Washington Is Creating A Wall Street Bubble, One Bank Suggests

“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.


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4 thoughts on “Washington Is Creating A Wall Street Bubble, One Bank Suggests

  1. Zero or negative interest rates are a game changer. Who is to say the s&p or dow is overvalued while base interest rates are so low. The stock market is the only game in town.

  2. If we can’t reengineer the human psyche, can we ever fix global socio-economic disfunction. We may have reached our limits as a species. As Yuval Harari asks, what evolves from homo sapiens?

    1. ” … what evolves from homo sapiens?” I don’t expect anything does. Every other previous version of humanoid being on earth died off. No reason to expect that we should be any different.

      1. I remain cautiously optimistic given dogma is the primary hindrance to actually building a functional sustainable civilization. We have the resources and technology build it. We just have a failure to imagine it and a handful of very powerful yet very scared and small people standing in the way. We’ve been in preposterous dystopia long enough that we either embrace the death throws of civilization or try Utopic concepts just because it seems less stupid than dying off out of spite for good ideas.

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