On Monday, with the markets struggling to claw-back some its overnight losses, Federal Reserve Chair Jerome Powell announced that the Fed had decided to pull the trigger on “purchasing” individual corporate bonds—an escalation of its quantitative easing measures aimed at thwarting a dangerous liquidity “crisis.” This move represents one of the greatest lies ever perpetrated on the American people—one that conceals an expanded bailout of the rich and a further fleecing of the middle class via the greatest redistribution of wealth in history.
The Fed claims this move was a necessary reaction to a growing liquidity crisis in the bond market. Sounds like a legitimate reason to take action to thwart a dangerous problem, right?
Not so fast. What exactly is a liquidity problem?
Simply put, a liquidity problem merely means there is a lack of buyers.
Every transaction in the markets requires three things: a willing buyer, a willing seller, and an agreed upon exchange price.
Again, a liquidity problem simply means there are lots of willing sellers at a given price point… but not so many willing buyers.
In this case, you have a lot of rich folks holding highly risky individual corporate bonds—debt instruments issued by seriously struggling companies. These wealthy investors desperately want to deleverage their portfolio risk and cash out of these bonds (for a massive profit).
However, there aren’t enough willing buyers—nobody wants (and rightfully so) to buy these risky instruments given the economic concerns we (and the world) are facing.
So, what happens? The price falls as liquidity constriction exerts downward pressure on them. That’s what happens in a free market—the participants (aka the invisible hand of the market) determine the fair price of said instruments based on aggregate perceived value.
However, the Fed doesn’t want the price to fall because their wealthy buddies will lose a LOT of money.
So, it is stepping in to fix the problem and bail them out—under the guise of rescuing the markets (and America) from a great and evil liquidity crisis.
No buyers? No problem—the Fed will become the buyers!
And, with an unlimited checkbook, it can become as many buyers as needed to keep the price propped up until the wealthy have been able to get out.
This leads to a virtual smorgasbord of issues; however, I want to specifically address four primary problems that result from the Fed’s and create a clear and present danger for not only our financial system but our overarching society as a whole.
Destruction of Price Discovery—Beware: Markets Are No Longer Free or Efficient
The first major problem with the Fed’s action is that it continues to destroy the price discovery process.
In a functioning free market, it is the responsibility of the buyers and sellers to perform their due diligence and determine their perceived value of a financial instrument (e.g., equity shares or bonds). In other words, together, they determine the underlying value (i.e., market valuation) and fair market price.
This is the invisible hand of the markets at work (coined by Adam Smith)—predicated on the power of the aggregate market. It’s what makes the market efficient—representing all the sum of all knowledge and possible combinations of competing interests.
However, when the Fed steps in to function as a buyer, it doesn’t care what the underlying value of the asset is. Rather, its purpose is to protect the wealthy by buying at a given (elevated) market price—regardless of what the market (i.e., the real buyers) say it should be.
Aggregate knowledge no longer matters—just the limited knowledge of the central planners. A balance between competing interests no longer exists—just the singular interest of the central planners.
This not only destroys price discovery—a critical feature of a free market system—but it massively degrades market efficiency.
What we are left with is an artificially manipulated (crony rather than free) market—one where the Fed (government/central planners) sets the market price.
This begs the question: How is this any different from the dreaded and vilified Chinese manipulation its currency??? (Answer: It is no different!)
Creation of a Massive Financial Bubble (Or Further Inflation of a Pre-Existing One)
The price discovery (and efficiency) problem inevitably leads to the next major problem—namely, the Fed’s actions create a financial bubble… or expand an existing one into the mother of all bubbles.
Liquidity is a natural process by which the market adjusts to appropriate valuations (prices)—based on the aggregate opinion.
By artificially pumping liquidity into the markets, the Fed is usurping the opinion of the broad market and declaring what valuations should be—meaning higher.
This inescapably creates a bubble—a market that is priced higher than its underlying “real” value.
The more the Fed attempts to inflate that bubble—the bigger it (the delta between true valuations and the current Fed-induced valuations) gets.
Now, if the Fed took a similar action when the liquidity spread moves in the opposite direction (more buyers than sellers), then you would eventually stabilize and slowly deflate that bubble.
However, there are two flaws with this hope.
First, that would mean the Fed is borrowing from future gains to stem current losses. In other words, we would have a flat market for decades—similar to Japan’s lost decade(s).
There is no free lunch—those artificial paper gains must be paid back. Folks don’t want to acknowledge that.
Second, the Fed has never—that’s NEVER—been able to implement quantitative tightening (meaning unwind its purchases). Every time it’s attempted it, the market has reacted negatively—meaning, the markets fall, and the Fed steps back in to “prevent” that fall.
Thus, it is a one-way street. An ever-expanding bubble… until it bursts. And when it bursts, it is going to be a massive explosion (crash) due to the shear size of the inflation (the delta between valuation reality and the wishes of the central planners).
To learn more about this financial bubble, check out our article Priced for Perfection: Mother of All Financial Bubbles… Or Market Has It Right?
Government Is Now Aggressively Picking Winners and Losers
Third, this is an unprecedented case of the government picking winners and losers—something it has zero business doing.
