The Fed Stole The American Dream
The Federal Reserve is responsible for far more of the evils in this world than you can possibly imagine.
For the last few decades, homelessness has been on the rise in virtually every major American city. Drug addiction and mental health issues are of course the driving factors- below is a graph of the amount of homeless using shelters in New York. We can see spikes in the late 1980s due to the crack epidemic, but the rate stabilized until the aftermath of the 2008 financial crisis. Due to deflationary forces rippling through our economy, mass layoffs and home evictions, millions of people across the States lost their housing and became desperate.
The Fed responded to the housing bust with a massive influx of cash into mortgage-backed securities. Cumulatively, since 2008, the Fed owns more than $2.6T of MBS. This caused massive asset price inflation in the housing market and led to enormous wealth gains for those who owned real estate- but those who did not, or lost their homes in the bust, now saw skyrocketing home values but did not have any equivalent jump in income to compensate.
This caused what is called "economic despair", similar to the opioid crisis plaguing midwestern "rust-belt" cities. The median age of a new homebuyer has risen steadily since 2008- due to the higher prices of homes, many were priced out of the market. Only middle-aged folks had the wealth to pay for these expensive homes- boosting homelessness across the spectrum but especially in young people.
With a collapsing economy and slowly rising rent and home prices, dozens of thousands of people were pushed onto the streets each week- and did not have a way back into housing. They turned to drugs, crime, and more to deal with the pain and anxiety.
Economic self-reliance- especially for men, is closely linked to rates of depression and suicide. When the jobs in the city leave, the houses get too expensive to own, and the school tuition skyrockets; many feel an overwhelming hopelessness and turn to self-destructive habits to cope with the pain.
Typically in a recession the Treasury will increase spending to cushion the blow to workers- and in 2009 they did extend a few unemployment benefits. But, by and large, Congress authorized few benefit programs for workers, and the average time on the benefit decreased after a slight bump in 2009. At the same time, the Fed was pumping massive amounts of cash into the banking system, boosting equity and bond prices to cope with the fallout of '08.
This caused the beginning of a massive bull market- 70% of the gains for the last 30 years have occurred since the Fed began their massive QE program.
This would benefit the real economy, they claimed- creating what is called a "wealth effect", the behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. They are made to feel richer, even if their income and fixed costs are the same as before.
However- who does this really benefit? Studies show that the majority of the equities are owned by the top 10% in terms of wealth- in fact, these wealthy individuals own 89% of all listed US stocks!
The wealthiest 10% of Americans own a record 89% of all U.S. stocks
The median American worker saw his bosses become enormously wealthy, without additional work or effort put in, while his/her wages were stagnant for basically the entire decade. This further contributed to economic despair and gave people a sense of a "rigged system" and that the American dream, touted by the Baby Boomers and those before them, was now dead.
Upward mobility became increasingly difficult as home and asset prices rose without a corresponding increase in median wages. Something had changed since 2008. Although the NBER (National Bureau of Economic Research) claimed that we had only experienced a recession, if we use their original terminology we actually had been through a depression.
Depressions were originally defined as prolonged periods of economic underperformance, which by all indications we were experiencing. GDP nominally was rising, but much of that could be attributed to increased government spending (a component of GDP) and the base effects of recovering from a weakened economy. NBER estimates we underperformed GDP potential by around $8.2 Trillion in real growth since ’08, which would have mostly gone to middle and working-class workers in the form of wages.
see here:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5959048/
Although unemployment spiked post 2008 and then began falling, a large part of the reason for this is how unemployment is actually calculated. They include people who do not have jobs and are actively looking for work- but what about those who have given up and no longer are looking? they are not included in these stats- which is why we see a falling Labor Force Participation rate (above) even when the unemployment figures are reportedly falling.
Millions of Americans have left the workforce- and many of these people have ended up homeless, addicted to drugs, and worse. According to the National Institute on Drug Abuse, almost 100k people lost their lives in 2020 due to an overdose- 5x the rate of the early 2000s.
The Fed has also worked to suppress interest rates to the zero bound- stimulating credit growth and pushing money out on the risk curve. This brought enormous sums of cash into the tech space, where companies received insane multiples on incredibly low earnings. Tech linked indices, like the NASDAQ, saw enormous price gains in excess of the other "blue chip" stocks of the real economy. Facebook, Apple and Google became trillion dollar companies and VCs were willing to pour in unlimited funding for whatever the tech giants wanted.
This virtually unlimited cash gave the tech firms the resources to supercharge their apps to become mass psychology manipulation tools- to addict young people, causing anxiety and depression. Worst of all, it pushed suicide rates up, especially among young girls, who were fed unending comparisons and social judgment from their peers in the digital milieu.
These apps have gotten more ubiquitous and more entrenched over time- if any young person wants to be relevant and have friends, they are pushed to buy into these harmful apps.
