Central Banks are moving heaven and earth to protect the economy from the devastating consequences of the pandemic. However, the expansive monetary policy fuels an unprecedented increase in debt forestalling the economic recovery.
Wealth and income inequality are major concerns. According to Wikipedia the top 10% of US households own over 70% of US household net worth, while the bottom 50% of households have less than 2% of the net worth.
But Time Magazine’s conclusion that, «The top 1% of Americans have taken $50 trillion from the bottom 90%» is wrong! The rich have not rigged the system and are not profiting at the expense of the poor. The truth is different. The wealth and income disparity has been caused by the Federal Reserve’s money printing to pay bills and support the economy. The end result: The underlying US economy is barely growing due to the huge additions to debt.
Currently, the Total Household Net Worth of all Americans is up to about $115 trillion, according to the Federal Reserve’s Quarterly Z1. That is a gain of $55 trillion, almost doubling since the end of 2008. Yet asset inflation accounts for $50 trillion, or around 90% of the $55 trillion increase. By the numbers: The value of all stocks surged $26 trillion, bonds $10 trillion and housing $14 trillion; totaling $50 trillion.
Subtracting the benefits from asset inflation, the underlying US economy has been growing by less than 2% per year prior to the pandemic. The reason underlying growth is so anemic: more and more money printing being continually added.
Economists have proven that the more debt an economy takes on, the slower it will grow. According to Lacy Hunt’s Hoisington 2Q 2020 Quarterly Review & Outlook, «Four great past economists – Eugen Bohm Bawerk, Irving Fisher, Charles Kindleberger and Hyman Minsky – all captured the two-edged nature of debt being an increase in current spending in exchange for a decline in future spending unless the debt generates an income stream to repay principal and interest.»
We are long past the point where the US economy can grow fast enough to repay the $5 trillion in newly printed debt. In other words, the short-term solution to the pandemic - print money to pay for current overhead - has created a huge headwind that will not allow for robust future growth.
Japan is a prime example. In 1990 when I started my short selling service, Market TrimTabs, one of my first recommendations was shorting the Japanese stock market. I went to Japan early 1990 and discovered that the major Japanese banks all had more than three times their capital in real estate loans. Therefore, I forecast that the banking system had to go bankrupt when the real estate market tanked. Except; even when the real estate market did collapse none of the big banks busted.
Why? The Japanese Central Bank absorbed all the losses and in essence gave newly printed money in exchange for bad debt. Indeed, ever since Japan has been continuously printing money to pay its bills.
So what happened to the Japanese economy that had been surging from the early 1950’s through 1990? Growth has slowed dramatically – much slower than all of Asia around it. All as a result of such a huge increase in debt that it made future real growth impossible.
The US is rapidly following in Japan’s footsteps. When the US real estate market collapsed in 2008, instead of letting the bad banks go broke and the single-family home market reset in price about 50% from the peak, the US - just like in Japan - papered over the problem and replaced the bad loans with newly printed money.
Strange as it may seem, despite all the destructive actions by Japanese and US bankers, not one banker went to jail and not one big bank went bust except Lehman Brothers. After all, what do big banks and central banks all have in common? Bankers, and they protect each other.
Bottom line, the US economy’s current growth and potential rebound is fake, just like our president.
Watch here a video commentary by the author about his op-ed article.