There Will Be No Economic Boom

Written by Lance Roberts

Last week, Congress passed a 2-year “continuing resolution, or C.R.,”  to keep the Government funded through the 2018 elections. While “fiscal conservatism” was just placed on the sacrificial alter to satisfy the “Re-election” Gods,” the bigger issue is the impact to the economy and, ultimately, the financial markets.

The passage of the $400 billion C.R. has an impact that few people understand. When a C.R. is passed it keeps Government spending at the same previous baseline PLUS an 8% increase. The recent C.R. just added $200 billion per year to that baseline. This means over the next decade, the C.R. will add $2 Trillion in spending to the Federal budget. Then add to that any other spending approved such as the proposed $200 billion for an infrastructure spending bill, money for DACA/Immigration reform, or a whole host of other social welfare programs that will require additional funding.

But that is only half the problem. The recent passage of tax reform will trim roughly $2 Trillion from revenues over the next decade as well.

This is easy math.

Cut $2 trillion in revenue, add $2 trillion in spending, and you create a $4 trillion dollar gap in the budget. Of course, that is $4 Trillion in addition to the current run rate in spending which continues the current acceleration of the “debt problem.” 

But it gets worse.
As Oxford Economics reported via Zerohedge:
“The tax cuts passed late last year, combined with the spending bill Congress passed last week, will push deficits sharply higher. Furthermore, Trump’s own budget anticipates that US debt will hit $30 trillion by 2028: an increase of $10 trillion.”
Oxford is right. In order to “pay for” all of the proposed spending, at a time when the government will receive less revenue in the form of tax collections, the difference will be funded through debt issuance.

Simon Black recently penned an interesting note on this:
“Less than two weeks ago, the United States Department of Treasury very quietly released its own internal projections for the federal government’s budget deficits over the next several years. And the numbers are pretty gruesome. 
In order to plug the gaps from its soaring deficits, the Treasury Department expects to borrow nearly $1 trillion this fiscal year. Then nearly $1.1 trillion next fiscal year. And up to $1.3 trillion the year after that. 
This means that the national debt will exceed $25 trillion by September 30, 2020.”

You can project the run rate quite easily, and it isn’t pretty.

Of course, “fiscal responsibility” left Washington a long time ago, so, what’s another $10 Trillion at this point? 

While this issue is not lost on a vast majority of Americans that “choose” to pay attention, it has been quickly dismissed by much of the mainstream media, and Congressman running for re-election, by suggesting tax reform will significantly boost economic growth over the next decade. The general statement has been:
“By passing much-needed tax reform, we will finally unleash the economic growth engine which will more than pay for these tax cuts in the future.”
Don’t dismiss the importance of $25-30 Trillion in U.S. debt. It is larger than the debts of every other nation in the world – combined.

Congress Killed The Economic Boom

While it truly is a great “talking point,” the reality is it just isn’t true.

As I have shown previously, there is absolutely NO historical evidence that cutting taxes, without offsetting cuts to spending, leads to stronger economic growth.

Even Congressman Kevin Brady, Chairman of the House Ways and Means Committee, confirmed the same.
Deficits, and deficit spending, are HIGHLY destructive to economic growth as it directly impacts gross receipts and saved capital equally. Like cancer – running deficits, along with continued deficit spending, continues to destroy saved capital and damages capital formation. 

Debt is, by its very nature, a cancer on economic growth. As debt levels rise it consumes more capital by diverting it from productive investments into debt service. As debt levels spread through the system it consumes greater amounts of capital until it eventually kills the host. The chart below shows the rise of federal debt and its impact on economic growth.

The reality is that the majority of the aggregate growth in the economy since 1980 has been financed by deficit spending, credit creation and a reduction in savings. This reduced productive investment in the economy and the output of the economy slowed. As the economy slowed, and wages fell, the consumer was forced to take on more leverage to maintain their standard of living which in turn decreased savings. As a result of the increased leverage more of their income was needed to service the debt – and with that, the “debt cancer” engulfed the system.

The Austrian business cycle theory attempts to explain business cycles through a set of ideas.

