Author: Charles Hugh Smith

The rot caused by easy money will only become fully visible when the hollowed out institutions start collapsing under the weight of incompetence, debt and hubris.

We have yet to reach a full reckoning of the consequences of the era of easy money, but it’s abundantly clear that it ruined us. The damage was incremental at first, but the perverse incentives and distortions of easy money–zero-interest rate policy (ZIRP), credit available without limits to those who are more equal than others–accelerated the institutionalization of these toxic dynamics throughout the economy and society.

Fifteen long years later, the damage cannot be undone because the entire status quo is now dependent on the easy-money bubble for its survival. Should the bubbles inflated by easy money pop, the financial system and the economy will collapse into a putrid heap, undone by the perversions and distortions of endless easy money.

Easy money created destructive, mutually reinforcing distortions on multiple fronts. Let’s examine the primary ways easy money led to ruin.

1. The near-zero rate credit was distributed asymmetrically; only the wealthiest few had access to the open spigot of “free money.” The rest of us saw mortgage rates decline, but we were still paying much higher rates of interest than corporations, banks and financiers.

If we’d all been given the opportunity to borrow a couple million dollars at 1% and put the easy money into bonds yielding 2.5%, skimming a low-risk 1.5% for producing nothing, we’d have jumped on it. But that opportunity was only available to banks, the super-wealthy, corporations and financiers.

The charts below show the perverse consequences of offering the wealthiest few limitless money at near-zero rates while the rest of us paid much higher interest. The wealthiest few could buy income-producing assets on the cheap at carrying costs no ordinary investor could match. Since there was so much “free money” sloshing around for financial elites to tap, the demand for income-producing assets soared, pushing prices into the stratosphere. These enormous increases in valuation generated stupendous capital gains for the wealthiest few.

Look at 2009 as the starting point in these charts, as that’s when the Federal Reserve instituted ZIRP and opened the spigots of easy money to “those with first access,” i.e. banks, corporations and financiers.

Here we see how the assets of the top 0.1% more than tripled since 2009, far outpacing inflation.

The net worth of the top 1% went ballistic as well. Nearly free credit is rocket fuel if you’re first in line and nobody else gets the same interest rate.

The bottom 50% of American households lost ground in the era of easy money. This is not coincidence, it’s direct causation: give the lowest interest rates and unlimited credit to the wealthy, and they will buy up the most productive assets, leaving crumbs for the rest of the American citizenry.

Here’s the Fed balance sheet, the money they created out of thin air and injected into the cheap-unlimited-credit-for-the-wealthy machine.

Note how the easy money sparked federal borrowing. Federal debt was under the line of GDP expansion until 2009, at which point it took off in a parabolic ascent. Now that interest rates have finally normalized a bit, the gargantuan interest on this debt will be extracted from the citizenry via higher taxes and/or reduced federal spending. (Giveaways to wealthy political donors will of course remain untouched, along with tax havens for the super-wealthy.)

The social perversions of easy money are equally destructive. When it’s cheap and easy to borrow more money, that becomes the “obvious” way to deal with challenges. This incentivizes enterprises and institutions to advance those with skills in finance and PR rather than in management.

With the discipline imposed by the cost of money gone and the expansion of opportunities to reap fortunes by pyramiding credit and leverage, competency was redefined from management focused on increasing productivity and cutting costs through efficiencies to extracting the soaring value of existing assets: nothing new was produced but yowza, a lot of people sure got rich.

The rot created by easy money has seeped into every fiber of our social, political and economic orders. Correspondent D.T. drew a direct line between easy money and the decline of competence in The Powers That Be:

“Nepo(tism) babies selected by accident of birth without any tempering in flames… cocooned in their own reality, disdainful of the unselected, coddled and hothoused, ignorant of history and, worst of all, supremely confident in the superiority of their own righteous abilities… because when you get first dibs on the free money there are no consequences you can’t buy your way out of.”

Is there any doubt that what some are calling The Disconnected Elite (DE) have fortified their Ivy League-luxe-enclave bubbles and unearned privileges with the easy money that comes with their position atop the heap? The cost of this elevation of incompetence, the complete disconnection from the realities of everyday Americans and the hubristic confidence in their own talent–i.e., believing your own PR–has hollowed out the nation’s institutions in ways those outside the institution cannot yet observe.

The rot caused by easy money will only become fully visible when the hollowed out institutions start collapsing under the weight of incompetence, debt and hubris.

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Speculation has its own expiration dynamics, and they don’t depend on us recognizing speculative excess for what it is. They will unravel the excesses regardless of what we think, hope or deny.

Now that debt is rising faster than “growth,” and “growth” is dependent on speculative credit-asset bubbles, the collapse of the Keynesian dream looms large.

