because he doesn’t even realize it’s Fed policy at the root of the problem to begin with.
Are negative interest rates in our future?
The markets are starting to think so.
On Thursday, Fed fund futures contracts began pricing in negative interest rates. They were initially priced in for December but then shifted to early 2021. This doesn’t guarantee negative rates, but it does indicate markets are beginning to expect them.
What is the NFL telling us about the economy?
The conventional wisdom seems to be that the economy will quickly recover once governments open things up again. But recent moves by the National Football League indicate its leadership isn’t so confident.
Everybody realizes the US economy is in a bad spot. But most people still seem to believe it will bounce right back once we deal with the coronavirus.
They’re all high on Federal Reserve fairy dust.
The mainstream is a fickle place.
On the one hand, we had Bank of America raising its 18-month price projection for gold to $3,000. On the other hand, some people argue the price of gold could crash later in the year.
A lot of people still seem to think the economy will fire right back up and things will snap right back to normal when the government-imposed coronavirus lockdowns end. I don’t believe we’re going back to normal for a number of reasons – primarily because things weren’t normal before coronavirus. The economy was a big, fat, ugly bubble. Coronavirus was a pin that popped the bubble.
But even if things were normal before the pandemic, the economy still wouldn’t just fire back up and restart on a dime.
Turn the key and the economy will restart.
That’s a myth a lot of people in the mainstream have peddled since governments started shutting down the economy in response to the coronavirus pandemic.
That’s not going to happen. We’re not going back to normal.
The US national debt pushed above $24 trillion on Tuesday.
The US government was already running massive budget deficits long before the coronavirus pandemic and the debt was piling up at a dizzying pace. Response to the outbreak has put spending and debt in hyperdrive.
As the coronavirus lockdown drags on and governments at every level enact more and more draconian measures, nobody seems to have an answer for what I believe is a most crucial question.
What’s the exit strategy?