Charles Hugh Smith raises an important question. Here are a couple of others. What if the Fed never really had control? What if the Fed follows, rather than leads markets? Smith doesn’t address those questions, but Robert Prechter has, and his well-supported answers will surprise at least 99 percent of financial market participants. Back to Smith at oftwominds.com:
When this bubble bursts, there will be no fourth or fifth bubble, there will only be rubble.
The US economy and its financial system operate under the implicit belief that the Federal Reserve controls the direction of the economy and finance. This belief isn’t in Fed influence, it’s in Fed control: the Fed can reverse a stock market decline on a dime, it can reverse a recession, it can do “whatever it takes” to keep markets stable and expansive.
The history of the past 30 years seems to support this belief. Every time a financial crisis has manifested, the Fed has “saved the day” with some new policy extreme, changing the rules, jacking up its balance sheet 10-fold, and so on.
The flaw in this confidence in Fed control is the three speculative bubbles that have inflated and burst in the era of Fed Control, 1995 to the present. These bubbles could not have inflated without a “dovish” Fed pushing interest rates down and juicing the financial system with liquidity / credit. Since all speculative bubbles eventually burst, the Fed is forced into “rescue mode” which requires ever more extreme manipulation, oops, I mean intervention, to stabilize the bubble bursting and inflate the next bubble.
What few entertain as a possibility is the Fed is losing control of the economy and finance for systemic reasons that have nothing to do with Fed Policy per se. In other words, it’s not a “Fed policy error” that brings th