Internet-based media observers like analyst Anthony Wile are warning that the Federal Reserve’s lack of action regarding interest rates is aggravating asset bubbles in the US and around the world.
“Current economic conditions show us that we’ve never really recovered from the 2008 recession,” said Anthony Wile, Chief Investment Strategist for
High Alert Investment Management.
Anthony Wile is the author of a 2007 book (
High Alert) that predicted the 2008 collapse and current economic difficulties.
As Wile and others have pointed out, the Fed is instrumental in the creation or absence of asset bubbles because the dollar is the world’s reserve currency and therefore used by a variety of nations and populations.
The Fed’s lack of resolve regarding interest rates is expanding the supply of credit at an artificially high pace. The more credit (money for all intents and purposes) that is made available by the Fed via commercial banks, the faster certain segments of the dollar economy expands.
The debasement continues until markets themselves recognize the expansion is unsupportable given the level of economic activity. At this point equity markets collapse and industry and individuals become entangled once more in recession.
Anthony Wile: ‘An Unstable System’
“The system itself is in a sense designed to be unstable and subject to cyclical collapses,”
Anthony Wile explained. “If the central bank doesn’t allow the downturn to fully express itself, then economic conditions are likely to support the formation of asset bubbles sooner rather than later. That seems to be what’s happening now.”
Wile’s perspective is shared by many others, including high-profile investors such as billionaire Carl Icahn who
recently warned in
USA Today of the “danger ahead” for the U.S. economy. Icahn sees bubbles in such areas as mergers, art and junk bonds. In fact, Icahn is so worried about it he’s produced a video that among other things cautions about the dangers of rates that continue to hover close to zero.
"The middle-class investor has nowhere to go with their money but into the (stock) market, or even more concerning, high-yield bonds, which are very risky," Icahn said in the video, which is posted on his website CarlIcahn.com. In an interview with USA TODAY, Icahn said he made the video to highlight the "dysfunction" in corporate America and on Capitol Hill.
Notably, Icahn made a direct connection between low interest rates and the mortgage meltdown of 2008, a correlation resisted by many commentators at the time. Regulatory issues, taxation and even “greed” were blamed for the crisis of 2008, but Icahn, Wile and others are convinced that the main culprit is easy credit and the resultant currency debasement.
Icahn likened such debasement to “steroids” and claimed that the current merger boom is a direct outcome – and one that is “contributing to false growth by companies." Companies, Icahn said, wouldn’t have the wherewithal to buy without the availability of Fed-supplied credit.
While Icahn didn’t mention it, the bubbles he’s worried about have appeared in all sorts of high-end sectors, including art, real estate and the automobiles, even in stamp collecting. When central banks stimulate, as they have been aggressively doing since 2008, the new “money” is lodged with commercial banks that lend it out to multinationals that in turn invest portions into equity markets.
Questionable Cycle
As equity marts advance, the additional income finds its way into the pockets of wealthy investors that begin to bid up high-end sectors of the economy. This is why resources and assets tailored to the rich tend to advance first as the economy “recovers.”
In truth, central bank money manipulation guarantees there are no real recoveries, only asset inflations that begin at the high end and then gradually penetrate downward until even the middle classes experience – momentarily – the inflationary impact of money printing.
Of course, by the time these effects are enjoyed by the wider middle class, the economy itself has grown dangerously unstable. Thus, middle classes are the last to enjoy “prosperity” and the first to lose it.
With Carl Icahn, Anthony Wile and other market observers warning about the dangers of asset inflation, it is probably safe to say that the central bank business cycle is relatively close to turning once more. While the broader population (especially in the United States) has not yet experienced price inflation on a massive scale, there are certainly signs that high-end price inflation is becoming a raging fever.
Cars, yachts and private jets are all apparently in demand in ways that they haven’t been since the mid-2000s. Yachts, for instance, are larger and more expensive than ever. Most recently, according to
Business Insider, The Admiral X Force 145 began construction with an estimated price tag of US$1 billion. The 465-foot vessel is said to include “crystal chandeliers and solid marble floors.”
Meanwhile, articles such as a recent one found in
Quartz entitled, “The new reserve currency for the world’s rich is not actually currency,” have profiled asset inflation in fine art. This article proposed that the “rich” are investing in art because it is analogous to gold as a “recognized store of value.”
Art is … an object that provides social currency knitting together a select group of global nabobs and those who want to be seen sharing economic and cultural rank with them. Owning art—and, if you can, owning a lot of art—provides a kind of access in today’s globally integrated social world that few other objects can provide.
What is not mentioned by the article, however, is that in times of economic stress, art prices often collapse. This collapse certainly differentiates it from precious metals that often advance during the bad times. In fact, the most recent expansion in gold and silver prices began after the dotcom implosion at the turn of the century.
The Quartz article offers a classic example of how the media can misconstrue an asset bubble by mistaking it for an economic evolution, or even revolution. This happens regularly within the context of central banking because people are fooled by monetary expansion and mistake it for real wealth.
