‘On Tuesday, we learned that U.S. home prices as measured by the seasonally adjusted Case-Shiller National Home Price Index fell for the seventh straight month in January. Since peaking in June, U.S. home prices have fallen 3% on a seasonally adjusted basis, and 5% without seasonal adjustment.
‘…that 3% drop in single-family house prices marks the second-biggest home price correction of the post–World War II era.’
And this from the Wall Street Journal: ‘Most Americans Doubt Their Children Will Be Better Off, WSJ-NORC Poll Finds’:
‘An overwhelming share of Americans aren’t confident their children’s lives will be better than their own, according to a new Wall Street Journal-NORC Poll that shows growing skepticism about the value of a college degree and record-low levels of overall happiness.’
Today and tomorrow, we look at it from a different angle…and see why it is likely to get whacked even harder.
‘Don’t fight the Fed’
Karl Marx believed the driving force of social/political/economic history was the struggle between the classes.
Richard Lachmann believed it was the struggle within various elite groups.
Lachmann is probably more right than Marx. The masses pay taxes. They vote for their leaders. They die in wars. But they are not the deciders. Even revolutions are usually led by disenchanted members of the elite, not by the common man.
Lachmann is probably right, too, when he says the actual course of events is an accident…the product of competition between elite factions, along with unpredictable technological and social developments.
Not interested in macro, socio-historical blah-blah? We aren’t either. But ‘don’t fight the Fed’ has been good advice for the last 40 years. Will it be good advice for the next 40? The Fed controls monetary policy. And the federal government controls fiscal policy. Between the two of them, they decide the future of the US dollar…and the US economy. Naturally, we want to know what they’re up to.
Remember, it is not by guessing, one day to the next, about stock prices, that you really make money on Wall Street. Instead, it is by being in the right place at the right time…and staying there as the Primary Trend runs its course.
Recall, too, that the Primary Trend reversed itself — after four decades — in two turnarounds. The bond market hit a record high in July 2020. The last time it had done that was around the time we were born — in 1948. Since 2020, it has been going down.
And the stock market topped out at the end of 2021. The Dow rose by more than 36,000 points. It has been dropping ever since…with tempting bounces along the way. (One of the endearing features of a bear market is that it tries to take as many investors as possible down with it. Over the past 40 years, 1982–2022, investors learned to BTD [buy the dip]; now, every bounce leads them back into dip-buying…and then the market dips again.)
But back to Lachmann…
Divide the conquerors
In short, he may be on to something. And it may help us understand what is coming next.
The elite have approximately US$50 trillion in new wealth, thanks to the policy choices of their compadres at the Fed and the federal government over the last 30 years. Congress spent money it did not have. And the Fed financed the deficits at ultra-low interest rates. Those low rates were responsible for an orgy of borrowing and spending that 1) raised corporate profits and asset prices, 2) provided vast funds for elite projects (such as stock buybacks…the invasion of Iraq…the COVID Lockdown…), and 3) led to today’s US$90 trillion debt burden.
Historically, the US could comfortably carry debt equal to 1.5 times GDP. That is, for every dollar of output (GDP) we could afford US$1.50 worth of claims against it (debt).
But the Fed’s way-too-low, for way-too-long interest rate policy distorted the old relationships. Had normal interest rates produced normal debt levels, we’d have total debt today of about US$40 trillion. Instead, we have US$90 trillion…or US$50 trillion too much.
Who will decide what happens to the excess? Not the voters! The deciders will decide. And there are only two broad possibilities. Deflation or inflation. Either the excesses are reckoned with in the traditional, honest way — with bankruptcies, defaults, and market crashes. Or they are inflated away.
Clearly, the elite prefer inflation, because much of the ultimate cost will fall on the public, not on themselves. But here’s where it gets interesting. Lachmann tells us that when the elite is divided, it often cannot get what it wants. Republicans versus Democrats…conservatives versus liberals…left versus right — are the internal divisions so deep that the elite cannot stick together…
…and stick it to the common man?
Tune in on Monday for more…
For The Daily Reckoning Australia