“DC’s policy bubble [is] fueling Wall Street’s asset bubble,” BofA’s Michael Hartnett wrote, in the latest edition of the bank’s popular weekly “Flow Show” series.
It’s a familiar narrative. It goes something like the following.
Massive fiscal stimulus accommodated by the Fed has created fertile conditions for speculation and asset price inflation, as i) abundant liquidity looks for a home, ii) investors chase out the risk curve and down the quality ladder in search of yield, and iii) home buyers take advantage of record-low mortgage rates, overheating the housing market.
I could, of course, get more specific, but that’s the gist of it. Below are some poignant visuals (“eye candy,” if you will).
The figures (from BofA) illustrate the relative size of the dual policy “puts,” which are really just two sides of the same coin. The middlemen notwithstanding, the Fed is just monetizing the deficit. And, let’s face it, that was the case prior to COVID. If QE isn’t unwound, it’s just debt monetization — by definition.
And this isn’t solely a US phenomenon. Virtually all large western economies are engaged in the same exercise.
Regular readers have seen that chart dozens of times. (Note: It may need to be updated. The data used for the figure was current through early October.)
In any case, Hartnett’s brief piece will invariably grab a few headlines Friday, so I though it was worth highlighting here.
The issue, as ever, is that belabored efforts to obscure the charade by suggesting it’s somehow not deficit monetization just because primary dealers are involved, serve no purpose other than to keep the general public in the dark about the government’s capacity to print money and help real people. The figure (below) shows that the monetary policy transmission channel is hampered by the intermediaries.
I’m a broken record on this. Eventually, if you want fiscal and monetary largesse to manifest in real economic outcomes and not just in rampant asset price inflation, you need to merge the two and drop the pretenses.
Hartnett doesn’t get into that. Rather, he warned that “Wall Street inflation will likely drag Main Street inflation higher, risking [a] disorderly rise in bond yields (taper tantrum), tighter financial conditions, [and] volatility events.” He cited a series of historical examples.
But the bottom line is that due in part to the fact that the monetary policy transmission channel is impaired and politicians steadfastly refuse to adopt the kinds of measures necessary to ameliorate the exponential dynamics driving the wealth gap wider (and thus leading to ever more contentious socioeconomic outcomes), 41 people are now richer than the poorest 50% of humanity.