Or is it just Powell and Trump’s power play at the expense of the economy by creating a big bubble?
Most of the central banks, especially FED, wanted to save their economies from the Covid-19 crisis by printing an unlimited amount of money and buying whatever they find in the financial markets from corporate bonds to stocks. That’s why the gap between stock markets and the real economy is getting wider every day.
Money printer going brrr is causing nothing but the bubble to get bigger and bigger. It makes one wonder, was it really the only solution or could there be a better path to follow? Let’s look back a little in the past to find the answer.
Back in 1979, the U.S. economy was not on a good track with its fight against inflation when Paul A. Volcker became the chairman of FED. He redesigned how FED operated back in the day from scratch by imposing a rigid cap on the money supply. Of course, this didn’t fix everything overnight and neither following short-sighted policies do. Yet the former showed some results eventually and by dint of iron-willed persistence, Volcker turned the inflationary 1970s into the disinflationary 1980s.
The inflation was down to 6 percent all the way down from around 12 percent, even though first short term interest rates went up beyond normal limits, economy endured two recessions, and unemployment hit double digits; furious farmers drove their tractors to Washington and encircled the Fed’s headquarters (Washington Post, 2019).
History showed many times why central banks should be free of politicians’ short-sighted policies and have a long term horizon when setting the monetary policies. However, FED today is acting under Trump’s tunnel vision and being led to catastrophe by the current FED chairman Jerome Powell on the steering wheel.
It seemed like a convincing act that Trump has publicly threaten Powell to remove him from his position, followed by Powell reacting back that he can’t be fired with Trump’s desire and won’t resign (NBC News, 2020) but there is no other explanation to Fed’s current policy rather than aligned interest of Powell and Trump to protect their seats with short term stock market success stories.
The stock market is the most powerful indicator they both rely on to show off with their success. Actually, since day one, Trump backed all his arguments of being him such a great president with how well the stock market was doing.
The stock market is indeed an indicator of how well the economy is doing but it’s only valid as long as it represents real economy and not when FED buys everything available to keep the markets from drowning. If a pandemic has hit the whole world hard and unemployment rates are historically at record levels, you have to use your resources to make sure none of your citizens starve to death and nobody is kicked out of their houses because they cannot pay their rents.
Funding big companies by buying their assets in the financial markets so that they can keep paying to their employees, which will save everyone in the country is nothing but a naive dream. When those companies take the money, they either write their executives big bonus checks or buy back their own stocks from the market to push the prices higher.
If stock markets don’t bleed while society bleeds, it’s just a mirage that economy is doing well.
Would you rather choose the scenario where bubble gets bigger, the transfer of wealth from average income citizens to already rich minority accelerates and we just postpone the economical collapse to have it later at a bigger scaleafter Trump and Powell assures keeping their seats or would you instead prefer financial markets to get in sync with people’s real economic struggles and reflect what people are really going through and solve this crisis in the long term with concrete monetary policies to come out of this struggle altogether, even if it means suffering in the short term?
Stay safe out there!
This piece is originally published in Medium!
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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.
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