The market is currently betting heavily on the FOMC delivering another rate cut in December, and considering the real goal of the Fed and fellow central bankers has been to “assure financial market stability”, not control inflation, assure healthy and homogeneous economic growth, or maintain a resilient job market, it is hard to expect Jerome Powell not to cut rates again in a few days.
Central banks’ independence is long gone; let’s not keep fooling ourselves about it. However, if the real goal is to assure financial market stability, which in practical terms means keeping volatility low across the board, especially in stocks and government bonds, are we sure that central banks are driving markets in the right direction and not towards the edge of a cliff, hiding risks they should instead address?
First of all, cutting rates right now when financial conditions are already looser than even before the Fed rate hike cycle began is only going to support the misallocation of capital from productive uses to speculative ones.
Why does capital keep being allocated to unproductive and speculative, if not toxic, investments? Because companies with healthy businesses and people with strong credit only have limited demand for leverage, they are able to finance themselves with the profit of their operations or personal incomes. However, banks and asset managers do have a problem: continuing to allocate capital that keeps piling up on their books as a result of relentless central bank money printing. As a consequence, they start investing and lending to companies and consumers with weaker and weaker credit, all the way down to deep junk territory. Not surprisingly, credit spreads are still incredibly compressed despite corporate and personal bankruptcies being at a decade-high across major economies, starting with the US. In some cases, like in the commercial real estate or auto loans sector, they are already way beyond the peaks recorded during the 2008 Global Financial Crisis.
In a nutshell, all central banks are achieving with their relentless money printing is keeping alive the zombie part of the economy that is increasingly sucking blood away from the healthy part of it. As a matter of fact, monetary inflation spreads to everyone the cost of inefficient capital allocation in what’s effectively a shadow tax on the population.
Another sign of central bankers driving without looking at the road ahead of them is represented by what’s happening in the private credit market. Let me remind everyone how, back in July, I warned that the Fed REMOVED from banks’ stress tests all loans and exposures to private credit in: “2025 FED STRESS TEST REVEALS HOW TODAY’S FED IS COMPLICIT IN HIDING BANKS’ PROBLEMS“. Shortly after, the private credit space started to show signs of distress; however, as I shared in “PRIVATE CREDIT: PEOPLE CAN SMELL THE SMOKE, BUT CANNOT SPOT THE FIRE YET“, regulators and policymakers are still oblivious to the true extent of the problem here. The BOE yesterday even lowered the amount of capital banks are required to hold, claiming strong results in the latest stress test they performed (“BoE lowers capital requirements for UK banks as they pass stress tests“), despite the UK economy being deeper and deeper into a structural crisis.
Rather than learning from the mistakes of Japan and the BOJ, other major governments and their central bankers are instead repeating them. What’s worse is that investors love and encourage this behavior. How come? Because it benefits those who hold assets whose values keep increasing, nominally, due to monetary inflation. But at what cost for the population?
The value of JPY compared to gold in the past 20 years has gone down by over 90%
What about the USD? In the same period of time, it lost almost 50% of its purchasing power.
Let me ask this question now: isn’t it a big contradiction to consider an economy “strong” while the value of its own fiat currency evaporates? I hope the answer here is straightforward.
Putting it all together at this point, it should be clear that the Fed and fellow central banks should be slamming on the brakes, slowing down, and turning their economic policy in a completely different direction rather than staying on the course that leads to economic oblivion. Slamming on the brakes will surely hurt those who aren’t wearing seat belts, especially those who instead kept standing and partying on the bus. However, it will save everyone from falling off a cliff like the one into which Japan is already free-falling. Rather than allowing people to go deeper into debt by approving lifetime mortgages, policymakers should instead let real estate prices crash so houses become affordable again. Rather than reassuring investors that stocks will keep trading at all-time highs, policymakers should pull the plug on zombie companies and egregiously overvalued ones. Rather than supporting investment in vaporware technologies, policymakers should refrain from that and focus on those that truly benefit the structural growth of the economy, adding real value to it. Rather than continuing to distribute stimulus checks that people end up spending on consumer products they can easily live without, and that will have no residual value, policymakers should invest in education, healthcare, and services that truly support the population’s well-being in the long term. Why is nobody shocked when 25% of buy-now-pay-later lending is now being used in the US to purchase food, is beyond my understanding (“25% of Americans are now using buy-now, pay-later for groceries“)? Why is nobody shocked by the fact that 95% of all Black Friday shopping has been financed with consumer lending? This is not how a “golden age” looks; this is how a dark age begins, and it is not too late to avoid that, broadly speaking, but no one wants to stop partying and endure the pain of sobering up.