Bloated Assets Eventually Explode–Which Means Our Economy Is Hanging By A Thread

When I was a kid, my mom would give me a dime and send me to Louie’s, a candy store down the block, to pick out a treat or two for doing my homework or cleaning my room. Yes–you could actually buy things for a dime at one time and, yes, I usually did my homework, and sometimes cleaned my room.

Louie’s was really what Main Street was all about–at least back then. It was a small local business that served the community. In my case, I would have called it a provider of essential services.

For those of you who follow me, you will know I have been on something of a tear– writing about my two favorite pinatas, “the Drunken Spenders” in Congress and their “Distributors” across the street at the Central Bank.

So, what does the micro-entrepreneur running the corner candy store have to do with all this?

Plenty.

Because the growing gap between Wall Street and Main Street is real.

As such, it’s high time, I’ve decided, to take my message to the corner outside Louie’s…and help connect the dots.

Main Street vs Wall Street

We measure our economic performance as a nation in a few ways; the primary measurement of the country’s productive output is Gross Domestic Product growth. Keep in mind, it takes a lot of candy stores, deli’s, nail salons and even individually-owned licensees of larger chains to make a dent in the American economic landscape, or our GDP.

Wall Street, on the other hand, measures success by increases in the value of stocks. Broad measures of course include the Dow Jones Industrial Average, the S&P and the NASDAQ. These indices constitute a sizable portion of American business. The bankers may profess allegiance to the needs of the broader economy, but at the end of the day their own success and compensation is tied to the performance of the capital markets– and those markets are comprised of big companies. 

Now, at times, the two (Main Street and Wall Street) may be correlated, but over the last generation, measurements of the relative performance of the economy and the markets have increasingly gone their own separate ways. The economy has limped along while Wall Street has lined its pockets. 

So, the question is: Why? 

Well, I’m glad you asked.

The USA’s Balance Sheet Is A Third World Mess

Over the last decade or so, our national accounts have deteriorated by any measure. Our current outstanding debt has increased from $10 Trillion to $27 Trillion while our ratio of debt to GDP, a primary measure of financial health, has gone from well under 100% to well above.

These metrics are on a trajectory that will take our debt levels well past the equivalent of a trip to Mars, long before SpaceX arrives!

Now, not all of this can be attributed to the masters of private finance. Government is an inefficient spendthrift that works on bad assumptions and estimates that never get corrected. Oh, and don’t forget how adept they are at burying just how bad their arcane accounting actually is. In fact, if you take a look at the bottom of the US Debt Dashboard, you will see a reference to our Nation’s unfunded liabilities, which it indicates amounts to more than $150 Trillion (a figure I think conservative). In fact, our finances now border on third world.

Fed Adds $6 Trillion to Balance Sheet

At the same time, the Fed’s balance sheet has grown six to seven times, by about $6 Trillion in total.

Historically, the Fed used its balance sheet to manage the supply of money in our economy…tweaking it as needed to help increase (or moderate) growth. The goal was to  minimize inflation, while simultaneously not sacrificing long term growth. This was what the Fed was charged with doing–and, it was its mandate.

Not so, anymore.

At present, the Fed has effectively abandoned any effort to control inflation–in part because it can’t get any! And, this represents the most insane aspect of this entire balancing act. Given the avalanche of cash it keeps printing, one might think that the money would make its way to EVERY level of American business.

It hasn’t. Small businesses–like Louie’s Candy Shop–go without.

We know this because even though they’ve been printing money like it’s going out of style, the economy itself has grown a cumulative $5.5-6 Trillion over the last ten years.

NOT ENOUGH.

You see, the “geniuses” we elect to Congress…together with the “geniuses” we appoint to run our Central Bank have figured out they can borrow $4 to generate $1 of low-quality to, at best, mediocre growth. 

So, if the Fed isn’t generating substantive economic growth…WHAT. IS. IT. DOING.