The theory views business cycles:
“As the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.”

The problem that is yet not recognized by the current Administration and mainstream economists is that the excessive deficits and exponential credit creation can no longer be sustained. The process of a “credit contraction” will eventually occur over a long period of time as consumers and governments are ultimately forced to deal with the deficits.

The good news is the process of “clearing” the market will eventually allow resources to be reallocated back towards more efficient uses and the economy will begin to grow again at more sustainable and organic rates.

Today, however, expectations of a return to economic growth rates of the past are most likely just a fairy tale. The past 9-years of stock market returns have been fueled by trillions of dollars of support and direct injections into the financial system – that support is not sustainable in the long run. While the injections have kept the economy from falling into a depression in the short term – the unwinding of that support will suppress economic growth for many years to come.

There is no way to achieve the necessary goals “pain-free.”  The time to implement austerity measures is when the economy is running a budget surplus and is close to full employment. That time was two Administrations ago when the economy would have slowed but could have absorbed and adjusted to the restrictive measures. However, when things are good, no one wants to “fix what isn’t broken”. The problem today is that with a high dependency on government support, high levels of underemployment and rising budget deficits, the implementation of austerity measures will only deter future economic growth, which is dependent on the very things that need to be “fixed”.

The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the U.S., the impact could be far more immediate and prolonged than the media, economists, and analysts are currently expecting. Sacrifices will have to be made, the economy will drag on at subpar rates of growth, individuals will be working far longer into their retirement years and the next generation of Americans will lead a far different life than what the currently retiring generation enjoyed.

It is simply a function of the math.

What Xi Jinping’s Longer-term Rule Will Mean for China’s Economy

With the path now apparently cleared in China for President Xi Jinping to continue in office past 2023 as officials scrap the two-term limit rule, questions about how the change will affect the economy, foreign investment and political power there abound.

While the timing of the move surprised many, the ultimate consolidation of power by Xi in this way was not unexpected, say three experts who discussed the major development on the Knowledge@Wharton show, which airs on SiriusXM channel 111. The guests included Jacques deLisle, a professor of law and political science, and director of the Center for East Asian Studies at Penn; Ann Lee, a professor of economics and finance at New York University; and Marshall W. Meyer, a Wharton emeritus management professor and China expert.

The experts were divided on what the move could mean for China: Xi’s new mandate could allow him to better meet a long-standing Chinese goal of becoming a more socialist society modeled on northern Europe, and it could give Xi more time to see through important longer-term projects like the “One Belt, One Road initiative” – the country’s plan for a new Silk Road trade route from China to Europe. Or, it could ultimately be a setback for democratic rule, particularly as it applies to limits on institutions, while enhancing a growing tendency to expand the “surveillance state.” 

Too Much Power?

Meyer pointed out that historically, China has moved its economy along through decentralization. The motto of Deng Xiaoping — China’s transformative ruler from 1978 to 1989 — was to let each province try its own way, and the winners can be copied. According to Meyer, the question is: “Does [more] centralization potentially up-end China’s very successful economic growth?”

The strengthening of Xi’s power is a cause of concern, deLisle agreed. “One of the things that authoritarian regimes do to avoid some of the pathologies of overconcentration of power is to have the leader think [that they are] going to be out of office in five-to-10 years,” he said, adding that is not the case with China. “Obviously, a great deal of power can be used to any number of ends – good, bad and indifferent. What we’re seeing right now is mostly a mix of bad and indifferent. But the potential for good is still there, of course.”

It helps that Xi has also gradually consolidated power, said deLisle. “[He] clearly is a strong leader for a strong China internationally that sells pretty well at home. It sells better at home when they can portray the U.S. as being in chaos and other Western governments as being in some chaos. It undercuts the argument for political change.”

With a longer term, Xi also would be able to more fully pursue his vision for China to become more like a socialist society modeled on northern European countries, which include Denmark, Sweden and Norway, said Lee. “Northern Europe is obviously a western society, and he would like the end goal for China to be like that – a very high income, innovative and socialist government.” With the “respect and attention” that Xi has cultivated within the world community, he is seen as the right person to pursue that model, she added. On its part, the Communist Party would not “want to mess around with that formula,” she said. 