Of course, some may say this was inevitable, as the tech giants would eventually be pushing for profit and exploiting these children anyways- but the Fed certainly sped up this process significantly by lowering interest rates and allowing unprofitable tech firms to borrow freely, pushing up valuations and allowing them to raise mind boggling amounts of cash.
Money is power, and power can buy many things, even the ability to influence minds.
Young people nowadays are in most ways actually worse off than their parents. They can't buy a home. They can't afford school. They can't get a good job. And this issue is causing societal-wide consequences, like a falling marriage and birth rate.
Couples typically only marry when they can afford their house- although it is commonplace in Latin American and Asian cultures for a married child and spouse to live with parents, this is taboo in the states, where owning a property is considered a rite of passage.
General rates of depression are rising- humans are made for community, for intimacy.
We need each other.
And by pricing couples out of the housing market, destroying jobs, and hiking asset prices, the Fed has seriously damaged the ability of young people to date and have children. Thus the birth rate is collapsing in the US as well, which portends some disastrous consequences in the next 40 years.
Small generations beget small generations- and we may begin a death spiral, similar to Japan where overwhelming amounts of old people are retiring, with no one to replace them. This decreasing population means less workers, less products, and a less industrious economy- creating economic stagnation and decline in the long run. Furthermore, it puts severe strain on the retirement system, such as social security.
The Social Security trust fund most Americans rely on for their retirement will run out of money in 12 years, one year sooner than expected. And this is an optimistic estimate.
The outlook also threatens to shrink retirement payments and increase health-care costs for older Americans. When the program was created, over 6 young workers were paying in for every 1 retiree receiving benefits. That figure is now less than 3:1, and is soon falling to 2:1.
This was a very interesting article. I'll politely disagree with a few key points. I believe these points were critical to the thesis, but I must say that I love the picture you created to represent Jerome Powell. Outstanding.
These critiques are not meant to come across as attacking. Just sharing a few observations.
I'm going to assume the wording about the Treasury increasing spending was just a phrasing issue, so I'll skip to the other things.
1. “This caused the beginning of a massive bull market- 70% of the gains for the last 30 years have occurred since the Fed began their massive QE program.”
Well, that was about 15 years ago. So that’s 50% of the time.
Why were gains so much better during that period? Because the measurement starts during a recession (or a depression as you assert, and I think there is a fair case for that). Just about any diversified portfolio will perform better coming out of a recession or depression than going into it.
2. The reason the wealthiest 10% of Americans own 89% of all U.S. stocks is not because interest rates are low. This is simply R > G. When the rate of return on assets is greater than the growth rate of the economy, we see wealth trend towards being more concentrated. There was a pretty huge book about this a few year back. Made some people very mad.
To keep it brief, we've seen wealth compounding because the returns on capital are much higher than the growth rate of the economy.
3. “The median American worker saw his bosses become enormously wealthy, without additional work or effort put in, while his/her wages were stagnant for basically the entire decade.”
The typical “boss” for most workers is just another employee with minimal to zero equity. They didn’t get rich. Their wages stagnated also. The executives got rich. The owners saw wealth compound. But the “boss” that most people see on a day-to-day basis is just another broke employee trying to look like they have it together.
A very interesting article, but I think you picked the culprit before examining the evidence. When the Federal Reserve dropped interest rates to zero, it reduced expenses for people with negative wealth. It drove stock prices much higher, but it drove interest payments down. The vast majority of interest payments go to wealthy individuals, because they are the ones with the capital to make loans and buy bonds.
Today, Jerome Powell has raised rates significantly. His goal was explicitly to break the back of labor. He spoke clearly about trying to reduce worker's bargaining powers so that wages could not keep up with prices. He was interested in breaking inflation by ensuring workers couldn't afford to maintain demand. It isn't a conspiracy. He said it straight into the cameras. The goal was to keep returns on capital higher. It wasn't pushing prices up, it was pushing the payments up. That's why interest rates are soaring.
Socialist security is a terrible system. It was terrible from the start. That's why it is mandatory. If it was optional, most people would opt out. It is essentially a giant Ponzi scheme with the government mandating all workers join the scheme and continue to pay into it. Yes, fertility rates are falling. Young generations are facing record debt levels and extremely weak wages. Many were defrauded by their colleges as they signed up for tens of thousands in debt, sometimes hundreds of thousands, expecting a good job that doesn't exist. Wages suck and they owe multiple years worth of income for debt that in many cases financed a worthless degree.
What do you do? You opt out of reproducing. Kids are a huge financial drain.
There's going to be a reckoning. The labor force is shrinking, but the number of people is not. It's real simple math. Fewer people working and more people eating means less to go around.
You're right about the situation facing young people, but the Federal Reserve's involvement is jacking up rates today to weaken employees.
Reposting as I think I forgot to use to "share a note".