The Current Purpose of the Fed: Inflate Stocks

Let’s be honest. The Fed today seems to be in existence today for one reason: to prop-up stocks.

The Fed, together with Congress’s massive $25 trillion government deficits, has helped inflate the values of publicly traded US equities in excess of $20 Trillion. And, there you have it: Wall Street MINUS Main Street in simple numbers. 

It wasn’t supposed to be like this.

Politicians Using the Fed

In 1913, Congress created the Federal Reserve in an effort to create a safer, more flexible, more stable monetary and financial system. It was charged with promoting economic growth and stability. Along with a few other “quasi”-governmental entities like Fannie Mae and Freddie Mac, the idea was to provide a stable base to Main Street in order to broaden the chances for economic prosperity. Not to ignore the phenomenal success stories that became GM and Ford, IBM and Microsoft, Intel, Cisco, Facebook, Google and even Tesla, but the “ancients” (I’m referring to elected representatives who preceded the current crop of corrupt, self-interested and conflicted politicians of the last few decades) seem to have understood that America’s greatness started from the bottom up. On Main Street. At places like Louie’s candy shop.

Sadly, we have become top-heavy. Here’s why:

It is MUCH easier to motivate and control a few centralized businesses, rather than the economy as a whole. 

The Fed is trying to control the overall economy through the use of a few key players–thereby preventing this money from actually getting to Main Street. 

Remember, the Fed was set up as an “independent” agency to give it the authority to act in an apolitical manner and a flexibility to act quickly and decisively in times of crisis. There is a lot of great intent embedded in this statutory grant. But there is also an extreme arrogance that has accompanied the Fed’s success. As such, the Fed really has lost touch with the broad strokes of the American economic landscape.

The Fed now operates with little effective oversight and constraint, particularly when its major constituents, Washington and Wall Street, are happy. Even its’ core statutory mandates–price stability and full employment–only modestly limit the Fed. Its board has continually redefined its own goals and responsibilities to suit its own perspectives and those of Wall Street. This “metamorphosis,” if you would, of the Fed has coincided with an increased accumulation of power over all aspects of our economic lives.

The Fed Is Now Banker to Not Just U.S.– But, THE WORLD

The Fed’s “independence” has effectively enabled it to operate outsides the bounds of government… and, even outside the country. Many now consider the Fed to be the Central Banker to the world. But what does that have to with its primary function? Nothing really, unless you like letting Mario Draghi, and now, Francine Lagarde host you on the Champs Elysees or Kuroda-san offering you sushi and teriyaki across the street from the Imperial Palace.

The interesting point about this independence is the fact that Washington politicians can accomplish many things through the Fed that politics precludes these lawmakers from doing on their own. And, that tends to make matters worse.

The Fed Is Fueling America’s Debt and Deficits

Deficits require money, and the Fed is all too happy to fuel the government’s voracious appetite for spending at the lowest possible cost.

As such, the Fed has become a veritable printing press. The result has morphed into a cozy relationship with Congress which long ago lost any concept of fiscal and financial rectitude and responsibility. The Central Bank has also become Congress’s financial surrogate with Wall Street, whose clients rake in deficit-fueled money with little financial responsibility to help service this growing fiscal mess.

One. Big. Hot. Mess.

So where does this leave us? At the mercy of the Central Bank where the sputtering economic engine and debt-hungry government have become ever more reliant on equity bubbles that are ever more reliant on cheap money.

And so goes the circle which creates enormous systemic risk.

Bloated asset prices eventually explode,which means, our economic health is just hanging by a thread.

So, what does it mean, particularly for the poor and middle class in our country? Sadly, they are likely to be marginalized even more. Keeping the ship moving will only increase reliance on the very largest American corporations, thereby making it cheaper and more effective to throw the little guy overboard.

To be honest, even this essay seems to have lost sight of the little guy, and that was certainly not my intent. If Louie were still around, he wouldn’t be selling any more candy, that’s for sure.