What they are actually doing [The Fed's], however, is driving the financial system to unsustainable extremes of valuation and speculation— and eventually to a crash landing.

Financial Storm Chasing With Blinders On: How The Fed Is Driving The Next Bust

As should be evident after six continuous years of frantic money pumping that old secret sauce doesn’t work any more because the American economy has reached a condition of peak debt.  During the Keynesian heyday between 1970 and 2007 the nation’s total leverage ratio—that is, total public and private credit market debt relative to national income—soared right off the historic charts, rising from a 100-year ratio of +/- 150% of national income to a 350% leverage ratio by 2007. 

Since the financial crisis, the components of national leverage have been shuffled from the household sector to the public sector, but the ratio has remained dead in the water at 3.5X. That means that contrary to all the ballyhoo about deleveraging, it has not happened in the aggregate, but where it has happened at the sector level actually proves that the Fed’s credit transmission channel is over and done. 

Monetary central planning at the zero bound embodies a destructive internal contradiction. It inherently generates rampant speculation in real estate and financial assets because ZIRP massively subsidizes the cost of carry. At the same time, its practitioners are institutionally disposed to bubble denial because they falsely believe that their policies are what is keeping the real economy advancing–even if currently it is at a sub-normal pace by historical standards. 

Without fail, therefore, monetary central planners keep their feet on the accelerator to the very end, boasting that the “in-coming data” shows the macro-economy approaching the nirvana of full-employment. What they are actually doing, however, is driving the financial system to unsustainable extremes of valuation and speculation— and eventually to a crash landing. We have had two of these processions of the lemmings—that is, Fed driven cycles of bubble inflation and bust—- already in this century. Now we are at the asymptote of the third.

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