Decades of Fed lead to Macro risk

I was pleased to read these articles, which exactly mirror my thought process. Decades of Fed policy, starting with low interest rates and excess monetary stimulus after the 2000 tech bubble crash, have been led by Alan Greenspan, Ben Bernanke, Janet Yellen and Jerome Powell. These have resulted in successive asset price bubbles as the Fed created more money out of thin air. For comparison, I am posting charts of the Fed assets (fiat money creation) next to GDP and Real (inflation-adjusted) GDP.

Before 2009, Fed assets were constant and relatively insignificant. The Fed only controlled the overnight fed funds rate, never long-term debt yields.

Currently, Fed assets are 38% of GDP. They continuously manipulate long-term interest rates by buying Treasury and mortgage debt.

This fiat money has gone to banks which loaned relatively little to consumers (which is why CPI was low for so many years). Most went into the asset markets, depressing bond yields and juicing the stock and property markets.

Consumer price inflation didn’t spike until Congress sent a huge surge of money directly to consumers as fiscal stimulus on top of the routinely increasing transfer payments. The Federal deficit is now 15% of GDP, the highest since World War 2.…

**Will We Go From Pandemic to Recession?**
**By Bret Stephens, The New York Times, Jan. 4, 2022**


**Between 2008 and 2014, the Federal Reserve bought more than $3.5 trillion in federal securities from major banks to encourage lending and investment. “To put that in perspective,” Leonard writes, “it’s roughly triple the amount of money that the Fed created in its first 95 years of existence.” ...**

**Prices for assets, real and financial, soared, even after the Fed reversed course and began to reduce its holdings... this was a bonanza for the savvy investor class, making it difficult for the Fed to ruin the party by raising rates. For others — savings account holders, wage-earners, renters, the young — the effects were less salutary.**

**Now we have an economy in which asset values keep going up because we expect them to keep going up, and in which easy money is creating speculative bubbles that seem obvious to anyone not living inside of them. ...** [end quote]

The price bubble in housing is particularly bad for working people since wages have not increased as fast as home prices and rents. This forces workers to spend more of their income on shelter and makes it harder for them to buy their own house.

The NY Times article links to an outstanding Macroeconomic article about Thomas Hoenig, a dissenting Federal Reserve member. Hoenig was president of the Federal Reserve regional bank in Kansas City. As part of his job, Hoenig had a seat on the Fed’s most powerful policy committee, and that’s where he lodged one of the longest-running string of “no” votes in the bank’s history.…

**The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed**
**By CHRISTOPHER LEONARD, Politico, 12/28/2021** [Note: there is no politics in this article, which is purely economic in scope]


**For Hoenig, the most dispiriting part seems to be that zero-percent rates and quantitative easing have had exactly the kind of “allocative effects” that he warned about. Quantitative easing stoked asset prices, which primarily benefited the very rich. By making money so cheap and available, it also encouraged riskier lending and financial engineering tactics like debt-fueled stock buybacks and mergers, which did virtually nothing to improve the lot of millions of people who earned a living through their paychecks. ...The only part of the economy that seemed to benefit under quantitative easing and zero-percent interest rates was the market for assets....**

**To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.**

**“There is no painless solution,” Hoenig said in a recent interview. “It’s going to be difficult. And the longer you wait the more painful it will end up being.”...** [end quote]

The Fed’s first and most important function is to provide liquidity during a financial crisis. The Fed did this effectively in 2000, 2008 and 2020. That was important to prevent a much deeper recession each time.

The Fed’s mandate does NOT include providing continuously increasing asset markets. They should have backed off their monetary stimulus shortly after the crisis was resolved each time. Providing excess monetary stimulus is obvious when looking at the asset price charts.

As individual investors, we need to be aware that what the Fed gave the Fed can take away.

The markets became addicted to the crack cocaine of easy money. Now the withdrawal process will be painful since the buildup has taken 20 years. Bubbles rarely deflate calmly.



Meanwhile, VTV his a 52 week high today. And over the last 52 weeks has out-performed the QQQ. Last year the S&P 500 out-performed the NASDAQ for the first time in years. Growth stocks are falling very fast. I’ve been selling this week, with very little buying at the moment.

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Currently, Fed assets are 38% of GDP. They continuously manipulate long-term interest rates by buying Treasury and mortgage debt.


I have the opposite finding. Or thoughts.

Basically capitalism does not work if the capitalists have to pay the actual costs.

The FED buying more and more bonds at lower rates saves the bankers from having worthless paper as longer term the rates go back up. Higher rates will devalue the bonds. The FED will hold everything and anything till maturity for the banks.

It is socialism. Just not for the average joe.

It is like the oil companies. If you include the actual costs involved with an environmental clean the oil companies would never have made a dime. We’d have no oil companies today.