The Fed Created The Everything Bubble And A Liquidity Crisis – What Happens Next?…”we are on the verge of another “Lehman Moment”. That time has nearly come.”
Brandon Smith
Alt-Market.com
Wednesday, 25 September 2019
It’s an interesting dynamic that the Federal Reserve has conjured in the decade after the 2008 credit crash. They spent several years using artificial stimulus measures to inflate perhaps the largest financial bubble in the history of the US, and then a couple years ago something changed. They addicted markets and investors to easy cash only to then cut off the flow of monetary heroin. The system was so dependent on the Fed’s “China White” that all it took to give everyone the shakes was interest rate hikes to the neutral rate of inflation and a moderate balance sheet selloff. Now, the system is dying from shock and it’s too late for intravenous stimulus to save it.
For many this might seem unprecedented, but it’s really rather common. The Fed has a long history of inflating bubbles using easy liquidity and then imploding those bubbles with the tightening of credit. It also has a long history of pretending like it is trying to save the economy from crisis when it is actually the source of the crisis. As Congressman Charles Lindbergh Sr. warned after the panic of 1920:
“Under the Federal Reserve Act, panics are scientifically created; the present panic is the first scientifically created one, worked out as we figure a mathematical problem…”
In the latest theatrics of the Fed, a new trend has emerged – The “disappointing Fed”. In order to understand this disappointment, we have to define exactly what markets want from the central bank. Obviously, they want QE4; a massive liquidity program. For the past year at least they have been clamoring for it, and they still have yet to get it. But what does QE4 entail? In order to institute a new QE marathon the Fed would have to:
1) Lower the Fed funds rate to zero.
2) Lower the overnight repo lending rate to zero.
3) Stop balance sheet cuts.
4) Launch permanent asset purchases, NOT just overnight lending backed by collateral.
If the Fed was planning to kick the can on the collapse of the Everything Bubble, they would have initiated all of these steps and they would have done it at least 6-8 months ago. So far, only one of these things has been done (the end of balance sheet cuts). Here we see why the mainstream economic world is continually on the verge of a conniption fit. The implosion of the financial bubble is becoming obvious, most major corporate institutions and banks are stretched thin by historic levels of debt and dollar liquidity has become so tight globally that interbank lending rates are skyrocketing well above the Fed’s set interest rates. Yet, after every Fed meeting, the central bank gives the investment world a bare bones response.
Here is the question people should be asking but almost no one is: Why? Why didn’t the Fed just open the floodgates on QE4 back in November/December when it was obvious that a liquidity crunch was forming? Why did the Fed hike interest rates and cut their balance sheet at all? The only thing it achieved was to spark crash conditions.
Ah, but there is the key to answering our conundrum…
Since around November of last year the Fed has entered into a rather consistent pattern in which it does the bare minimum to make it appear as though it plans to support markets and defuse any crisis event while actually not doing much of anything. There comes a point where “kicking the can” on economic collapse becomes impossible, and I believe we have now reached that point according to the evidence. As I’ve noted in past articles, the Fed would not loosen the noose on liquidity until the crash starts to hit the consciousness of the general public. In other words, the Fed will not unleash QE4 until we are on the verge of another “Lehman Moment”. That time has nearly come.
The Rest…HERE
