For part 1, read here. Got the idea from some blogs and twitter posts I recently read. Will attribute at the bottom
I figured I would take some time to explain why this is a bad idea and rates need to go way the fuck up. But, lets take a quick step back.
The Federal Reserve has a number of jobs and one of them is to regulate the base line of how much interest someone has to pay when borrowing money from the government. This, in turn, acts as the base line interest rate that all other loans (including your mortgage) start at.
Exhibit 1: Interest Rate
After the financial crises, the Fed tanked the interest rate to get super low interest money out there to sustain both the financial markets and housing.
There are a few issues from here. We had a temporary crash in the housing market, where alot of people got hurt. But, no one really seemed to learn a lesson, which is that there is a large inherent risk in the housing market. Second, it created alot of money in the system. I mean a fuck ton.
Exhibit 2: Monetary Base
This is not a commonly looked at chart, because generally it stays constant. But, as part of the “bailout” the fed implemented “quantitative easing,” which when talking about the financial crisis meant buying up a bunch of dogshit mortgages from the banks (not individuals directly). The net result is a ton of cash in the hands of financial institutions where they had shitty assets. To keep the economy going, this kept going on and on through the Obama years.
Typically, printing this much cash results in a big period of inflation. To compensate from there being SO MUCH FUCKING MONEY in circulation, shit should be just as expensive. But they aren’t.
Exhibit 3: No Consumer Inflation
For reasons of efficiency, globalization, innovation, competition, what-have-you, its actually become much cheaper to buy shit than it was just ten years prior. The inflation seems to hit college and healthcare the most for reasons that I am not sure about at this time. A future update in this blog maybe. But, for the day-to-day life, its cheaper to buy stuff.
So then, where is the inflation?
Exhibit 4: Housing vs. Monetary
That should be fucking frightening to everyone. So this chart is again monetary base (discussed above. Money the federal government is letting out) against the Case-Shiller which is an index that shows how much home prices have changed since a set point in time (in this case 1980) accounting for inflation, etc.
This means that this is one of the dumps for monetary value. Someone is getting a fuck ton of this money, and buying up houses. Right around 2011 or so, people started buying up property and the index has now shot up PAST where it was valued at the housing crisis. So, who is using this federal money to buy shit?
Exhibit 5: Monetary vs Stock Market
Yep. Similar to the above, this is monetary base against the Russell 3000, which is an older stock market index that goes back a long time. You can see the dot com burst in the 2000s. The financial housing crash, and this is where we are now. FAR ABOVE where that was in valuation. This means the money is still in the financial markets. Simple economics says this is where the money is. The only way this kind of growth can be sustained would be through GDP growth. And GDP growth is doing fine. But, I think there is an easy culprit for this growth.
Exhibit 6: Debt
The economy is doing better, but as a result, people have taken a ton more risk. And global debt is at an all time high.
Look, if you take basic macroeconomics, it’ll tell you that business is a cycle. Things go up and up and then fall and right back around again. I’m a layman here, but my guess is the bailout didn’t let the economy fail like it should have. It artificially hoisted it up by printing cash. So, now we have a piss load of cash and debt out there, and it has HEAVILY inflated stock values and housing values.
Eventually, something will give.
Recently, a reader asked me why I was all doom and gloom about the economic state of the world. This is a good start. I am not sure what will cause a collapse, but I know over-inflated economic markers when I see them.
I am not sure what is going to start this stuff off. All it will take is one nasty economic event, and then everything is set up for things to impload. The world has taken on too much risk, and things will get way worse before it gets better.
Strap in. Batten down the hatches. The storm is coming in.