Worse, it is an unelected, unaccountable, quasi-government body doing so!
The Fed has unilaterally chosen who it is going to bailout (the winners)—the wealthy (the primary investors in bonds).
However, by doing so, it is also choosing who will be losers—the middle class. And it is doing so behind the veiled cloak of “goodness” (aka the liquidity crisis).
As we have noted, liquidity is an inescapable reality of a free market—you can’t have gains without losses. It is a symbiotic, yin and yang relationship—”a concept of dualism, describing how seemingly opposite or contrary forces may actually be complementary, interconnected, and interdependent in the natural world, and how they may give rise to each other as they interrelate to one another” (source).
You can’t have a heaven without a hell. Nature demands a balance and always seeks an equilibrium—that’s why we have weather systems. The markets—or at least free ones—are no different.
There is no liquidity crisis. It is an entirely made-up construct by the elites to avoid the dark side of the risk they took. It is not a liquidity crisis—it is merely the natural process (mechanism) by which the invisible hand of the free markets guides the markets to a place of equilibrium—where price equals the aggregate opinion of value.
In this case, the markets want to move down. However, it works in the other direction as well. Again, you can’t eliminate times of low liquidity, while solely embracing times of high liquidity—at least not while maintaining a free market.
The Fed is merely shifting the losses from one group (or class of Americans) to another. In essence, it is radically distorting the risk-reward (yin-yang) equation—shifting the curve to benefit an exclusive and tiny class of citizens at the expense of the vast majority… the commoners.
The Greatest Redistribution of Wealth in History
Finally, this artificial and harmful manipulation of the risk-reward equation is resulting in the greatest redistribution of wealth in the history of mankind.
Remember, the Fed has no faith or credit (money)—it is trading with the money of we the people. Specifically, the future money of the tax-paying citizens—the middle class.
When those risky bonds finally decline to match reality, the middle class will be on the hook for the losses. In other words, massive amounts of wealth will have been transferred from the middle class (the losers) to the wealth (the winners).
One man’s gains are another man’s losses. In this case, the elites (viz., the ruling class and the uber rich) gains will come at the expense of the commoners (viz., the middle class).
Thus, this simply represents an escalation of the Fed’s ongoing efforts—led by Jerome Powell and encouraged by President Trump and the members of the elite class (and its support network)—to carry out the greatest wealth redistribution in the history of mankind.
The result will be a further explosion of the wealth gap—and a further increase in the wealth and opportunity inequality in America. This inequality will continue to manifest itself in growing civil discontent and unrest—leading to an inescapable collapse of our socio-economic system.
That is, unless the elite are able to recognize the crisis and move to swiftly resolve the problem—something that seems all but a pipedream at this point. To learn more about the dynamics of socio-economic collapse (and why we argue it will be nearly impossible for us to avoid it), we highly encourage you to read our article Exposing the Wealth Gap: Economic Inequality Is Driving Civil Unrest.
You may also want to read Civil Unrest, Uprising, or Revolution: Harbinger of Our Dystopian Destiny?—a related article that builds on the above article and provides some additional insights—as well as suggestion for what you can do about it to be prepared.
Is there a liquidity crisis? No. There is merely a lack of willing buyers for high risk corporate bonds.
There is a liquidity “crisis” any and every time the market declines—whether by one dollar or a hundred. It simply means buyers aren’t willing to pay the current market price to own the underlying asset—they don’t perceive enough intrinsic value to justify it and therefore believe a fair price (i.e., fair market value) is lower.
It’s akin to a buyer’s market in real estate (versus a seller’s market)—again, a yin-yang relationship.
While this is entirely natural, it does mean that sellers of those corporate bonds will have to accept a lower price—potentially a much lower price—if they want to sell theirs (and deleverage their portfolios).
That’s how free markets work! With big rewards comes great risk.
Sometimes you’re the bug… sometimes you’re the windshield.
In this case, the holders of those bonds (overwhelmingly the wealthy) have been the proverbial windshield during the bull market run (reaping the rewards). Now, they should become the bug (hit by the inherent risk they accepted).
However, the unelected and unaccountable Fed has unilaterally determined (in secret) that it will flip the script and allow the wealthy to remain the windshield… and—you guessed it—the middle class will be the bug yet again.
The Fed’s decision to purchase individual corporate bonds merely represents the expansion of its ongoing and harmful strategy of quantitative easing.
This action will inevitably result in a further expansion of centrally-managed cronyism into our financial markets, a futile attempt by the elite to keep the mother of all financial bubbles inflated and the greatest redistribution of wealth in history flowing—from the middle class to the wealthy elites.
It represents one of the greatest lies every perpetrated on the American people.
It’s time for the commoners—across all socio-economic segments—to wake up and come together to save our country and system from collapse. The system is broken. We must fix it before it’s too late.
The elites will never recognize or accept this until it is too late. We the people must take back control of our democratic republic and put it back on the path to social and economic equality—one of opportunity (not outcome)—and sustainability for generations to come.
If we fail… the ultimate collapse of our profound American experiment is guaranteed.