They’re All High on Fed Fairy Dust

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.

US GDP contracted by 4.8% in the first quarter. It was the first negative GDP reading since a 1.1% decline in the first quarter of 2014 and it was the lowest level since the 8.4% plunge in Q4 of 2008.

And the worst is yet to come.

The Q1 GDP number only captures the first couple of weeks of coronavirus-inspired government lockdowns of the economy. In fact, in January Donald Trump and others were telling us that it was the best economy in the history of the world. That was also in the first quarter.

The first-quarter GDP print came in even worse than expected. Economists were projecting a contraction of 3.5 to 4%. The precipitous and rapid plunge in economic activity not only reflects the impacts of turning off the economy in the midst of coronavirus; it also reveals just how fragile the economy was before the pandemic.

Back in January, President Trump called it the greatest economy in history. Trump continued to talk up the economy during the State of the Union address, taking credit for the “strong” economic growth. At the time, Peter Schiff said nobody should be taking credit for the condition of the US economy. In fact, economic growth wasn’t much different than it was when Obama was president.

The only difference is we had to borrow even more money to achieve the same level of fake GDP growth that we did under Obama. The reality is nobody should be taking credit for the current US economy. The question is who deserves the blame?”

Despite the hyperbolic cheerleading, the economy was riddled with debt and was already being propped up by extraordinary Federal Reserve monetary policy. We had three rate cuts in 2019. The Fed was running repo operations to stabilizing the financial markets and the central bank had already launched quantitative easing before COVID-19, even though Jerome Powell and Company refused to call it that.

The US economy was a big, fat, ugly bubble and coronavirus was the pin that popped it.

And judging by the Q1 GDP number, the air is coming out even faster than most analysts expected. In fact, recent economic data reveals a veritable house of horrors.

And yet on the same day we get this awful GDP print, stock markets rallied. The Dow Jones was up 532 points. The S&P 500 enjoyed a 2,66% gain.

That’s because the mainstream has been led into an economic fantasyland by a trail of Federal Reserve fairy dust.

According to media reports, the primary impetus behind the stock market gains was a promising new coronavirus drug. The vas majority of people out there still seem to believe that once we “solve” coronavirus, the economy will open right back up and everything will be fine. They still believe things will just snap back to normal. As I have said multiple times, things aren’t going back to normal. They weren’t normal to begin with. As Schiff put it, the best we can hope for is recovering from a depression to a recession.

The Federal Reserve was propping up the economy in January and it continues to prop up the economy today. The only difference is it’s had to add a lot more props over the last several weeks.

Trillions of them in fact.

The Federal Reserve has pumped trillions of dollars of new money into the economy. Its balance sheet has swelled to nearly $6.6trillion. And during its meeting yesterday, Fed Chair Jerome Powell promised to press on with as much as necessary.

At least give Powell credit for at least realizing things are really bad right now.

We’re going to see economic data for the second quarter that’s worse than any data we’ve ever seen.”

And yet he remains clueless about how the very policies he is pushing have brought us to this place to begin with. Like most everybody else, he still thinks it’s all about the virus and that if we can just pump in enough stimulus, the central bank can see us through.

In its statement, the Fed promised it would continue to throw the kitchen sink at the US economy with no holds barred.

The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time.”

It also committed to leaving interest rates at zero percent as long as it takes.

The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

During the post-FOMC meeting press conference, Powell refused to speculate on just how long rates might have to stay at zero. But if the great recession gives us any indication, forever might not be a bad guess. It seems incomprehensible that the Fed could ever raise rates given the levels of debt in the economy. Remember, the central bank was already cutting rates before coronavirus.

Of course, inflating the money supply by trillions of dollars has consequences of its own. Nobody seems concerned about that either. In fact, one reporter asked Powell how he would prevent a deflationary spiral even as the Fed chair directs the most inflationary monetary policy in history. In a tweet, Schiff said the question is will the Fed be able to admit its mistakes and reverse policy in time to prevent hyperinflation?

Powell also said the US government shouldn’t worry about the national debt. In fact, he encouraged more borrowing and spending to stimulate the economy.  Schiff hit the nail on the head again, tweeting, “The problem is Powell never worried about the debt.”

By-and-large, almost everybody is wandering around in this economic fantasyland high on Fed fairy dust. They’re convinced that this is a tiny economic speed bump. They don’t realize they’ve actually driven off a cliff. But at some point, the high will wear off. People will realize that the economy isn’t going to snap back to normal when Donald Trump snaps his fingers. And they’ll start to realize the fairy dust is what’s killing them.