Global markets remain haunted by the specter of an unwind of unprecedented speculative leverage. When markets break to the downside, there is clear potential for another episode of derivative-related selling that would panic buyers.
The Chairman’s rambling (non-answer) reply could be summarized in four words: “The Fed is trapped.” It’s trapped by Bubble Dynamics – a historic Bubble that either inflates or collapses. What the Fed labels as “markets functioning” is at this point a “functioning” speculative Bubble.
We’re in the throes of an extraordinary upside global market dislocation. I do not recall such a ferocious globalized short squeeze – stocks, corporate Credit, currencies and EM sovereign debt. We can only imagine the behind the scenes fracas in derivatives trading.
The global Bubble has been pierced, though unprecedented monetary inflation only exacerbates the epic divergence between inflating asset prices and deflating economic prospects. As I’ve written over the years – and as demonstrated rather conspicuously in March: contemporary finance seems to operate miraculously – so long as it’s inflating. It just doesn’t work in reverse. These days it’s even more frightening to contemplate how this all ends. The Scourge of “Whatever it Takes” Monetary Mismanagement.
Bubbles, at their core, are fueled by Credit – or “Credit inflation.” Asset inflation and speculative asset price Bubbles are a common upshot. At their core, Bubbles are mechanisms of wealth redistribution and destruction.
Contrary to Milton Friedman and Ben Bernanke, Schumpeter didn’t view the twenties as the “golden age of Capitalism.” Depression was a consequence of egregious boom-time excess rather than the result of the Fed’s post-crash failure to print sufficient money.
Instead of pinning the blame on monetary policy the last 30 years, they will triple down on the same monetary and fiscal policy that got us here… the top down approach (financial elite and corporations) that does not make it to those who truly need help – the American people – to keep the economy flowing.
Now on a weekly basis, we’re witnessing things that couldn’t happen – actually happen.
This should have been the crucial debate almost two decades ago. I would say it is the monumental debate of our times – except for the fact that there’s no debate.
Sound Money is precious – to be coveted and safeguarded. As a stable and liquid store of value, Money is the bedrock of Capitalism, social cohesion and stable democracy.