After the next crash, what if all the Fed’s horses and all the Fed’s men can’t put our Humpty Dumpty economy back together again? From Charles Hugh Smith at oftwominds.com:
The consensus holds there will be another bubble after the Everything Bubble pops, but this might be misplaced confidence in the godlike powers of central banks.
The consensus holds that central banks–the Federal Reserve in the US–will gradually inflate away the world’s rising debt burden while propping up assets and the economy with the usual bag of monetary magic: suppress interest rates so debt service costs ease, increase the money supply and credit to prop up asset bubbles in stocks and housing, and thereby generate growth in consumption via the elixir of “the wealth effect:” as assets loft higher, everyone feels richer and so they borrow and spend more.
Well, not everyone, because only the top 10% own enough assets to feel “the wealth effect,” but since they account for 50% of all consumer spending, that’s enough to maintain the status quo, in which the bottom 90% lose ground (especially the bottom 60%) and the top 10% are doing splendidly.
Should the bubble du jour pop, no worries, central banks will rush to the rescue as they have for 25 years, goosing money supply and credit, opening the floodgates of liquidity, pushing interest rates down so everyone and every entity can borrow and spend / speculate more, more, more.
This is a nice story, and proponents have the past 25 years of history to back it up. But beneath the surface appeal of this story–a Hollywood ending every time, as the Fed will inflate another bubble, one after the other in an endless loop–there are stirrings in the deep that suggest the Everything Bubble is the last bubble of its kind, and attempts to inflate another bubble when this one pops will collapse the entire rickety contraption.