Xi could also use his power “to push forward with bold economic reforms, [but there is] not a whole lot of evidence of much movement in that direction,” deLisle said. What is evident, however, is that Xi has led a “very repressive regime in terms of civil liberties-type issues, in terms of dissident views and [other] such things, and there’s absolutely no sign” that is going to change, he pointed out. “So whatever the economic outcome, it’s not going to look like Northern Europe in terms of its politics.”

Unexpected Timing

Meyer said the move to enable Xi to continue in office beyond 2023 was “not a surprise,” but he was taken off guard by the timing – he expected it to happen “much later.” Another surprise, according to deLisle, is that “there’s been very little pushback as one would expect from foreign governments, particularly the U.S. Usually we would say this is a setback for democratic governance, which China doesn’t really have,” he noted. “But … [it is] disconcerting in an era when authoritarianism seems to be on the rise.”

The U.S. and other countries haven’t spoken up against Xi’s tenure extension for good reason, said Lee. “The U.S. and every other country also have interests in having a stable China,” she explained. “They have major investments in China, and so corporate leaders certainly don’t want uncertainty from China in an already uncertain world with Trump.”

According to Lee, the move is significant in that it reaffirms China’s commitment to the One Belt, One Road project in the face of opposition to it from several countries. “They feel it’s important to perhaps signal to the world, and even domestically, that Xi’s going to be around for a while so that everyone knows that this [initiative] will continue because he is the face of it.”

The move to extend Xi’s term is likely be ratified in the Communist Party’s plenary sessions coming up in March, or it could be put off for later, considering that he has just begun his second term, said deLisle. In any event, “it’s going to happen unless there’s a decision to change policy direction,” he added.

According to Meyer, Xi himself and his party wanted his term extended. “Here’s a person who likes power and breaks norms regularly,” he said. He noted that at the same time, Xi is “being pushed from left and from right.” The opposition from the “right” includes the faction led by former president and party chairman Jiang Zemin, who appears to have been sidelined by the Xi regime, he explained. The pushback on Xi’s policies from the left include those who want to return to what they see as “the good old days” before Deng Xiaoping. “[Xi] followed his own predilections, but I also think that he’s being pushed to have to consolidate power.”

A Balancing Act

Meyer spotted inconsistencies between Xi’s supposed attempts to “westernize the economy” and the baggage China continues to carry of loss-making state-owned enterprises (SOEs), saddling banks with capital shortages. He noted that on the one hand, Xi is taking steps to consolidate his grip on the economy by elevating two senior officials in particular. Liu He, who is credited with leading the effort to draft Xi’s economic blueprint, is tipped to be named vice premier in the March party meeting, and to be in charge of China’s financial system and its industrial sector, according to a Wall Street Journal report. Also, Wang Qishan, who led Xi’s anti-corruption drive, is likely to be named vice president at the March meeting. Those moves stem from worries that foreign investors will pull out from China as interest rates in that country and those in the U.S. begin to converge, said Meyer.

On the other hand, Meyer pointed out state-owned enterprises “are taking up a lot of the credit space in China, and dragging the economy.” According to Lee, China’s economy could continue to move forward despite the drag of loss-making SOEs. She pointed to the country’s internet-era giants such as Alibaba and Tencent, pointing out that they don’t rely on credit and are growing with their own equity resources and cash flows. “These new economy companies don’t require debt to grow,” she added. “China has always kept one foot in the old space while letting companies grow into some new space. That’s how they moved in to the industrial revolution, and that’s how they’re going to move into this new economy innovation society.”

A Plateful of Challenges

China has its share of challenges, too, and they don’t have easy solutions, deLisle noted. He pointed out that the country’s economic growth has slowed to the “new normal” of 6%-7%, adding that analysts are concerned about how sustainable that is. China also has an aging population. “China is trying to deal with that through moving up the value added chain – more brainwork, less brawn work and more automation,” he said. “But these are all tough things to do in any circumstance, and they’re facing this transition at a rapid pace. They’re getting older sooner than most countries at their level of development.”