Blowback has its own dynamics, as we’ll learn in the decade ahead.

One of the most durable expectations in the financial sphere is that inflation will drop sharply in a recession and the Federal Reserve will lower interest rates back to near-zero. There is a good reason to doubt this: rising wages. Yes, we all hear about the millions of human workers who will shortly be replaced by AI–wonderful for corporate profits!–but few pundits bother looking at long cycles in interest rates and inflation, and even fewer pay any attention to the absurdly extreme asymmetry of labor and capital.

As I’ve often noted here, labor’s share of the economy has fallen for 45 years. Only recently did it reverse slightly. It’s not yet clear if this was a brief false-breakout ot a change in trend, but there are good reasons to expect a secular, cyclical reversal that lasts years or even a decade.

In other words, a decade in which labor / wages gain at the expense of capital.

There are two basic narratives that are offered as explanations for how capital siphoned $50 trillion from labor over the last 45 years. One is that the macro-forces of globalization and financialization inherently favor capital and reduce labor’s leverage as production and jobs were offshored and US workers entered a race-to-the-bottom competition with developing nations’ low-cost workforces–a competition that kept US wages stagnant even as US corporate profits and financial assets soared.

The other narrative starts with the observation that the erosion of wages and the glorification of corporate power was the direct result of specific policies being adopted.
The dominance of corporate interests and the stripmining of labor were anything but inevitable: it was
engineered by policies that enriched the top 0.01% (the Financial Aristocracy), and the
top 10% who own 90% of America’s productive capital.

This wholesale transfer of wealth and income from workers to Capital was documented
by a RAND Corporation report,

Trends in Income From 1975 to 2018.

Time magazine summarized the findings:

The Top 1% of Americans Have Taken $50 Trillion From the Bottom 90% —
And That’s Made the U.S. Less Secure.

(We’re told the stagnating wages of the past 45 years) were the unfortunate but necessary price of keeping American
businesses competitive in an increasingly cutthroat global market. But in fact, the $50 trillion
transfer of wealth the RAND report documents has occurred entirely within the American economy,
not between it and its trading partners. No, this upward redistribution of income, wealth, and
power wasn’t inevitable; it was a political choice–a direct result of the trickle-down policies we chose
to implement since 1981.

The net result of this four-decade siphoning of wealth/income from workers was
documented by a Foreign Affairs article:
Monopoly Versus Democracy:

Ten percent of Americans now control 97 percent
of all capital income in the country. Nearly half of the new income generated since the global
financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens.
The richest three Americans collectively have more wealth than the poorest 160 million Americans.

In other words, the bottom 90% have very little stake in the status quo: they receive
essentially zero income from America’s stupendous $140 trillion hoard of private wealth and
have essentially zero political influence, as documented in

Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens.

We can see these realities in the data /charts.
As the charts below (courtesy of the Federal Reserve FRED database) show, wages’ share topped out in the early 1970s and trended down for 45 years. Corporate profits skyrocketed 15.7-fold since 1982 while inflation rose “only” 3-fold.

This decline in wages is mirrored by a corresponding decline in the wealth of the bottom 90%. It’s not just wages that stagnated–so did the share of the nation’s wealth held by the middle class / bottom 90%.

The middle class’s share of private-sector wealth (total net worth) has plummeted from 37% in the early 1990s to 28%, a decline of $12 trillion compared to what would have been the case had the middle class continued to hold 37% of net worth.

$50 trillion here, $12 trillion there, pretty soon you’re talking real money that’s been transferred from the wage-earning peasantry to America’s Financial Aristocracy.

We see this vast asymmetry in who collects the primary engine of wealth for the top few: capital gains. Those who already own most of the wealth have pocketed the stupendous gains of the past three decades.
Middle class households pocket $4,000 or $5,000 in annual capital gains while those who own most of the wealth pocket on average a cool $1 million–200 times the middle class gain in unearned income.

So why will wages rise, regardless of deflation and AI? Catch-up and blowback. Even if we accept the “gee, we were helpless to stop wage stagnation” story (which is false, as detailed above), financialization and globalization are reversing and so labor can finally play catch-up to capital’s asymmetric gains.

If catch-up is suppressed by corporate political power, then blowback kicks into gear. The workforce has had enough of corporate-state pillaging, and while corporations are gleefully planning the elimination of their human workforce via AI and automation, that fantasy isn’t going to play out as expected, for automation has limits which I discuss in my book

Will You Be Richer or Poorer?.

Nobody thinks that there could be political limits on corporate power, but precious few asymmetries that reward the few at the expense of the many last forever. Blowback has a remarkable ability to careen from nobody notices or cares to full-blown revolt in relatively short order. The greater the asymmetry, plunder and hubris of the Aristocracy, the greater the eventual swing of the pendulum to the opposite extreme. Blowback has its own dynamics, as we’ll learn in the decade ahead.

