Investors may not care about an impending dollar shortage until there aren’t enough dollars around to drive markets higher. From Adem Tumerkan at palisade-research.com:
Former Federal Reserve Chairman – Ben ‘Helicopter’ Bernanke – just threw cold water on the mainstream growth narrative. He said the economy by 2020 is going to go right over the cliff.
Although rarely – I do agree with Helicopter Ben about something. . .
President Trump’s $1.5 trillion in personal and corporate tax cuts – plus $300 billion in increased federal spending – was done at the “very wrong moment.”
The huge tax cuts and government spending requires a significant amount of new debt to be issued, all while the Fed’s tightening and unwinding their balance sheet via Quantitative Tightening (QT).
This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile.
Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But if the Fed is shrinking their balance sheet, that means the bonds they’re selling to banks are sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every global economy.
This illiquidity is going to cause the oil that greases the wheels of markets to dry up – fast.
So, with the dollar shortage making matters worse – we also have that there’s never been a time when the Fed began tightening and it didn’t lead to negative economic growth or a market crisis.
The historic evidence of the Fed’s rate hikes – and the inverting yield curve – right before a recession is irrefutable.
Take a look at over the last 40 years. . .
As the Fed continues their rate hikes and QT, the over-indebted system becomes illiquid and more fragile. Things will eventually crack.
The protégé of Austrian Economist Ludwig Von Mises – Murray Rothbard – once asked a series of questions that stumped many economists defending the Fed.
From his book America’s Great Depression, he called these ‘The Sudden Cluster of Errors’, which were. . .
1. Most businesses in the economy generate steady profits and can service their debts fine. Then suddenly, without warning, conditions change, and the bulk of businesses begin posting huge losses and can’t pay their creditors.
2. How did all these astute business men, MBA graduates, and ‘professional’ forecasters make such huge errors together. And – most importantly – why did it all suddenly happen at this particular time?
3. Why do the capital goods industries – raw materials, construction, etc – fluctuate much more wildly than the consumer goods industries? During recessions you see home construction firms belly up, but places like GAP and Hollister survive.
The explanation is the Fed’s artificial moving of rates up after keeping them down for years triggers the harsh bust.
To continue reading: Critical Mass: When Will Investors Care About The Dollar Shortage Crisis?