In November 2010, Fed Chairman Ben Bernanke wrote a self-serving (sorry, Op-ed) column for The Washington Post.
The title of this (largely fictional) piece was ‘Aiding the Economy: What the Fed Did and Why’.
Here’s a snippet:
‘Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.’
Let’s start with lower corporate bond rates will encourage investment.
Well, the ‘investment’ did happen, but not in the way Ben envisaged.
‘…concern is growing that soaring [US] corporate debt will make the economy susceptible to a contraction that could get out of control. The root cause of this concern is the trillions of dollars that major U.S. corporations have spent on open-market repurchases — aka “stock buybacks” — since the financial crisis a decade ago.
‘In 2018 alone, with corporate profits bolstered by the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index did a combined $806 billion in buybacks, about $200 billion more than the previous record set in 2007.’
Harvard Business Review
Corporate executives took full advantage of the low rates to issue bonds to ‘invest’ in their own personal enrichment…putting their stock options seriously into the money…
‘In 2019, a CEO at one of the top 350 firms in the U.S. was paid $21.3 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in rather than when granted). This 14% increase from 2018 occurred because of rapid growth in vested stock awards and exercised stock options tied to stock market growth.’
Economic Policy Institute
Did those higher stock prices do anything to boost consumer wealth?
Well, that depends on whether you’re a consumer in the top 10% or bottom 90%.
Guess which consumer group the corporate executives belong to?
Source: WSJ Daily Shot
If, as Bernanke stated, a boost to consumer wealth can also spur spending, then why after the greatest bull market in history is the US economy still unable to stand on its own two feet?
What’s that I hear from Ben and his central banker mates…deathly silence.
Did Ben’s ‘wealth effect’ theory lead to higher incomes?
Again, it depends on whether you’re in the top 10 or bottom 90%.
Those in the 90th percentile (top 10 percenters) have over the past 40 years enjoyed a real (after inflation) boost to household income…especially the aforementioned CEOs.
The remainder…well, wages growth for them has been firmly stuck in the slow lane:
Source: Congressional Research Service
With the vast majority receiving (almost) sweet nothing in wage growth, how do they make ends meet?
The WSJ headline says it all:
Here’s an extract from the article (emphasis added):
‘The debt surge is partly by design. A by-product of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it. Companies increasingly can’t sell their goods without it. And the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.’
Bernanke’s wealth effect is a complete nonsense. There has been no real trickle down from the 10 percenters to the rest.
For the 90 percenters, lower interest rates have ‘afforded’ them the ability to keep up appearances by borrowing to make ends meet.
The imbalance between the haves (10 percenters) and have nots (90 percenters) is clearly evident in the assets and liabilities of both groups.
According to the WSJ (emphasis added):
‘The value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A full 33% of that gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data.’
Everything Bernanke theorised about has, in practice, been completely and utterly disproven.
Yet, today’s central bankers keep using the same discredited playbook.
Are they stupid?
But I think there’s a bigger picture.
They know they’ve inherited the management of the world’s largest Ponzi scheme.
The base continually needs to be expanded to maintain the illusion of solvency…which in turn, keeps confidence levels up.
And like all Ponzi schemes, those towards the apex get most of the spoils….10% get 90% and the 90% get 10%.
However, the longer the pyramid scheme goes on, the more likely it’ll create unintended consequences.
As reported in The New York Times (emphasis added):
‘America’s economy has almost doubled in size over the last four decades, but broad measures of the nation’s economic health conceal the unequal distribution of gains. A small portion of the population has pocketed most of the new wealth, and the coronavirus pandemic is laying bare the consequences of the unequal distribution of prosperity.’
In driving rates lower, the Fed (and other central banks) actually drove a wedge into society.
Which is why Donald Trump garnered so much support in voter land. That certainly wasn’t a consequence Bernanke expected in 2010.
How will the wedge be removed? If history is a guide, the answer is very painfully over a very long period.
The pyramid is crumbling…the 90 percenters (the ones who spend most of what they earn) are close to tapped out.
Therefore, in order to keep the scam going (and confidence up), governments are now playing a bigger role.
Last week, our Treasurer proudly boasted…
‘Today’s National Accounts shows the Australian economy is strengthening and the Morrison Government’s economic recovery plan is working.
‘In the December quarter, Australia enjoyed economic growth of 3.1 per cent, significantly beating market expectations of 2.5 per cent.
‘This is the first time in recorded history that Australia has seen two consecutive quarters of economic growth of more than 3 per cent.’
As you would expect, the mainstream media and economic commentators ‘waxed lyrical’ about what a tremendous result this was for Australia.
But let’s do some back of the envelope maths here (using rounded numbers).
Australia’s annual GDP is $2 trillion. On a quarterly basis, that’s $500 billion.
$500 billion x 3% = $15 billion over two quarters, it’s $30 billion…give or take.
Not a single solitary sole in the economic commentariat bothered to ask this question of the treasurer…is that all we get for going $212 billion deeper into debt?
Source: Australian government
The whole show is a giant con…keep borrowing more and more from the future to get less and less bang for the borrowed buck, while enriching the few at the expense of the many.
I can see a backlash a comin’…especially when automation (introduced by the haves) starts to displace more and more of the have nots.
As Abraham Lincoln said, ‘You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.’
Don’t be fooled by this scam. It too will end like all others…badly.
Editor, The Rum Rebellion
P.S: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.