There is an Economic Depression coming, but don't blame it on Wall Street
Jim Delinis
December 2, 2014
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There is a significant amount of whispered panic among financial professionals right now around the world. Previously unshakable correlations are breaking down all over equity, currency and commodity markets. The whispers are getting louder as the days go on: nothing makes sense anymore. Financial instruments are not reacting to events in the way they have for the last sixty years. The markets are sick. A perfect storm is brewing. And no one knows where this leads, or how it ends.
Markets that have been artificially distorted for years by central banks, desperate politicians and powerful algorithmic trading programs have set the world up for the next financial crises. Only this time, don't blame Wall Street for the fallout.
The dirty secret among those who pay attention is that the people who govern the money supply and set interest rates around the world - people in the Federal Reserve, the European Central Bank and the Bank of Japan - don't seem to believe in the markets they govern at all. They look at the traditional market and see a wild beast that needs to be tamed and controlled. They see in the market a destructive force whose direction needs to be manipulated and planned to ensure economic growth. In doing so they have distorted traditional price discovery on every equity, currency and commodity on the planet making the effective allocation of resources impossible and creating distortions that will lead to an economic depression around the world.
The growth of income inequality over the last six years has nothing to do with tax rates, subsidies or "game rigging" by Wall Street (before 2008 however is a different story). The type of people who would be supportive of Elizabeth Warren and her message of economic populism aimed at big banks and institutions are fighting the last war, not the next one. The reason why income equality has grown is very simple: the top 10% of Americans own 89% of stocks and bonds.
The Federal Reserve has spent over $3.5 trillion on its various forms of Quantitative Easing programs since 2008. The main effect of QE has been to inflate the asset prices – the stocks and bonds - that the richest 10% own. Don't believe me? Please have a look at this chart and tell me otherwise.
Quantitative Easing has ended up being trickle-down economics at its worst, because the effect of all of that QE has been to funnel money into the pockets of equity and commodity owners at the expense of people who aren't in on this particular act of theft.
It has dramatically increased income inequality in this country. A large part of the fallout will be well-meaning politicians like Senator Warren blaming free markets for problems that government intervention caused in the first place. The answer they will advocate for? More government of course. More regulation. More intervention. The Central Planners will figure it out this time. After all, hasn’t their record of market-manipulation been stellar so far? Let’s take a look around the world.
On October 31, 2014 the Bank of Japan announced an $870 billion dollar QE program to take Japan out of the triple-dip recession it is currently in (after running five other forms of QE over the past 10 years). What is making this round of QE so potentially catastrophic for the world is that the BOJ are using this money to buy stocks and bonds not just in Japan but around the world, regardless of price or economic fundamentals. They are using their QE to purchase S&P 500 e-mini futures rain or shine preventing financial professionals from discovering the true value of financial instruments. They are in short preventing even a modest correction forcing the market to go in one direction – up.
There is no need to talk about how catastrophic this is going to end up when the music stops and reality sets in. Asset prices around the world will eventually correct hard and trillions of dollars will disappear very quickly. A world-wide depression and more unemployment will follow. When it does, don't blame Wall Street for the wreckage. Blame the politicians and central bankers compulsion to centrally plan the unplannable.