The sheer scale of the Federal Reserve’s post-Lehman quantitative easing experiment can be gauged by the fact that its balance sheet is now $8.3 trillion or 1/3 the American GDP. In contrast, on the eve of Lehman Brothers failure on 15 Sept 2008, The Fed’s balance sheet was a mere $900 billion.
Yet the Bernanke Fed’s revolutionary experiments in monetary policy applied by J. Powell in 2020 to combat the COVID virus shock, generated the weakest economic recovery since World War II. The Fed is also way behind the inflation curve in the real world despite Chairman Powell’s insistence that inflation is “transitory”. More significantly, the Fed has deepened inequality between rich and poor across America and the world.
Since the US dollar is a global reserve currency and the Fed is the planet’s de facto lender of the last resort. Investors lucky enough to own large cap technology stocks on Wall Street multiplied their wealth 10X or more. Yet billions of human beings worldwide have been devastated by anaemic growth, flat wages, the deflationary chill of globalization and, above all, the pandemic shock in 2020.
The Nasdaq 100 of large cap US tech stocks has a triple leverage index fund whose symbol is TQQQ. A mere $100,000 invested in TQQQ in 2010 is now worth $17,600,000 before last week’s market tantrum. This fabulous scale of wealth creation is simply unthinkable anywhere outside Silicon Valley.
The Fed’s money printing experiment slashed returns on risk free US Treasury debt and forced investors to buy higher risk, long duration growth equities. Bank lending as a proportion of GDP declined since 2010 while financial markets on Wall Street scaled all time highs. Counter-factuals are as incredible in economic history as in geopolitics. Yet it is safe to argue that the global banking village was on the precipice of systemic Armageddon in September 2008 when the Bush White House recklessly let ostensibly “too big to fail” Lehman Brothers file for Chapter 11 bankruptcy.
It is also safe to argue that the world economy would have slipped into another Great Depression in April 2020 had the Powell Fed not injected $3.5 trillion in emergency liquidity into the money markets. The Fed is now not just Wall Street’s lender of the last resort but the world bond market’s buyer of the first resort.
It is no coincidence that the financial markets are now hostage to every nuance of Fed policy since its money printing tsunami has distorted the very risk management DNA of global investors and spawned speculative casinos in luxury assets from Patek Philippe watches to Jumeirah Bay waterfront mansions.
The Fed, like the ECB must now confront the fateful trade off between economic growth and rising inflation. US home prices have risen almost 20% in the past year, US wages are creeping higher as 11 million jobs remain vacant and Brent crude has doubled since last summer. This time, the inflation wolf is here.
Matein Khalid is Chief Investment Officer at Asas Capital