The Economic Doom-Loop Has Begun

No communist was ever as dedicated to economic suicide as the current class of idiots who rule us…

High inflation, over-regulation, and a general sense that things are going in the wrong direction remind us of the late 1970s and early ’80s. But today the underlying problems that were responsible for our woes in that time are vastly worse. The coming reckoning for Washington’s insanely irresponsible monetary policy may dwarf the troubles from all recent recessions and periods of inflation.

The Federal Reserve has created a doom loop between the housing market and inflation. For years it has printed tens of billions of dollars each month to buy sketchy securities meant to subsidize the housing market and favor bond traders. This continues even now, in spite of inflation and a red-hot housing market. But the housing market has become dependent on unearned, newly printed money, and stopping the flow might cause a catastrophic correction. If it doesn’t stop, however, inflation will explode.

Inflation closes the gap between money earned and money spent. Since the financial crisis of 2008, the Federal Reserve expanded M2 money supply from just under $8 trillion to around $22 trillion today. During that time GDP has increased from around $14.6 trillion to around $24.5 trillion today. We’ve gone from a ratio of one dollar chasing $2.20 in goods in services to an almost 1 to 1 ratio today. Inflation during the same period, according to the government, has eroded the dollar by a mere 33 percent.

You think 8 percent inflation is high? Prices need to double to restore any semblance of balance between currency and the things you can buy with currency. We have a long way to go.

To understand how dire the situation has become, we need to review a curious practice the Fed began shortly after the 2008 crash. In November 2008, the Federal Reserve began an extraordinary program of purchasing mortgage-backed securities (MBS) Using newly created money (not tax dollars or private investments), the Fed dumped billions of dollars per month with the stated goal of helping the government stimulate the economy.

A mortgage-backed security is simply a pool of mortgages. As homeowners pay their mortgages, the money then flows to bondholders. The 2008 financial crisis resulted from problems valuing these securities. In order to sell a MBS, the buyer had to gain some confidence in the likelihood of repayment. Because this involved so many complex and unknowable factors relating to each of the individual mortgages, the debt could sometimes turn “toxic” or drop in value quickly when buyers lost faith in the future performance of homeowners.

Years passed and a recovery seemed to abate the emergency. Yet the Fed just kept buying more and more. Traditionally, the Fed stimulated the economy by purchasing U.S. treasuries. This avoided the sticky problem of establishing a fair price for the security because the treasury’s value is relatively easy to establish. An MBS, however, cannot be easily valued because reasonable minds can make different predictions about the likelihood of individual homeowners repaying their loans. Thus, unlike purchases of treasuries, bulk purchases of mortgage-backed securities are ripe for waste, fraud, and abuse. There’s no easy way to audit whether the Fed is overpaying for the securities.

The sheer scale of the Fed’s involvement in the mortgage market caused an unstable bubble. As the president of the Kansas City Fed recently said, “by owning roughly one-quarter of the MBS market along with a significant portfolio of longer-term Treasuries, our presence in financial markets muddies price signals, encourages excessive risk-taking, and can foster financial instability. Asset prices remain historically high and remain vulnerable to economic and policy uncertainty.”

In other words, lenders don’t need to worry about lending to risky borrowers because the Fed is buying all the crap nobody else will touch.

Although the Fed promised it would stop buying mortgage-backed securities by March of this year, the promise came with a giant asterisk. As old bonds mature and disappear from its balance sheet, “monthly purchase schedules will continue to be issued to reflect reinvestment of principal payments . . .” In other words, when the Fed receives a dollar from an MBS payout, it just uses it to buy another bond.

Thus, in the face of red-hot inflation, the Fed bought another $38 billion in mortgage-backed securities in March. In April, it bought another $40.1 billion. This month, the Fed is in the process of buying another $34.5 billion.

Until recently, the Fed has been on an unprecedented buying spree. It increased its total MBS holdings from $1.7 trillion in 2020 to $2.7 trillion today. Indeed, the Fed made roughly $400 billion of those purchases after its chairman’s June 2021 testimony in which he famously labeled 5 percent inflation “temporary.” It was obvious then that inflation was just getting started.

So all of this might seem like terrible news. But it’s nothing compared to the doom loop that has begun to turn. The coming reckoning could be savage and apocalyptic. Let’s walk through what might happen next.

The problem with inflation is not just how high it is, it’s how quickly it is increasing. Again, the money supply has increased so much that prices would have to almost triple to restore balance between goods and the dollars chasing them. So the Fed’s mandate requires it to intervene to stop inflation. It typically does that by raising interest rates and selling back its bonds. When the Fed sells a bond, the cash flows out of the economy relieving the inflation pressure.