Other concerns relate to the future of unviable SOEs, and obstacles the country has faced in using its specialties elsewhere, such as building infrastructure in Africa and Central Asia. “Not every country is as effective at absorbing and using infrastructure as China has been, and so there have been problems there,” deLisle noted.

Lee agreed that China faces those challenges. It is precisely in such circumstances that it helps to have leadership stability “to navigate these very uncertain waters,” she said. “The last thing they want is to have another Tiananmen Square [protest], because that happened when China was experiencing really high inflation – in the double digits.” At that time, China was making a transition from an agricultural society into a more modern one with increased exports and so forth, but that was painful, and caused “an enormous amount of unemployment and inflation,” Lee noted.

China’s leaders probably see the present times as being equally challenging, said Lee. That must be the key driver for them to decide to bring more durability to Xi’s leadership and “stick with the formula that seems to be working well for them.” Its leaders are looking for “consistency,” even if that means slowing economic growth, she added. In any event, a 7% GDP growth on an economy of its size is “a tremendous amount of economic growth,” she pointed out.

The Making of Lehman Brothers II

Simon Johnson

Lehman Brothers Collapse and Trial: Richard Fuld Jr.

WASHINGTON, DC – Last week, with some fanfare, the US Treasury Department released a report on what to do about the Orderly Liquidation Authority. The OLA, created under the Dodd-Frank financial reform legislation of 2010, was intended to prevent a recurrence of what happened in September 2008, when one failing firm, Lehman Brothers, was able to trigger a cascade effect that nearly destroyed the financial system.

The OLA allows the Federal Deposit Insurance Corporation (FDIC), subject to reasonable safeguards, to take over a failing financial firm and wind it down in an orderly manner – very much in line with what happens, with some regularity, when a small bank becomes insolvent.

Although the Treasury report reads more like a political document rather than a well-reasoned technical assessment, it still comes to a sensible conclusion: keep the OLA in place.

Unfortunately, the report also masks a broader legislative and regulatory agenda that will add unnecessary risk – and a lot of it – to the financial system.

The OLA has attracted a great deal of bipartisan support in recent years, including on the FDIC’s Systemic Resolution Advisory Committee (the SRAC, of which I am a member). But some highly influential Republicans on the House Financial Services Committee have attacked the OLA relentlessly, arguing that it represents a government bailout-in-waiting. They want to abolish it, and insist that failing financial firms simply go through a court-supervised bankruptcy process.

Lehman Brothers, of course, went bankrupt – and it was the spreading effects of that failure that caused so much damage in September 2008 and subsequently. House Republicans, drawing on work by scholars at the Hoover Institution, have argued that modifying the bankruptcy code – creating a so-called Chapter 14 – would allow such firms to fail without the risk of adverse systemic consequences.1

The good news from the Treasury report is that the Trump administration is not prepared to support this position. Treasury recognizes, albeit implicitly, that no bankruptcy court can deal with the complex globally interconnected liabilities of JPMorgan Chase, Citigroup, Goldman Sachs, or other bank holding companies with over $500 billion on their balance sheets. (Lehman Brothers owed more than $600 billion when it failed.)

The Treasury report makes a big deal of demanding that bankruptcy must be the first and preferred option when a big bank is in trouble. But this is exactly what the Dodd-Frank legislation said – and it is what the FDIC and other regulators have worked hard to implement. (All SRAC meetings are public and broadcast online, and the details of implementing the OLA have been reviewed many times by Paul Volcker, Sheila Bair, and other experts.)

The Treasury report does sketch out a new Chapter 14, but this would achieve little. The main problem with the bankruptcy approach is the lack of Debtor-In-Possession financing for a complex global financial institution with an enormous balance sheet; without access to operational funding from the private sector, the entire process collapses – exactly the Lehman scenario.

The second problem with the bankruptcy approach is that international regulators would find themselves unable to cooperate – for their own legal and procedural reasons – with a US process that affects a major part of their own economies. Senior officials at the Bank of England, for example, have been commendably forthright about this – including at public SRAC meetings.

