Not, “Business As Usual”
What Has The Fed Achieved: Crushed the middle class, Enriched the rich, and Distorted the economy.
Let's review the accomplishments of the Federal Reserve since it began its massive interventions to manage risk, volatility, interest rates, bond yields, the mortgage market, bank subsidies, and liquidity. These can all be summed up as the cost of credit-capital, or capital that is borrowed into existence on the basis of some kind of income stream or collateral.
Now look at how the Fed suppressed the cost of capital to below inflation, thereby dangerously distorting the economy. Remember that from 2009 to 2020, the Fed forced the economy to adopt zero interest rate policy (ZIRP), while official inflation devoured 22% of the dollar's purchasing power. Since there was never a point in time when inflation was zero, businesses and bankers really paid less for capital.
Instead of increasing productivity, efficiency, or innovation, trillions in nearly cost-free capital went into manipulation, speculation, and the stifling of competition. All things considered, the Fed's ZIRP has left the economy devoid of diversity and dominated by bloated monopolies, cartels, and platforms that produce addictive, low-quality goods and services that lower productivity across the board.
The Fed's cover stories were driving demand ahead and inflating the wealth effect: by cutting interest rates to almost zero, they enticed businesses, governments, and individuals to borrow and spend money now rather than later. They also created asset bubbles, which made the wealthy feel even wealthier, with the idea that this emotional reaction would spur further borrowing and spending.
These policies' fundamental weaknesses are starting to show. Demand-driven growth eventually consumes all available revenue, overleverages assets like commercial real estate, and drives up inflation as money chases scarce resources and goods.
An Election Year Fed Cut Could Court Political Catastrophe
The money supply is once more expanding.
One of the indicators that alerted people to the rise in inflation was the sharp increase in the money supply as indicated by M2. Another significant indication that inflation will slow this year was the drop in M2.
M2 is now increasing. At the high of 10-year Treasury yields in late October, it seemed to have peaked. M2 then started to rise sharply and steadily, as seen in the chart below.
Prior to the Federal Reserve's dovish turn, the most recent weekly data were issued on December 26 and cover the period through December 4. According to them, the money supply has increased to its greatest level since April, when the Fed's actions to prop up the banking sector after the failure of Silicon Valley Bank caused an M2 rise.
This pattern suggests that although inflation will still be declining, it will do so more slowly. It is reasonable to anticipate that the rise in M2 will halt and that inflation will begin to rise once more.
The Fed Is Concerned About Being Seen As Political
This affects the Fed in a significant way. It implies that a rate reduction at the beginning of the year might be extremely dangerous, as the Fed might decide to make one right before inflation starts to spike again. More dangerously, the Fed might find itself in the unfortunate scenario of having to lower rates in an election year and then raise them afterward.
This would be problematic enough in the increasingly unlikely event that Joe Biden is re-elected. In an exclusive interview with Breitbart News, Donald Trump already forecasted that the Fed will lower interest rates in order to maintain Biden's leadership. The idea that the Fed operated politically would be solidified by a cut during an election year, followed by an increase in inflation and then another cycle of rate hikes.
Imagine for a moment that the Fed is forced to increase in order to control inflation if Donald Trump wins in November. The independence and possibly even survival of the Fed would be in jeopardy due to the ensuing political tempest. Previous iterations of the US central bank were overthrown because it was thought that they had turned into instruments of the ruling class. That pattern might be replicated if the Fed raises during a Trump administration after cutting rates during the election campaign. - Breitbart
Envisioning 2024 with No Comparable Events
Making forecasts about the upcoming year based on historical analogs, such as the cycle of presidential elections, bond yield inversions, interest rate cuts by the Federal Reserve, and so forth, is a popular pastime for financial analysts and seers.
Finding obscure metrics and calculating the percentage of times the analog worked in the past is a part of the parlor game. This leads to a classic confusion between correlation and causation: just because a team from the old AFL wins the Super Bowl, it doesn't necessarily follow that the Super Bowl caused financial condition X to occur.
I would contend that because of how terrible things are right now, none of the typical analogs will come to pass. Think about the current situation in the banking industry and the historic tens of billions of dollars that the Federal Reserve has transferred to banks holding reserves at the Fed. Such a large-scale bank subsidy program is unprecedented.
Let us now examine the federal debt, which is growing at rates never seen during a peaceful period. Where is the analogy for accruing trillions of dollars in debt when bond yields cannot return to almost zero due to inflation demands? There isn't any.
Given the numerous extremes we casually brush off as unimportant, all forecasts of a continually increasing stock market and strengthening economy seem somewhat absurd when seen from an informed historical perspective. It is true that extremes can go even more extreme without the system collapsing, but it would be very optimistic to assume that extremes won't have any effects because we have safe, stable analogs under control.
Perhaps the analogues from 1893, 1929, 1968, and 2008 will be combined into a potent concoction of surprises. The full insight from Charles Hugh Smith is found here.
Imagine you are about to land after a long flight.
A highly trained pilot is crucial during landing in heavy turbulence as they possess the skills and experience to navigate the complex, and rapidly changing conditions.
Just as that pilot will use training and experience to land your flight safely, we have readied ourselves for whatever lies ahead, not only to “land safely”, but to be ready for the next “takeoff”.
