Taking a wrecking ball to a delicate machine (Part Two)
Graphic illustration of what Fed policy is doing to the US economy of the future...
Problems Ahead?
Last week we spoke in conceptual terms about what Fed policy is doing to the US economy, citing Senator Warren labelling Federal Reserve Chair Jerome Powell “a dangerous man to be running the Fed”.
This week, we’re taking a more statistical approach.
The chart below, updated from one that we published last month, shows the US credit stock (grey line, LHS) which started to fall since around April last year (this implies that economic activity will just keep slowing below the levels of that time).
The rate of weekly change in this stock (yellowy/orangey line, RHS) shows the dramatic scale of the bailout to save the US regional banks in April this year (a crisis which was both directly and indirectly caused because of the policies that the Fed et al had been following for over a year at that point.[1]
The blue line represents the rate of average change needed to sustain a constant credit (and ultimately economic) expansion. (RHS)
When the 12-month average (the green line, RHS) dips below this, the rate of expansion of the US economy will be slowed.
When the green line turns red, that means that the rate of slowdown is so severe that a recession is almost certainly coming (the economy has stalled).
From this clear, causal, forward indicator, we can see that US policy is already recessionary and continuing to make things worse.
But Jerome keeps on blithely making things worse…..
There may be trouble ahead,
But while there's moonlight
And music and love and romance
Let's face the music and dance – Nat King Cole
(as an alternative to Jerome’s song -
[1] This was the steepest Fed bailout on record.
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Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment planner.
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