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Free Market Collapse

“One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Milton Friedman.

Let’s run down some of the real time statistics:

* Unemployment: 20% or greater. States are still behind in processing claims.

* National Debt: 25,000,000,000,000. That is trillion folks. Grew by 1 trillion dollars in one                                month.

* Price of Crude Oil: Future oil deliveries per barrel were negative at one point. At inflation adjusted levels, oil is priced at 1880’s level’s.

* M2 Money supply: Chart is almost off the charts!

* San Francisco Health Department: Confirms it is providing alcohol, weed, nicotine & other substances to the homeless they are housing in hotels during coronavirus quarantine.

*Texas: Salon owner jailed for seven days for cutting hair so her children could eat.

 

It seems the Federal Government is intent on not letting a single company go bankrupt, this at the risk of bankrupting pension funds, insurance companies, our country and our collective morality. Many cities and states are similarly bankrupt, overly dependent on the bond market and tax increases.

All this corporate life saving is being done for who? Bondholders? Employees? Zombie companies have been around for longer than any free market would allow because of the persistent low interest rate environment. Interest rates have been dropping since the 1980’s, but rates have been at or near the zero bound since the Great Recession of 2009.

Low rates keep marginal companies alive with cheap money while stealing savers the ability to save and pension funds the ability to safely invest within the parameters of their conservative investment objectives. The intention of the low rate policy is nice, but the results will be more devastating as time goes by and debt grows at every level.

What can’t be paid back, won’t be paid back. The Free Market has been effectively dissolved into a bureaucratic money printing and price discovery mess. Real price discovery is important in equity and bond markets because it’s a gauge of investor attitudes. Investor complacency seems to be setting in again because of the Federal Reserve monetary backstop. Jerome Powell, Fed Chair, has said we have “no limits” on our bond buying and lending power.

Actually, there are limits, Section 13 (3) of the Federal Reserve Act describes these limits. “Don’t fight the Fed” is an investor mantra that means to not countertrade the Federal Reserve Bank policies. Somebody does need to fight the Fed, but it won’t be politicians. Politicians need budget deficits funded, who will fund growing budget deficits? The circle is vicious and growing.

We are heading for a debt deflation explosion. I don’t know when it will occur, but it will occur. And this will occur regardless of the Central Banks stated dual mandate of stable prices and sustainable employment. Money creation and markets are socially distancing from the eventual reality of the debt explosion.


About the author

Craig Reger

Craig is a Registered Investment Advisor Principal at Leamington Capital Advisors.

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