Since 2008, we have been in an era of unprecedented money printing and interest rate suppression. Now the cost of all of that easy money is coming due.
We’ve been paying for it through price inflation, and now we’re paying for it through a deflating bubble economy as the Fed tries to undo its malfeasance.
In the wake of the financial crisis, the Federal Reserve pushed interest rates to zero and held them there for years. It also ran three rounds of quantitative easing, pumping trillions of dollars of freshly printed money into the economy. The Fed tried to “normalize” monetary policy by raising rates and shrinking its balance sheet in 2018, but it ended up aborting that attempt when the bubbles blown up by a decade of easy money started leaking air.
The pandemic gave the Fed cover to double cut rates again and double down on QE. In less than two years, the central bank expanded its balance sheet by nearly $5 trillion and flooded the economy with more money created out of thin air.
The bubbles blown up after 2008 got even bigger.
Now the Fed is trying to fight the inevitable price inflation.
WolfStreet perfectly summed up what has happened over the last 15 years.
The era of money-printing and interest-rate repression in the United States, which started in 2008, gave rise to all kinds of stuff, and the easy money kept going and kept going, and all this money needed to find a place to go, and then money-printing went hog-wild in 2020 and 2021. And the stuff it gave rise to just got bigger and bigger, and crazier and crazier. And much of this stuff is now in the process of coming apart, I mean falling apart, or getting taken apart in a controlled manner, and some stuff has already imploded in a messy way.”
In a nutshell, what the Fed giveth, the Fed taketh away.
The unraveling is easiest to see in the real estate market since it is one of the most interest rate-sensitive segments of the economy. In some markets during the Fed-induced boom, home prices spiked by 50% and 60%. That was on top of a huge price surge before the pandemic. But now the air is coming out of the bubble. Existing home sales have dropped for 10 straight months. Year-on-year, existing home sales have plummeted by 35.4%.
Home prices are beginning to fall as well, especially in the biggest bubble markets. In November, the median price of a house in San Francisco was down by 21% compared to a year ago, and down by 27% from May’s peak.
As WolfStreet put it, “There has been a sea-change in the real estate market. And it’s not pretty. But the bubble was so huge, and so magnificent, fueled by money-printing and interest rate repression, that the deflation of this bubble must by definition get messy.”
Easy money also helped blow up a cryptocurrency bubble. That bubble has popped.
A year ago, market capitalization in the crypto sector reached $3 trillion. But since then, the sector has been in a freefall. When the Fed started raising rates and shrinking its balance sheet, the whole thing just blows up.
The price of bitcoin has plunged by around 73%. Many of the hundreds of cryptocurrencies created during the mania have gone to zero and have been left for dead. Big companies built around crypto are going under.
“Crypto was one of the places where liquidity from money-printing went to,” WolfStreet said, “And now that the liquidity is being drained ever so slowly, the whole space started to collapse,”
The most visible bubble blew up in the stock market. Over the last decade-plus, we’ve seen a rash of crazy IPOs. Stocks for money-losing companies shot to the moon. All of the major stock market indices surged to record levels. The “fundamentals” in this stock market boom were easy money and speculative mania.
Now that the Fed has gone to a tighter monetary policy, the air is coming out of the stock market. Some of the most speculative stocks have collapsed by 70, 80, or even 90 percent. The tech-heavy NASDAQ has dropped over 34% from its highs. As WolfStreet accurately points out, the huge surge in the stock market that really started back in 2009 was fueled by money printing and artificially low interest rates.
And now we have QT and surging interest rates, and the whole circus is coming apart. Lots of these startups that became highfliers will end up in bankruptcy. Some already have. But it will drag out for a few years because there is still so much money floating around, and people are still dip-buying, and they’re still picking up these now penny stocks to try to make 100% in three days or whatever, it’s just like crypto trading.”
As WolfStreet notes, “There’s other crazy stuff that came out of the money-printing and interest rate repression era.” There are other bubbles. And they are all deflating.
Some have already imploded like a thousand US stocks and a gazillion cryptos and crypto companies. These 13 years of free money have turned out to be very costly afterwards.”
The only way to pump the bubbles back up is to go back to easy money. But that means more price inflation. That puts the Federal Reserve in a no-win situation. It can stand firm in its inflation fights and let all of the bubbles deflate – which means a deep, painful recession. Or it can reverse course and try to rescue the bubble economy with more inflation.
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