The Treasury report mentions these issues, but it fails to address them in any meaningful way.

The Chapter 14 proposal is a hamburger with almost no beef. It is hard to see how the Senate Judiciary Committee (which has jurisdiction over the bankruptcy code) could be persuaded to waste time on this.

Much more worrying, however, is what lurks unmentioned behind the Treasury report: a serious legislative effort, supported by the Trump administration, to reduce the level of scrutiny applied to banks that are on the verge of becoming systemically important. The proposed bill, the Economic Growth, Regulatory Relief, and Consumer Protection Act, is a misnomer. Title IV of the law would raise the threshold for “applying enhanced prudential standards from $50 billion to $250 billion.”

The main lesson from the experience of 2008 and the subsequent deep recession is that it is much better to prevent big banks from failing than to deal with the consequences when they do.

I testified to Congress that $50 billion, as defined under Dodd-Frank, is a sensible threshold at which the Federal Reserve should pay more attention to financial institutions. Art Wilmarth of George Washington University Law School has also written persuasively on this point: at $250 billion, a bank’s failure can have major ripple effects.

To be fair, even under the proposed legislation, the Fed would retain significant discretion regarding how to prevent big banks (and nonbanks with bank-type structures) from creating structures – organizational and financial – that could bring down other parts of the system, including across borders.1

But fairness cuts both ways: there is no indication that Donald Trump’s appointees to the Board of Governors of the Fed will be careful or limit what big banks want to do. As in 2008, we risk learning the hard way why adequate regulation of systemically important financial institutions is essential.

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

China: Herding Rivals and Rhinos

By Phillip Orchard

Chinese President Xi Jinping made a string of moves over the weekend that reflect the extraordinary power he’s wielding from atop the Chinese system – but also the threats to both his position and his country that are keeping him up at night.

On Feb. 23, the Central Committee of the Chinese Communist Party proposed that the rule limiting the president and vice president to two terms be removed from the Chinese Constitution at next week’s National People’s Congress. The proposal is certain to be implemented. On the surface, the move confirms what we already knew: Xi has no intention of sticking with recent precedent and stepping down when his second term ends five years from now. This was made abundantly clear at the epochal 19th Party Congress last fall, when “Xi Jinping Thought” was added to the party constitution. There, Xi declined to name a successor to replace him as party secretary in 2021. Xi’s intentions have been further underscored by a string of high-profile anti-graft purges of rising stars (generally from rival factions) seen as potential challengers to Xi.

Xi is motivated by more than mere lust for power. Rather, with China trapped between conflicting political and economic forces as it enters a prolonged period of slowing growth, Xi has launched a wildly ambitious slate of reforms intended to put the economy on solid footing and safeguard party legitimacy amid the coming storms. This reform drive will not be completed by the end of Xi’s second term.

Meanwhile, a growing consensus has emerged among Chinese elites that a strongman is needed to see these painful reforms through and respond decisively to a crisis. The previous model, which emphasized consensus and spreading powers among elite factions, is seen as having left Xi’s immediate predecessors, Jiang Zemin and Hu Jintao, too weak to tackle threats to party legitimacy such as unchecked corruption – and prone to paralysis in a crisis.

This doesn’t mean Xi is immune to resistance, though. There will be winners and losers with every reform, and massive amounts of money and power will be at stake. The risks of a destabilizing power struggle will only grow during times of heightened economic duress. Thus, power consolidation is a never-ending endeavor for Xi, however successful he’s been in sidelining rivals and tightening his grip over critical levers of power.

Why the Presidency?

Still, Xi’s decision to spend political capital on the presidency is a bit curious. In nearly all aspects of the Chinese system, positions of party leadership supersede those of the state, including the presidency. It’s largely a symbolic office, with few formal powers. Indeed, under the rule of paramount leader Deng Xiaoping from the 1980s until the early 1990s, the position was always held by a figurehead. It only began to be held concurrently by the Communist Party secretary when Jiang Zemin took power in 1993.