As economies expand and “prosperity” seems to enlarge, commentaries are written about the significance of the wealth evolution. In truth, the media can’t resist sensationalizing the expansion of asset bubbles by treating them as something other than what they really are – symptoms of an overabundance of easy credit.
Troubled Fed?
Even if “normal people” are not aware of the inevitability of asset bubbles and their corrosive effects, the mavens at the Fed certainly are. There is a subdued but significant debate about how dangerous asset bubbles have become, as indicated by a recent article in Reuters entitled “Prick Asset Bubbles With Rates” commenting on the Fed’s inability to act regarding rates.
The question of whether the Federal Reserve should adjust interest rates to deflate risky financial market bubbles split some of its top policymakers on Friday, suggesting the controversial idea is re-emerging as the U.S. central bank approaches an historic policy tightening. Giving the central bank an effective third mandate –beyond its formal objectives for inflation and employment –has won more adherents since the 2007-2009 financial crisis, which some blame in part on too-easy monetary policy in the preceding years that allowed risks to take root.
This article implies that the Fed needs to act to head off asset bubbles, but asset bubbles are the inevitable outcome of a central bank economy and are intrinsic to the modern monetary mechanism. The article uses phrases like “head off any brewing instability” via rate hikes, but it is probably too late for that.
“People seem to believe that asset bubbles only emerge in the latter stages of an economic recovery,” Anthony Wile said, “but that’s not true. They are intrinsic to the process. The Fed won’t state it, but today’s asset bubbles are so large and serious that the Fed is virtually paralyzed. Even a small upward move might puncture the economy’s supposed prosperity – and reveal the extent to which the economy has grown dependent upon the artificial wealth of these high-end bubbles.”
Rupkey: ‘Rates Will Never Go Up Again’
Anthony Wile’s analysis is borne out by other observers who see the same sort of syndrome. According to
Business Insider, Chris Rupkey, chief financial economist at MUFG “and one of the most bullish strategists on Wall Street,” now believes the Fed won’t raise rates at all in 2015, and may never raise again.
In an email blast following Friday's report, Rupkey wrote that "rates will never go up again." "The jobs market struck out in September as far as the Fed's concerned," Rupkey wrote on Friday. "No rate hike in October now certainly, and 2015 looks increasingly impossible. If the Committee was looking for more improvement this isn't it." Rupkey added: "We are reassessing our Fed call for December at the moment. The idea the U.S. economy could power forward while the rest of the world is stalling out, that idea can be put in the garage bin.
It is interesting that Rupkey only now decided that the Fed is trapped. His perception illustrates the deficiencies in modern economic models that accommodate an activist central bank. So long as modern economists grant that central banks can “manage” the economy using various tools of monetary expansion and contraction, business cycles will likely continue to grow in violence and destructiveness.
Finger pointing will continue to confuse the public as well, and will inevitably emanate from the highest levels. In fact, former Fed chairman Ben Bernanke has just released a memoir that calls for Wall Street insiders to be held more accountable for market meltdowns and other kinds of market instability.
According to Bernanke, the economic meltdown was triggered in part by “reckless lending and shady securities dealings that blew up a housing bubble.” Bernanke granted that corporations were “held accountable” but stated in an interview that blame should have been assigned directly to senior Wall Street individuals.
Bernanke’s new memoir is extensive at 600 pages and is entitled
The Courage to Act: A Memoir of a Crisis and Its Aftermath. According to AP: “The memoir details his take on the crisis in which the government took over mortgage giants Fannie Mae and Freddie Mac and provided hundreds of billions in aid to the biggest U.S. financial institutions. … He writes that the taxpayer-provided bailouts of banks and Wall Street firms were hugely unpopular, but says they were necessary to avoid an economic catastrophe.”
A System Worth Saving?
The trouble with this sort of analysis is that it assumes that the current system is worth saving – or at least worth retaining even without significant structural reform. In fact, according to critics of the current system, instability (and resultant recessions, depressions and impoverishment) is a direct outcome of central bank interference in markets and is to be expected on a regular basis. History seems to bear this out.
Bernanke’s point is that Wall Street tycoons ought to be punished for “reckless lending and shady securities dealings.” But this is analogous to rhetoric that was popular during the 1930s, when significant Wall Street reforms were advanced and implements as a result of the Pecora Commission.
It was the Pecora Commission that gave first the US and then the world “public markets” and much of the regulatory system that is part and parcel of today’s financial scene. Ironically, the instabilities that the commission sought to address are arguably almost as bad today as in the 1930s. Unemployment, income inequality and investment risk remain significant despite the regulatory model that has been adopted throughout the West.
The real problem seems to be central banking and the price fixing that takes place as a result of central bank mandates regarding the price and volume of credit. It is impossible for individuals to anticipate or ameliorate the business cycle using monetary “tools” because it is usually impossible to predict the future.
“Asset bubbles are built into the modern economic process,” Anthony Wile explained, “and the results won’t be any better than those that have gone before. We may see a market run-up for several more years depending on how the Fed and other central banks handle the situation. But eventually there will be a significant downturn once more, aggravated by the inability of central banks to act now. The longer they wait, the worse it will get. But I guarantee you, they will wait as long as they can.”