The toxicity of the current economy

For a few years now I’ve watched from the sidelines as asset prices in every major investment category have defied all fundamentals and climbed to new dizzying heights.

In 2008/2009, when the subprime real estate loans imploded and nearly took down a few major banks, the government decided to step in to bailout all the institutions responsible for the mess. This $700 billion dollar handout came at the expense of taxpayers, who of course had no say in it. As if this wasn’t enough, the federal reserve then instituted 3 rounds of Quantitative easing, purchasing 4 trillion dollars of Treasury bonds and mortgage backed securities to keep interest rates low. The justification for these extreme monetary actions was that without it the entire financial system would collapse. While I am no PHD in economics, I don’t believe that this would have been the result. Sure, several of the largest banks probably would have gone under, but that is what was supposed to happen. When banks took unnecessary risk with their client’s money, and end up losing it all, it is the bank that should have be punished, not the consumer. When the government said the credit markets froze up, they were talking about the large banks. The too big to fail ones. The smaller community banks not as exposed to the same toxic loans would have survived and picked up the slack. But of course, the government is owned and run by the big banks, so they will keep themselves alive at any cost. I believe that the bailouts have done nothing but keep alive the toxic, speculative, bubble based economy which has existed since for the last few decades.

The result has been skyrocketing asset and real estate prices, which has been extremely detrimental to the middle class. On its own, the stock market rising probably doesn’t have too much of an effect, but when housing costs soar year after year while wages are stagnant, the budget for middle class people are squeezed. Homelessness has risen significantly in major cities on the east and west coast. An recent article mentioned that there are 2 empty investor owned properties for every homeless person out there.

Colleagues and people I have respect have continuously told me that assets such as Real Estate can only go up. The picture I believe they are missing is the constant lowering of the fed fund rates for the last 3 decades. Notice that the low point has kept getting lower, until it hit zero, where it was for 8 years. It correlates very closely with the rise in the housing prices. It is surprising how quickly they forget, it was just 10 years ago in which prices dropped over 50% in most cities, and in fact probably would have dropped more if the Fed hadn’t bought trillions worth of non-performing mortgage backed securities.

It has gotten to the point where, for the current economy to continue functioning, the prices of assets must keep going up. The federal reserve has done everything in its power, to keep the asset bubble going, mainly lowering interest rates. Everything is so intertwined and leveraged, that when things start going the wrong way even a little bit, a catastrophe ensues, just like in 2008. The problem currently is, they’ve hit rock bottom with the interest rates. When the next recession hits, they will probably have no choice but to enact another round of Quantitative easing, but with their current balance sheet at 4 trillion, it’s unclear how much more printing they can do before something like hyperinflation takes over.

I’m not sure that people realize how precarious the situation is. It is not even just the U.S., the central banks of the entire world have printed their way to near negative interest rates. Every bank that gets close to failing gets bailed out. The cost of servicing the mountains of debt that countries and companies have taken on is starting to grow as the Fed has started unwinding its balance sheet. We’ve already seen the market take a big hit last week just from the Fed unwinding a miniscule 20 billion from its 4 trillion balance sheet. They really haven’t even started yet. We are surely in for quite a ride…

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