Submitted by Gary Evans of Macromon
The Tragic Consequences Of Jack Asset Monetary Policy
You have to own assets to make it in the New Economy. Pity the younger generations.
Check out the growing wealth disparity in the below chart, which is clearly the result of monetary policy.
The Fed’s increasing reliance on the asset price channel of the monetary transmission mechanism over the past decade has been to “jack up” or inflate assets, hoping the “wealth effect” stimulates aggregate demand. Household net worth is now at a record level and the economy is purring.
The asset price channel of monetary policy relative importance has increased as households have been deleveraging after the GFC, rendering the credit channel of monetary policy almost completely ineffective, at least, until recently.
The result is asset bubbles everywhere.
The political consequences are also far from benign.
Conservative savers who have kept their money in bank CDs, witnessed their interest income go to zero, while the highly levered and risk takers were bailed out. Many, who have done all the right things — worked hard, saved, paid their bills on time — feel they have been screwed in a big way.
We know of one person, who owned three houses on our street, and didn’t pay his mortgages for over four years, yet still collected rent from his tenants. The banks didn’t foreclose because they worried that flooding the neighborhood market with homes would drive down the price of their collateral. Not the case anymore, however.
He was only one of several hundred thousand deadbeat borrowers, who gamed the system, did all the wrong things and was rewarded. The stand up borrower and citizen got screwed.
Once an asset has doubled or tripled in price, many people feel stupid and are envious of those who’ve profited. My favorite quote on this subject is from Charles Kindleberger, “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.” –HM— Howard Marks (@HowardMarksBook) September 10, 2018
Do you wonder why populism is on the rise — The Tea Party and Donald Trump?
We understand and feel the anger, but do hope and pray the backslide toward tribalism will be reversed sometime soon.
People’s QE Is Coming
Because the wealth disparity is so vast, as it has become in the past seven years, the efficacy of asset inflating or, what we call “jack asset” monetary policy diminishes, and more and more Fed stimulus is needed; as are higher, and higher asset prices.
That is why we believe that during the next recession, the Fed will be forced to roll out some sort of “people’s QE.” That is, the direct financing of consumption, possibly in the form of financing a universal basic income, the direct bailout of public pensions, and the funding a massive jobs facility, for example.
Of course, the new QE will likely be executed through the direct purchase of Treasury securities earmarked for such programs.
Smells Like Argentina
Wow, this smells a lot like late 1980’s Argentina. I was there and witnessed very similar policies. The major difference is the Argentine austral was not a reserve currency.
A “people’s QE” will supposedly ensure the new liquidity is injected directly into the hands of those who will spend it, generating the demand to lift the economy out of its morass.
Sticking with the old QE policy, or just augmenting it with the Fed’s direct purchase of equities and corporate bonds, will prove ineffective due to the growing wealth disparity. The marginal propensities to consume of high net worth groups approach zero as wealth increases.
The result will most likely be a disaster. The dollar will tank and its role as the world’s reserve currency will be over. Yes, there will be another deflation scare but it will sow the seeds of inflation as the policies mentioned above are ushered in. Are you listening, deflationistas?
Maybe the Fed should have never have ventured down this road, transforming the economy into the asset driven beast that it now is, but we are way beyond the Rubicon Crossing, folks.
Until then, let’s focus on making money. Everything is awesome.