Cycles of Change: Understanding History's Persistent Echoes
The Fed Knows Best, Right?
The FOMC meeting transcript from August 5, 2008 shows that the Fed believed the period of substantial systemic risk had passed, and that the chances of "unchecked systemic risk pushing the U.S. economy into a severe downturn" were small at that time.
The Fed noted that while some financial firms were in trouble and may fail, this should not be seen as surprising enough to cause healthy firms to fail as well.
The Fed was more concerned about the threat from increased energy and commodity prices, which were expected to lead to slower growth in the fall.
December 2007 and January 2008 FOMC Meetings
In December 2007, the FOMC lowered the federal funds rate by 25 basis points to 4.25%, and refrained from providing an explicit assessment of the balance of risks.
In January 2008, the FOMC held conference calls and noted that downside risks to growth had increased significantly since the December meeting. Participants discussed the possibility of substantial additional policy easing.
On January 21, 2008, the FOMC lowered the federal funds rate by 75 basis points to 3.5%, stating that appreciable downside risks to growth remained.
April 2008 FOMC Meeting
After lowering rates further in January 2008, the FOMC hit pause in April 2008 to survey the impact of the lower interest rates on the economy.
Some analysts at the time believed higher inflation was a concern, and few realized how severe the coming global financial crisis would be.
In summary, the Fed initially believed the systemic risks had passed in mid-2008, but grew increasingly concerned about downside risks to growth in late 2007 and early 2008, leading to a series of rate cuts. However, by April 2008 the Fed decided to pause and assess the impact of the rate cuts, unaware of the severity of the crisis that was about to unfold.
The journey of the Dow Jones Industrial Average from early August 2008 to January 2011 encapsulates a tumultuous period in the global financial markets. In August 2008, the Dow stood at 11,784, reflecting a relatively stable economic environment. However, the ensuing months saw a precipitous decline, with the index plummeting to 6,645 by March 2009, marking a significant downturn triggered by the global financial crisis. This period represented one of the most challenging times for investors, businesses, and economies worldwide, as market volatility surged and confidence plummeted.
A Train Wreck In Slow Motion
In an article written by Brandon Smith in February, 2020, he raised concerns about two significantly underreported issues in the mainstream media regarding the global economy: the stagnation of global demand for goods and services and the escalating corporate debt bubble. It posits that these factors are primed to cause substantial disruptions, with corporate debt identified as a critical component of the prevailing economic instability. This debt has been repeatedly used as a mechanism to prevent the deflation of what the author terms the "Everything Bubble," although the fundamentals of the economy are increasingly failing to support this artificial buoyancy.
The manipulation of stock markets through corporate stock buybacks is highlighted as a pivotal factor inflating their value. Corporations have been borrowing money, sometimes from each other or the Federal Reserve, to buy back their own stocks. This reduces the number of shares on the market, artificially inflating the value of the remaining shares. While this has kept stock markets seemingly prosperous, the underlying reality is that corporations are accruing significant debt to maintain this appearance. Corporate debt levels have surged, echoing the precarious situation just before the 2007 credit crisis, with the official corporate debt load exceeding $10 trillion, not accounting for a staggering $544 trillion in derivatives exposure.
The article details the unsustainable nature of current corporate debt levels, indicating that the debt-to-GDP ratio has spiked beyond any previous peak in the last 40 years. This surge in borrowing forebodes severe economic repercussions, despite potential interventions by central banks. The Federal Reserve is specifically critiqued for its role in fueling this bubble, with the implication that there's an apparent lack of intention or capability to prevent its collapse. This scenario is exacerbated as corporate profits begin to wane, with the decline in stock buybacks signalling an inability to sustain the bubble through these financial maneuvers.
The conclusion drawn is ominous, suggesting that the corporate world is nearing its limit in warding off the consequences of the debt bubble, with 2020 potentially marking the beginning of significant financial unraveling. As corporate profits continue to slide, the Federal Reserve's role as the buyer of last resort is questioned, with skepticism about its ability to prevent a crash. The narrative warns of a "slow motion train wreck" in the economy, exacerbated by complacency and a lack of preparedness for imminent financial turmoil. The call to action emphasizes the urgency of mitigating personal risk and preparing for the fallout of an inevitable burst of the corporate debt bubble, amidst potential geopolitical escalations and liquidity crises. Read the entire article here.
