Market Insights

Who Does the Fed’s “Unconventional Policy” Benefit?

Gold Alliance disclaimer
Post-2008, the Federal Reserve installed a series of “unconventional” policy measures to combat the Great Recession. Today, the results are in, and we get to see just how successful the Fed’s moves have been. First, however, let’s take a look at the stock market. For the fourth straight session, the Nasdaq and the S&P 500 set new records. The Dow Jones saw an increase as well. Now in its peak. Dangers loom, of course—trade wars, historic debt levels—but it doesn’t seem to matter to the markets. With its new “report card for the unconventional monetary policy,” Deutsche Bank refers to quantitative easing, zero interest rates, negative interest rates, and all the other tools in central banks’ toolkits. In its report, the German central bank investigates these policies’ impact on the economic performance across the globe. Analyst Daniel Lacalle sums up the results as follows:
  1. In 8 of the 12 cases analyzed, the impact on the economy was negative.
  2. In 3 cases, the impact was completely neutral.
  3. The unconventional policies only worked in the case of the so-called QE1 in the US—and basically only due to its very low starting base and the US becoming a major oil and gas producer.
In other words: In 11 or the 12 cases, the impact of “unconventional monetary policies” was either negative or insignificant. The following graphic clearly illustrates the ineffectiveness of central banks. Here’s where the discussion of the stock market from above comes in: The benefits of the unconventional monetary policies have boosted the stock market through ultra-cheap debt and low interest rates. And the now-fattened corporations have purchased their own stocks as well at an astonishing pace. Just look at today’s stock market records. Contrasting these “wonderful” numbers is the fact that the average American isn’t seeing any benefits at all. We are told that unemployment has been defeated. For instance, July saw 73.83 million Americans employed. However, that number is only 1 million higher than 18 years ago, while the US population is 48 million higher. Inflation is another issue that plagues the average worker. Wages may be up around 2.8%, but July’s inflation rate came in at 2.9%. In fact, core inflation is close to a six-year high. These numbers should make us question the long-term safety of the American republic. In War and Peace and War: The Rise and Fall of Empires, historian Peter Turchin describes how at the height of the Roman Republic, the wealth of Rome’s top 1% was somewhere around 10 to 20 times a commoner’s, while at the empire’s decline, the factor may have been as high as 10,000:1. Sure, the US numbers aren’t as crazy (yet), but the fact remains that the “recovery gains” have mainly been absorbed by the asset-holding classes while the American middle class is falling further behind. Just look at the graph below. Turchin lists three dynamics that have been common during late imperial decline throughout history:
  1. Real wages are stagnating due to oversupply of labor.
  2. Parasitic elites are being overproduced.
  3. Central state finances are deteriorating.

Does this sound familiar?

We are facing national debt of $21 trillion and a future marked by trillion-dollar annual budget deficits, but let’s ignore that so we can follow the message of the White House and celebrate the record-high stork markets. Surely, there will be no hangover.