"Addicted"

"Addicted"

by Charles Hugh Smith

"I realize nobody wants to hear that most of their "wealth" was conjured out of thin air, but there it is: and that which was conjured out of thin air will return to thin air. Something for nothing is a powerful attractor, but it doesn't offer a narrative that the delusionally self-important demand: I earned this by working hard and being smart. Oh, right, yeah, sure. It had nothing to do with currency being created out of thin air and made available to insiders, financiers, banks, etc., or being able to leverage this new money into ever-larger bets, all guaranteed to be winning trades by the Federal Reserve. Nope, you're all stone-cold geniuses.

Back in reality, tangible assets - real as opposed to financial conjuring - are at historic lows relative to financial-bubble assets. Tangible assets represent such a meager proportion of total assets that we might assume they could slip to zero without affecting our "wealth" much at all.

The Fed Is the “Greater Fool”: If we compare financial-bubble assets to the nation's Gross Domestic Product (GDP), a (flawed) measure of real-world activity, we find they’re worth over six times the nation's real-world economy. This reflects what happens to valuations when "money" is created out of thin air and then leveraged into fantastic, monstrous illusions of "wealth." Assets are chasing their own tails higher, completely disconnected from the real world.

Here’s the sole dynamic driving assets higher: the Fed is the “greater fool.” What do I mean? Everyone knows the Fed will always save the day. Should valuations falter, buyers know there will always be a greater fool willing to pay more for an overvalued asset because the Fed has promised us it will always be the greater fool. This obviously isn’t just plain old normal healthy "capitalism" at work.

So by all means, lavish yourself with praise for your hard work and genius, and keep chasing your own tail because the Fed has promised us it will always be the greater fool. What a pretty fantasy. But aren’t we on "the road to recovery?” The "recovery" has an unfortunate but all-too accurate connotation: recovery from addiction.

No Recovery From Addiction to the Fed’s Free Money: The "recovery" does not include any treatment of the market's addiction to Federal Reserve free money for financiers. Rather, the "recovery" is entirely dependent on a never-ending speedball of Fed smack and crack and a booster of Fed financial meth.

The addiction to Fed speedballs had already turned the entire financial sector into a casino of lunatic junkies who delusionally believe they're all geniuses. Beneath the illusory stability of the god-like Fed has our back, the addiction to free money has completely destabilized America's social, political and economic orders by boosting wealth and income inequality to unprecedented extremes.

While it was convenient to blame the carnage on the response to the Covid pandemic, the damage to the speedball-addicted financial system had already reached extremes before the pandemic. The addiction began decades ago, but like all addictions, the amount of stimulus needed to maintain the high keeps expanding, and eventually the need can't be met without toxic doses: then the junkie addicted system collapses.

Both Smack and Crack: The ever-greater doses of Fed speedballs had unleashed both deflation (smack) and inflation (crack). Real returns on ordinary savings had been crushed to zero (deflation of ordinary income), and as the cost of capital/credit had been dropped to near-zero, then the purchasing power of wages has deflated while the speculative gains of those who own assets have soared (asset inflation).

By lowering the cost of capital to zero, the Fed had generated fatally perverse incentives. With the cost of capital at zero, it made sense to buy labor-saving technologies to replace costly labor - labor that is costly to employers because of America's perverse sickcare system, which burdens employers with ever-higher costs.

Not only have the Fed's free-money speedballs made it essentially free for financiers to speculate in the stock market casino, the Fed had rigged the game and bailed out its cronies whenever their bets soured. This has fueled infinite moral hazard: Go ahead and gamble with free money from the Fed, and go ahead and leverage it up 10-to-1 because the Fed will bail you out if you lose, but if you win, the stupendous gains are yours to keep.

The problem with addiction is you're dependent on the high, no matter what the eventual consequences may be. Long-term consequences are ignored because all that matters to the addict is to get the next Fed speedball and throw it on the gambling table to keep the high going.

Our entire economy is now dependent on ever-expanding speculative gains. Should the casino winnings falter, our economy will crash. And given the primacy of money and consumption in our society and political system, the financial collapse of the Fed's casino lunacy will sweep those systems over the falls.

The Fatal Consequences of Addiction: As the level of Fed smack and crack needed to maintain the high increases, system fragility increases geometrically. The irony of addiction is that when the crack/meth kicks in, the addict feels god-like, in control, invulnerable. This artificial confidence is entirely illusory, a deadly combination of delusion and hubris. In this delusional state of supreme confidence, the addict loses touch with reality, i.e. the fatal consequences of the addiction. That's the detour we've taken in becoming addicted to the Fed's free-money speedballs.

Now the road to recovery has ended in a trackless wilderness. There is no way back and no way forward. The addict's addled confidence will push them into the ice-cold river. And as they're swept over the falls, the realization that it was all a drug-induced delusion will come too late to make a difference."

- dailyreckoning.com