There has been some thought that Xi would eventually step “aside” rather than “down” and try to wield power more from behind the scenes in a manner akin to Deng, who was China’s most powerful leader since Mao, despite never holding the titles of president or party secretary. If Xi were looking for a way to deflect pressure over his apparent disregard for party norms and precedent, one possibility would be to install a figurehead as president five years from now, with Xi continuing to serve as party secretary and chairman of all-powerful bodies such as the Central Military Commission. Xi, of course, could still choose to go this route. But evidently he wants the ability to stick around in the role if necessary.

There are practical reasons for Xi to hold on to the title of president. For one, the president is the official face of China internationally. At a time when China is becoming increasingly active across the globe, there’s political value at home to being the one consistently in the spotlight abroad.

Allowing someone else to be the one rubbing shoulders with fellow heads of state could also conceivably threaten Xi’s control over Chinese foreign policy. Second, even though the office of the president matters little today, power in the Chinese system is fluid. It’s not hard to see a scenario in which the office is imbued with powers by rivals attempting to contain or challenge Xi outright. So, Xi is acting now – while he’s strong – to give himself options in a future when socio-economic and political winds are highly likely to be blowing less in his favor.

Containing the Gray Rhinos

The complexity of the economic and political challenges facing Xi during his second term was reflected in two other moves over the weekend. On Feb. 23, Chinese regulators seized control of Anbang Insurance Group, a vast but heavily indebted conglomerate known for its overseas acquisition binges, and charged its chairman, Wu Xiaohui, with economic crimes. (Wu has been detained since June.) And on Feb. 24, State Councilor Yang Jing was sacked – just a month ahead of his scheduled retirement – for colluding with “law-breaking businessmen and society people.” According to the South China Morning Post, Yang is believed to have taken bribes from another disgraced tycoon, former Tomorrow Group chairman Xiao Jianhua.

Chinese authorities reportedly snatched the billionaire from a Hong Kong hotel more than a year ago, and he has remained in detention ever since.

Since the beginning of Xi’s first term, his administration has been gradually intensifying pressure on debt-fueled Chinese conglomerates known as “gray rhinos,” with several over-leveraged firms such as HNA, Fosun and Dalian Wanda being forced to sell off newly acquired overseas assets over the past year and scale down their financial services offerings. This crackdown demonstrates just how tightly intertwined Xi’s economic and political concerns are.

Power politics is certainly playing a part in the effort. Yang, for example, was also the top aide to Chinese Premier Li Keqiang, who has been largely sidelined by Xi but remains a potential challenger to the president. Both men hail from one of the two major factions Xi has tried to dismantle via his anti-corruption campaign. Wu, meanwhile, is also believed to be highly politically connected. (He married Deng Xiaoping’s granddaughter.) Allowing such deep-pocketed figures to try to forge independent bases of political power or resist Beijing’s reform agenda would be a direct threat to Xi and to party stability.

Broader economic risks are also at play. Perhaps the foremost policy focus of the Chinese Communist Party this year is eliminating financial risk, which Xi elevated to the level of national security last year. This requires a herculean effort, given the scale of the Chinese economy’s reliance on debt-fueled growth. And it’s forcing Beijing to take on the country’s weak regulatory agencies, state-owned enterprises, the banking sector, sources of capital outflows, provincial and local governments, and more – all at once.

Large financial holding companies like Anbang and Tomorrow Group, among their other problems, are seen as contributing to a boom in shadow financing that, according to regulators, poses a systemic threat to the Chinese economy. Indeed, it’s hard to see how Anbang’s business model, which was raising money for overseas acquisitions by selling extremely high-yield investment products thinly disguised as insurance policies, can be sustainable without implicit guarantees of state backing during a downturn. (Anbang has some 2 trillion yuan, or $316 billion, in assets.) This raised the specter of tens of thousands of ordinary investors taking to the streets after being left empty-handed should any of these firms default. And mass unrest is what Beijing fears most. Meanwhile, the private conglomerates, which have notoriously opaque ownership structures, have also been accused of serving as vehicles for Chinese elites to move ill-gotten wealth offshore, potentially undermining Xi’s anti-graft campaign.

