Over the last few weeks, the Federal Reserve has been in utter desperation mode to try to revive and keep the American economy on life support. What many in the mainstream media have failed to include in this recent coronavirus economic narrative is that the virus was just the pin of one the biggest bubbles ever created, which we call the central bank bubble revolving around U.S sovereign bonds.
Before we dive deep into this, let’s start with what the Fed has been doing to combat against the coronavirus and to keep markets alive for the time being. To begin, welcome back to the era of the printing press, but this time they have made it clear they will conduct “QE infinity” if this is a prolonged depression, which it will be.
For some prospective, previous QE programs were:
- QE1: $1.7 Trillion
- QE2: $600 Billion
- QE3: $1.6 Trillion
With this latest being:
- QE4:$1.6 Trillion
An overwhelming number in such a short period, making previous QE programs look like peanuts in comparison. In fact, the Fed printed roughly $970,000 every second last week to keep the market afloat. To validate that the Fed is artificially keeping the market alive, just look at this next chart:
This chart showcases that while the Fed balance sheet has shot up ($5.2 Trillion), corporate earnings have plummeted. The market is clearly on life support with the Federal Reserve as its temporary backstop. Presently, the aviation, hotel, and automotive industries, to name a few, are in a major crisis. This applies to all businesses, but since 2008 companies have taken advantage of prolonged zero interest rates and have gone on a total debt binge, with the majority of this debt going strictly to share buybacks and dividends to shareholders.
It is expected the Federal government will bail some of these companies out with the unprecedented stimulus package passed last week. Which displays we don’t live in a real capitalistic society, wealth effects have been the primary mandate for the Federal Reserve for the past three decades (beginning with Greenspan).
But we now face a severe issue, which resides in the bond markets. The Fed has made it very clear that they will conduct QE forever if needed to normalize things; however, the more and more they print, and as more stimulus gets announced from the U.S government, the confidence in the U.S dollar will begin to dwindle.
Many prominent investors are calling for a significant dollar rally, as they believe the USD will forever be the world’s most sought out currency given its reserve currency status. However, they fail to realize this is a much different world we are navigating through then the 2008 financial crisis.
For starters, this will not be a temporary few month recovery. There are many signals being sent to the market that we are entering a great depression type environment. As CNBC reported just two days ago, the Federal Reserve itself has made estimates public that the unemployment rate could hit 32%, which would have 47 million Americans out of a job. For comparison, during the great depression of 1933, peak unemployment was 24.9%.
It’s worth revisiting the great depression, which had devastating effects. Personal income, tax revenue, profits, and prices dropped, while international trade fell by more than 50%. The great depression lasted until the beginning of World War II.
Source: Alex Deluce | Gold Telegraph
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