One route leads to the return of market fundamentals and sane stock valuations, at the cost of a historic market correction.
The other route leads to runaway hyperinflation that eats up the debt almost as fast as it devours the dollar’s buying power. That would likely cause the dollar to lose its hegemony as global reserve currency and bring about a simultaneous market collapse.
Here’s where we are, and where we might be going…
How did we get here?
For the most part, through Fed interventions that suppressed interest rates for the last 13 years, creating artificial demand for U.S. IOUs in the form of bonds, and generally maintaining an “easy money” policy. (And let’s not forget the hundreds of millions of stimulus checks, unemployment extensions, fraud-riddled Payroll Protection Program and the other boondoggles associated with the pandemic lockdown.)
Now, all this works great. For a while. The Fed came out of the Great Recession with $2 trillion on its balance sheet. Today, over a decade later, its balance sheet sits at $8 trillion. And climbing.
Let’s reiterate: This works great. For a while.
Junk-rated companies are able to borrow massive amounts of money (and spend it all on bitcoin, sure, why not?) at absurdly low rates, only 3% over the “safe rate” offered by Treasurys. Everyone who owns stocks made money, at least on paper. We’ve already watched stock valuations climb into the stratosphere as lockdown-addled day-traders took their stimmies to the Robinhood casino to play with the /WallStreetBets and AMC apes. We’ve seen home values skyrocket (15% annually in April 2021 and currently about 30% higher than the peak of the housing bubble).
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