The Irreverent Economist

Stocks and Bondage

 

“Their younger recruits, having nothing in them of the feelings or principles of ’76, now look to a single and splendid government of an Aristocracy, founded on banking institutions and monied corporations, under the guise and cloak of their favored branches of manufactures, commerce and navigation, riding and ruling over the plundered ploughman and beggared yeomanry.”

Thomas Jefferson's letter to William Branch Giles, 1825

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The title of our Q2 letter, Stocks and Bondage, was the name of the Princeton Triangle Club’s 1981 musical revue—staged in the fall of my freshman year—which presciently marked the beginning of the longest bull market in US history.  I thought it was a great show (even though I had no interest in finance) and so consider it a fitting title for this concluding letter.  I believe we are at the end of an era.

We are now living though one of the most extraordinary periods in US history.  Our society is grappling simultaneously with a pandemic on the scale of 1918, an economic shock more severe than any since the Great Depression, a social protest that ranks among the largest in US history, and a general breakdown in political and civil leadership.  Tensions with our primary trading partner and geopolitical rival are escalating, with potentially serious consequences for the US economy and financial markets.  Global output is on track to shrink by 5% in 2020. That’s a drop of 10 percentage points relative to the norm of recent years, making this the worst economic contraction in modern history, by far.

All of this is occurring against the backdrop of stock and bond markets that have never been more highly valued or more heavily leveraged.  Investment returns have been sustained in recent years not by fundamental improvements in corporate profitability, but rather through the assumption of debt, as central banks drove institutional borrowing costs toward zero.  These monetary operations have fomented a culture of financial engineering, greed, and moral hazard of epic proportions.  Such activities are not new; they have been ongoing since Jefferson penned his letter to William Giles in 1825.  What makes the current situation unique in American history is policymakers’ success in fostering a speculative frenzy amid the worst economic and social conditions since 1932.  That’s the kind of thing you used to see only in developing countries.

America’s appallingly unequal distribution of wealth can be attributed in no small part to the actions of our Federal Reserve which—with support from political leaders—have underwritten asset inflation, corporate concentration, endemic corruption and an erosion of democratic accountability.

It ought to be self-evident that printing money in order to inflate the prices of financial assets is not a sure path to prosperity.  If it were, such policies would have succeeded everywhere by now.  Invariably they have failed—albeit at different rates and in different ways.  The most notorious example (and one that bears more than a passing resemblance to our current situation) is the rise and fall of the Mississippi Company and its illustrious leader, John Law.  Ben Bernanke, believing himself to be America's monetary messiah, has been following in Law's foosteps since 2002.  Bernanke (High IQ No Clue) is the principal arsonist-firefighter who purports to solve a debt problem he helped foster with more debt.

The wealthy find ways to evade their debts, avoid the effects of low interest rates, and profit from inflation.  It's the poor and working class who cannot escape debt peonage, financial repression and an escalating cost of living. Their wages rarely keep up with rising prices, so their real earnings fall.  Any savings they have are in bank accounts whose purchasing power is undermined at every step. Few of them own homes, a reliable inflation hedge.

Our central bankers (now seconded to the likes of Pimco, Goldman Sachs, Citadel and Blackrock) along with all of the other financial political elites who purport to lead this country, should be deeply ashamed.

Karen Parker Feld

 

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