How the Fed made money but not product

This is a long, insightful interview of Rana Foroohar, a columnist at “The Financial Times.” She’s the author of multiple books, including 2016’s “Makers and Takers,” which is a look at the financialization of the U.S. economy.

https://www.nytimes.com/2022/06/17/podcasts/transcript-ezra-…

The interview is far-ranging but the gist is that the Federal Reserve has been tasked with maintaining financial stability since the 1980s. As the Fed created so much fiat money that borrowing costs sank to nothing, Congress and companies were no longer forced to choose between uses for costly money.

With a wave of free fiat money, there was a disconnect between the financialization of companies and actual manufacturing of goods and services. The money went into assets, not into productive capacity, R&D or improvement of infrastructure.

**This is how boom-bust cycles look. If you look just at the period from Covid onward, there’s been a four-fold increase in the number of retail investors, that means little guy investors, in the markets relative to the institutions. Professionals have been getting out since really 2018 or so but little guys are getting in because it’s the tail end of the cycle. And the Fed in its best efforts with a good intention has been trying to smooth things out. But really what it’s been doing is making things that have no value look like they have a lot of value until they don’t. ...**

**But the moment that [CARES Act and American Rescue Plan] money begins getting moved directly into the pockets of most people, then you begin to see inflation. Happen and the moment inflation begins to happen, then you begin to see the Fed tap on the brakes. And the moment the Fed taps on the brakes, then you see the asset economy pop, and pop much quicker than people were expecting. Suggesting that its underpinnings are more fragile than they had admitted....**

Many trends, including onshoring, environmental protections and higher labor costs, are inflationary. Costs for services have been rising faster than CPI (goods-based) inflation for a long time. The paradigm for goods of “efficient but cheap” broke down when Covid stopped the supply chains.

This predicts an inflationary future. Many “little guy” investors in stocks and cryptocurrencies will lose.

Wendy

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With a wave of free fiat money, there was a disconnect between the financialization of companies and actual manufacturing of goods and services. The money went into assets, not into productive capacity, R&D or improvement of infrastructure.

This has been happening since the Industrial Revolution began. So this has been a trend for a very long time.

Examples:

Sears Roebuck
Montgomery Ward
JC Penney
Pretty much all auto manufacturers
Aircraft component suppliers (to all the Western aircraft mfrs)
Ships
And so on.

They have ALL outsourced production of components AND full items for pretty much forever.

They do it because a specialized contractor can do what it does: Specialize in making a part or running a process at a net cost that is significantly less than the company can if it were to DIY.