The Negatives of Credit Growth

Last week I called the economy schizophrenic. Actually, that’s an insult to schizophrenics.

This is simply a dysfunctional economy. It’s the product of a good idea called capitalism with excessive intervention—namely by the Federal Reserve Bank of the United States.

Today’s economy reminds me a little bit of the movie, Jurassic Park. Altering the natural order of things has unexpected consequences… like a T-Rex eating you alive.

Similarly, the Fed printed money for years and kept interest rates at artificially low levels—even when it probably didn’t need to. Sure, raising rates 10 years ago might have caused a little recession along the way, but that’s NORMAL.

Instead, they decided to take intervention to a new level. Rather than seeing the role of business cycles in a healthy economy,  they became reactive to equity markets. To be clear, keeping equity markets in a bubble has never been a mandate of the Federal Reserve.

But there they were.  They would threaten to raise rates, the markets would panic sell and then the Fed would quickly back off.

The Fed was playing a game of chicken with investors and the investors won over and over again—so much so that people began to believe that the Fed wouldn’t ever let the markets go into free fall.

Then Covid happened and, with it, something unprecedented. True helicopter money was released into the hands of ordinary Americans by the United States government. You see when the Fed prints money it lands in the arms of banks who would simply hoard it.

This time, things were different. People needed the money to eat so the government put it into their hands. And that, along with high demand for goods because of a crippled supply chain lit the fire of rapid inflation—the worst we have seen in 40 years.

Of course, somehow the Fed didn’t realize that it was real at first and didn’t act quickly. In hindsight, gradual increasing of rates would have made sense and probably prevented the need for extreme measures. Instead, it waited for things to get out of hand and then put its foot on the gas like never before.

Now we are sort of in no-man’s land. Inflation seems to be getting under control. There is some distress in the economy as seen by bank failures and corporate bankruptcies at 2010 levels. The commercial real estate markets are a mess.

But…we also added 339,000 jobs last month. Why? I don’t know other than to guess it has something to do with optimism that the Fed will change course and become Dovish with rates. In other words, businesses may not believe that the Fed will let things get that bad before they reverse course and start cutting rates.

It reminds me of a spoiled child who knows that if he whines long enough his parents will give in. It’s not the kid’s fault that he behaves that way. It’s the way the parents taught him to behave.

Similarly, businesses and investors don’t really believe the Fed when it says enough is enough about low rates and money printing. I’m not sure that I do either.

So, that’s this non-economist’s take on what’s going on with the economy. There’s a good chance that I have several flaws in my argument but, as I’ve said before, I’m trying really hard to make sense of it so I can move forward.

Richard Duncan is a real economist—one who recently spoke to Congress on what he believes needs to be done to move America ahead. He has some pretty good ideas about what’s going on with the economy now that I think will be useful to you. Listen to my interview with him on this week’s episode of Wealth Formula Podcast!

Richard Duncan is the author of four books analyzing the causes and the effects of the economic crises that have brought the global economy to the brink of collapse during recent decades.

The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005), predicted the global economic disaster that began in 2008 with extraordinary accuracy. It was an international bestseller. The Corruption of Capitalism: A strategy to re-balance the global economy and restore sustainable growth (CLSA Books, 2009) described the long series of US policy mistakes responsible for the Crisis of 2008. The New Depression: The Breakdown Of The Paper Money Economy (John Wiley & Sons, 2012) introduced an important new analytical framework, The Quantity Theory of Credit, that explained all aspects of the global economic crisis that began in 2008: its causes, the rationale for the government’s policy response to the crisis, and likely future developments.

His latest book is The Money Revolution: How to Finance the Next American Century (John Wiley & Sons, 2022). The first two parts of the book describe the evolution of Money and Credit over the last century. These include a detailed history of the Federal Reserve since its establishment in 1913 and a discussion of the transformation of our economic system from Capitalism to Creditism during the five decades since Dollars ceased to be backed by Gold. Parts One and Two show that a “Money Revolution” has occurred and fundamentally altered the way the global economy functions. Part Three demonstrates that this Money Revolution opens up unprecedented opportunities for the United States to radically accelerate economic growth, enhance human wellbeing and strengthen US national security by investing aggressively in the Industries and Technologies of the Future.

Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis. Richard currently publishes Macro Watch, the biweekly video newsletter he founded in 2013.

Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio. His books have been reviewed in the Financial Times and The Economist, and taught at Harvard and Columbia.

He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, The World Knowledge Forum in Seoul, and the CFA Society during a speaking tour around South America. In February 2023, Richard was the guest speaker at a House Ways and Means Committee policy dinner in Washington, D. C.

Richard studied literature and economics at Vanderbilt University (1983) and international finance at Babson College (1986); and, between the two, spent a year traveling around the world as a backpacker.

Shownotes:

• The Confusing Economy
• Will Credit Growth Push the US Into Recession?
• Savings and Money Supply
• Economy Impact of Student Loan Repayments
• Rethinking the Fed’s policy
• Wealth to Income Ratio
• US Current Account Deficit
• Macro Watch