To fight inflation, interest rates need to exceed the inflation rate. That means a dollar saved loses purchasing power unless savings interest rates climb from less than 1 percent to something over current inflation (now around 8 percent). One rule of thumb provides that savings interest rates should reach 150 percent of inflation in order to reverse the trend. The theory holds that high interest rates encourage saving cash thus slowing down the speed at which money chases assets. If interest rates are less than inflation, it makes holding cash a losing proposition.

But in this environment, raising interest rates will cause a cascade of problems. The higher interest rates will slow the economy and cause unemployment. It will also swallow up tax revenue as the government has to pay interest on its massive debt. But more critically, it will increase the rate of default on home mortgages. Those defaults will make mortgage-backed securities less valuable and more unpredictable. That’s how the 2008 housing market seized up.

The more the Fed props up the mortgage industry, the more it encourages inflation. The more inflation increases, the more urgent it becomes to stop printing money. When the printing press stops and interest rates rise, those MBSs likely will turn toxic again, freezing the market at the exact moment the Fed needs buyers for its bonds.

Alternatively, the Fed could just let inflation rip as it continues to pour gasoline on the fire. At this point, the latter scenario appears more likely as the Fed engages in half-hearted symbolic inflation-fighting measures. Not surprisingly, the inflation numbers get scarier and scarier. At some point, runaway inflation will force the Fed to take real action. One thing is certain: the longer it waits, the more it will hurt.

Closing the gap between money earned and money spent means cutting government spending, raising interest rates, reducing regulation, and lowering taxes. Government can and should facilitate increases in productivity by reducing its interference in every private transaction. More Americans get a check from the government than pay taxes. The labor participation rate is dangerously low. There just aren’t enough people pulling their weight to make the things needed to sop up all of this excess money.

Even communist countries have resorted to my suggested reforms when markets smash their utopian plans. But no communist was ever as dedicated to economic suicide as the current class of idiots who rule us.

My daughter and SIL bought a small house on ten gorgeous acres in Idaho 18 years ago for $50,000—a bank repo. Remodeled it with inherited money, doubled the size, installed all the best of everything. Put it on the market abut 60 days ago for $610K, sold it in two days for $620K. Got in right, got out right. Will cover cost of new wonderful house on 30 acres further north, near Canadian border. She’s delighted, tired of all the wrong people moving into N.Idaho and bringing their stupid politics with them.

Luck?

“But no communist was ever as dedicated to economic suicide as the current class of idiots who rule us”.

This is criminal and they need to be hanged for what’s going to happen.

This is Bernie Madoff on a giant scale.

(In April, it bought another $40.1 billion.)

Not to worry. It’s only 40 billion. /s

It’s not like the national debt and unfunded liabilities total nearly 200 trillion dollars.

I have always expected global economic meltdown would accompany the rise of the Antichrist. Now I can’t prove that, Biblically.

But the stage is set for huge economic meltdown, IMHO.

I expect the anti-messiah will have all the “answers” and the world 🌎🌍 will turn to him.

Propping up housing values is politically popular too. No one wants to see their house value go down, except the young and poor who are priced out of the market. Housing and 401ks represent the vast majority of wealth to the middle class. Tight monetary policy will deflate both leading to a lot of pain in the short run. Necessary pain, but very unpopular.

VIDEO: 7m53s: 26 May: Fox News: Laura Ingraham: ESG proponents are corporate America’s ‘self-appointed thought and governance police’
Opinion by Fox News Staff
“The Ingraham Angle” host Laura Ingraham slammed proponents of environmental, social and governance criteria as “the self-appointed thought and governance police for corporate America” in Thursday’s monologue...

TRANSCRIPT:
INGRAHAM: Environmental, social, governance. The acronym ESG is a classification and rating system that globalists are now using to pressure American companies into adopting progressive practices at every level of their operations. And like so many really bad ideas, it, of course, originated at the United Nations. Now for years, they’ve aggressively marketed the concept as good for companies, good for you and good for the planet. ESG propaganda even comes in the form of really creepy videos.
Basically, think of those behind the ESG movement as the self-appointed thought and governance police for corporate America. So companies not on the S&P 500 ESG index are punished by institutional investors and asset managers who themselves are pressured to drop offending companies from their mutual funds or their pensions. Now, one of the biggest promoters of ESG is a guy named Larry Fink, the CEO of BlackRock. BlackRock is the world’s largest asset manager, and this means one company has an enormous amount of leverage to force other companies to go woke...
https://www.msn.com/en-us/news/opinion/laura-ingraham-esg-proponents-are-corporate-americas-self-appointed-thought-and-governance-police/ar-AAXMuH8?ocid=uxbndlbing

Buy low and sell high : )

Is the housing boom about to bust? Sellers are slashing prices at levels not seen since before the pandemic amid rapidly cooling market as hedge fund manager of The Big Short fame warns ‘It’s like watching a plane crash’
https://www.dailymail.co.uk/news/article-10862005/Sellers-slashing-prices-levels-not-seen-pandemic-market-rapidly-cools.html

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