The Federal Reserve’s flawed bridge-building policies leading to ‘unexpected’ comeuppance


For more than a decade, financial experts have criticized the Fed’s abnormal dominance in money markets. The Federal Open Market Committee, made up of 7 members, has replaced itself as the sole determinant of short-term interest rates, thereby supplanting the main market-building processes of capitalism.

Experts pointed to the issues, especially the inadequate advantages of borrowers and the disadvantages of lender, investor and saver. They also exposed the increased risks associated with misallocation of capital and resources. When the financial system recovered from the Great Recession and economic growth returned, critics concluded that it was time for the Fed to cease and desist – in 2010.

However, FOMC members, free and on their own, proclaimed that things were never quite “good enough” and that the economy was still “fragile”. Therefore, they decided to stay the course, even expanding their operations to include huge purchases of longer-term bonds.

The Federal Reserve is fueling the US Treasury deficit, thus swelling the money supply …

However, as is happening on Wall Street and in the investment world, dismay and aversion to the Fed’s meddling has given way to taking advantage of the situation. This approach was based on a combined philosophy of “if you can’t beat them, join them” and “go where the money is”.

However, expert analyzes appear periodically. Significant damage over several years for savers, investors seeking security and income, insurance companies, pension funds, etc. were noted and measured. Despite the facts, the FOMC continued to repeat its mantra “low rates benefit everyone”.

The result? As with any bizarre trend that goes beyond its reception, the first reviews have been silent. This deep silence grew during the Fed’s “struggle” against the damaging effects of the coronavirus pandemic. More fiat money, more debt, more misallocated capital and more interest income diverted from savers to borrowers.

A perfect example of the damage caused by misallocation that is always with us

The Wall Street Journal explained the issues in a May 2015 article, “Easy Access to Money Keeps US Oil Pumping – Many Investors Find Drilling Attractive; the lack of production discipline could keep prices low ”

The two key elements are “easy access to money” and “lack of discipline in production”. Here is the anomalous image created by the cheap money (emphasis added):

Wall Street’s generous contribution to American oil drillers helped create the American energy boom. Now that same access to easy money allows them to keep going, despite oil prices languishing around $ 60 a barrel.

Aided by an immediate money supply, the flow of oil from the United States could keep crude prices low for the remainder of 2015 and beyond.

And this nefarious combination of cheap credit and overproduction is not relegated to the United States and oil. All over the world, there has been an overabundance of products and resources. China’s slower growth is often blamed, but that doesn’t explain why resource producers continue to produce even as prices continue to fall. Cheap money does it.

Bottom line: an unhappy ending awaits you

Aided by the coronavirus pandemic, the financial system is heading into uncharted territory. Therefore, the best investment approach is to remain flexible and be prepared to take abnormal action when abnormal risks and opportunities arise. A good size allocation to cash reserves should be beneficial, both in seizing opportunities and in controlling emotions.