Beijing is moving forcefully to shore up the private conglomerates and clip the wings of their ambitious tycoons while the economy is reasonably stable and Xi is unassailable. But it’s unclear how easily the government will be able to do so without overburdening state banks already trying to shed toxic assets, or without furthering a liquidity crunch that ripples into other parts of the economy, or without bilking everyday Chinese investors who’ve been promised the world. As with most of Xi’s reform agenda, this effort is riddled with unsavory trade-offs. However long Xi decides to stick around, heavy will be the head that wears the Chinese Crown.

The Biggest Threat to Your Financial Wellbeing

by Nick Giambruno

You may recall the international spectacle Alan Greenspan sparked in 1996.

In an otherwise dull and forgettable speech, Greenspan, the Federal Reserve chairman at the time, said the now famous phrase “irrational exuberance.”

Investors thought Greenspan meant the Fed was about to raise interest rates.

Of course, Greenspan didn’t say the Fed would raise rates. Nor did he intend to signal that.

Nonetheless, investors quickly panicked.

US markets were closed at the time, but stocks in Japan and Hong Kong dropped 3%. The German stock market fell 4%. When trading started in the US the next day, the market opened down 2%.

Billions of dollars of wealth vanished in 16 hours… all because one man said two words.

That’s an absurd amount of power for one person to have.

It’s also a shameful testament about the economy. It’s based more on the Fed’s shenanigans than actual production.

After the US president, the Fed chair is the most powerful person on the planet.

By simply saying the right words, the Fed can create or destroy trillions of dollars of wealth in both the US and abroad.

We’re in Uncharted Territory

Throughout the 1920s, the Federal Reserve’s easy money policies helped create an enormous stock market bubble.

In August 1929, the Fed raised interest rates and effectively ended the easy credit.

Only a few months later, the bubble burst on Black Tuesday. The Dow lost over 12% that day.

It was the most devastating stock market crash in the US up to that point. It also signaled the beginning of the Great Depression.

Fast forward to today…

The economy has been on life support since the 2008 financial crisis. The Fed has pumped it up with unprecedented amounts of “stimulus.” This has created enormous distortions and misallocations of capital that need to be flushed.

Think of the trillions of dollars in money printing programs—euphemistically called quantitative easing (QE) 1, 2, and 3.

Meanwhile, with zero and even negative interest rates in many countries, rates are the lowest they’ve been in 5,000 years of recorded human history.

This is not hyperbole. We’re really in uncharted territory. (Interest rates were never lower than 6% in ancient Greece and ranged from 4% to over 12% in ancient Rome.)

The too-big-to-fail banks are even bigger than they were in 2008. They have more derivatives, and they’re much more dangerous.

Allegedly, the Fed has been taking these actions to save the economy.

In truth, it’s warped the economy far more drastically than it did in the ’20s. I expect the resulting crash to be that much bigger.

The Biggest Threat to Your Financial Wellbeing

The mainstream “fake news” media endlessly praises the Fed. It portrays Fed employees as a bunch of selfless, benign bureaucrats trying to save the economy.

In reality, the Fed is the primary cause of most of the harmful distortions in the economy.

You can blame the Fed for…

✔ Unlimited money printing

✔ Artificially low interest rates

✔ The boom/bust cycle

✔ Bailout funds to prop up “too big to fail” institutions

✔ The War on Cash

✔ Cronyism in the financial industry

✔ Various asset bubbles… just to name a few.

If you ask me, the Fed is the biggest threat to your financial wellbeing. Period.

Today, That Threat May Be Imminent

In December, the Fed raised interest rates to their highest levels since the 2008 crash.

This could help prick the massive bubble in the stock and bond markets.

But the threat goes beyond that. Even a small rate increase could also be lethal for the US budget, which is built on credit.

In other words, economic depression and currency inflation (perhaps hyperinflation) are very much in the cards.

These things rarely lead to anything but bigger government, less freedom, and shrinking prosperity.

Sometimes they lead to much worse.