Wages–and the inflation they generate–are going up for good whether anyone thinks this is possible or not. And inflation pulls interest rates higher, whether anyone thinks this is possible or not. It’s not just the Federal Reserve that matters; asymmetries, exploitation and plunder matter, too.

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Extremes keep getting more extreme, but for those at the top of the heap, it’s all fine. For everyone else slipping down the ladder, all that FINE adds up to Fragile, Insecure, Nonsensical, Expensive.

Readers occasionally point out I’ve been predicting that unsustainable extremes will eventually unravel for 10+ years, yet everything’s still fine. Yes, everything’s still fine, maybe even peachy, but perhaps we should describe “fine” in light of the policy extremes that keep getting more extreme to keep all that fineness duct-taped together.

How about this for FINE:

Fragile

Expensive

To assess just how extreme things have become beneath the placid surface of peachiness, let’s look at federal debt, the Fed balance sheet and Household Net Worth in relation to inflation and GDP, two standard measures of growth.

All else being equal, most economic-financial metrics will roughly track either inflation or Gross Domestic Product (GDP), the broad measure of the economy’s activity / expansion /contraction.

In other words, one way to identify extremes is to look for metrics that are way out of line with GDP and inflation.
Consider federal debt as an example. We can be forgiven for assuming federal borrowing would more or less track the expansion of GDP.

But as the chart below shows, if federal debt had tracked GDP since 1990, it would be around $16 trillion, half of its current bloat of $32 trillion. Hmm, $16 trillion here, $16 trillion there and pretty soon you’re talking real money.

The GDP of Japan is around $4.3 trillion, the GDP of Germany is about $4 trillion, so that $16 trillion in “excess federal borrowing and spending” is the equivalent to four GDPs of the third and fourth largest economies in the world (just behind the US and China).

Does an “excess $16 trillion” of federal debt qualify as extreme? I think the fair conclusion is “yes.”

Next up, the Federal Reserve Balance Sheet, which reflects the sum created out of thin air to buy US Treasury bonds and mortgage-backed securities as the means to inject gobs of US dollars into the financial system as liquidity for speculation.

Hmm, if the Fed balance sheet had tracked GDP, it would have risen from around $700 billion in the early 2000s to a meager $1.8 trillion, a far cry from its current level of $8.6 trillion. In round numbers, this is about $7 trillion in “excess Federal Reserve stimulus,” not quite the combined GDPs of Japan and Germany but hey, $1 trillion at these levels is a mere rounding error, right?

Now let’s look at the really, really fine part of the extremes, Household Net Worth: all the plump, juicy wealth created for the top 10% who own the vast majority of financial assets to enjoy.

If Household Net Worth had tracked GDP, it would total about $90 trillion, $50 trillion less than its current level of $140 trillion. You see what’s really fine here: the federal government injects $16 trillion in excess stimulus, the Federal Reserve injects $7 trillion in excess stimulus for a total of $23 trillion, and the top 10% reap $50 trillion in excess wealth: yowza, that’s a really fine investment!

Of course private and corporate debt has soared along with federal debt, but never mind the details. $50 trillion in excess wealth is roughly twice the size of America’s GDP of $26 trillion. That’s a lot of extremely fine wealth to play with.

But all this really fine wealth hasn’t exactly been evenly distributed. It turns out the bottom 50% of households lost ground since 1990, as their share of the total household wealth fell from about 4.5% to 3% (see chart below).

The middle class (the 50% to 90% segment of households) also lost ground, as their share of wealth fell from above 36% to less than 29%. A 7% decline may not sound like much, but recall that each 1% is $1.4 trillion, so that 7% decline adds up to roughly $10 trillion in today’s total wealth of $140 trillion.

Meanwhile, back at the Really Fine Ranch, the top 1% saw its share of the wealth soar by 40%, from 23% to 32%.
It seems some have received more fineness than others.

Extremes keep getting more extreme, but for those at the top of the heap, it’s all fine. For everyone else slipping down the ladder, all that FINE adds up to Fragile, Insecure, Nonsensical, Expensive.

New Podcast:
Its a Waterfall – Risk, Collateral & Productivity (48 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print):

Self-Reliance in the 21st Century.

Read the first chapter for free (PDF)

Read excerpts of all three chapters

Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)

My recent books:

The Asian Heroine Who Seduced Me
(Novel) print $10.95,
Kindle $6.95

Read an excerpt for free (PDF)

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel)
$4.95 Kindle, $10.95 print);
read the first chapters
for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print)

Read the first section for free

Become
a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email
remain confidential and will not be given to any other individual, company or agency.