Hanlon’s razor admonishes us to, “Never attribute to malice that which is adequately explained by stupidity.” The Federal Reserve’s monetary policy is promoting income inequality as our table above illustrates, but I do not believe that the Fed’s action are malevolent.
Standard monetary procedure in the U.S. has been to loosen the money supply in the wake of a recession. The Fed went to this well one too many times and was forced to embark upon its novel money printing experiment. Today, it is stuck. Surely some Fed officials have figured out that their actions are making the rich richer and the poor poorer, but the present policy cannot be terminated. Even discussing the end of the program causes market distress.
Once money printing begins it must continue until either the printing or the lack thereof causes a crisis. As we learned two weeks ago, the Fed cannot and will not taper. The new plan is to keep printing while hoping that an economic miracle takes place before the inevitable consequences of incessant money printing.
There’s a German in charge of the ESM fund, and that does not bode well for Greek debt forgiveness. I believed that Germany would take a softer approach to Eurozone woes after Merkel won the election, but it appears that the situation is more complex. Perhaps the other FANG countries are refusing to forgive debts, or maybe this has been the German plan all along.
No matter, the EU has lowered the interest rates on Greek loans to way below market rates and stretched out their duration to thirty years, but these actions are insufficient to return Greece to fiscal and economic health.
Greece is supposed to achieve a debt to GDP ration of 110% by 2022, but that target is a fantasy. Greece has no growth prospects and is still adding to its enormous debt pile. The troika is playing with fire. Eventually, Greeks will refuse to pay their debts. The only question is whether a democratically elected government or the winners of the coup d’état will be defaulting on the debt ending the five year old depression.
The United States has already witnessed peak economic growth from this business cycle, and conditions will worsen over the next year. The slight rise in consumer spending is being ballyhooed by some in the financial media as a sign that “momentum could be growing in the U.S. economy.”
Examine the chart above and note the pattern. The peaks have been successively lower while the troughs have been deeper since 2012. Of course, consumer spending rose from July to August, but this does not indicate a trend or momentum just a blip upward as a respite from a slow, inexorable decline.
Consumer sentiment has yet to approach the highs from the last recovery and appears to be turning over. The index peaked in May coinciding with the lowest mortgage rates in generations. Since then, rates have risen, housing sales have slowed, and the stock market peaked. All the signs point to continued tepid growth with the chances of a recession increasing as the data piles up.
Consumer sentiment has previously reversed course during this “recovery,” but what differentiates this reversal is that it is being confirmed by the slow-down in housing and mortgage activity.