The Fed's Casino Is In Flames, But Please Continue Gambling
June 18, 2020
Here's the thing about gambling: risk cannot be made to disappear, it can only be transferred to others.
Those taking seats at the gaming tables in the Federal Reserve's casino believe that they can't lose. Or more precisely, any losses they suffer will quickly be made good by the house, i.e. the Fed, which can digitally print as much currency as needed to restore order to the gambling.
The punters crowding around the tables have forgotten that gambling is inherently risky. The Fed can digitally print currency, but it can't force punters to play.
Unfortunately for all the punters crowding around the tables, the casino is on fire. The Fed's rigged games are in flames, and Head Tout/Fixer Jay Powell is telling all the nervous gamblers who smell smoke to please stay at the tables and continue gambling, the fire is under control.
But of course it's not under control, it's raging out of control, and to maintain the illusion of control, the Fed is buying chips in its own games: buying junk bond funds and corporate bonds.
The Fed's casino has operated on a simple principle: the Fed digitally prints trillions of dollars and hands the dough to broker-dealers in exchange for Treasury bonds, mortgage backed securities and now, junk bond funds and corporate bonds.
The new currency flowed into financial assets as banks, corporations and financiers borrowed money, leveraged it up and bought back their own shares or bought stocks.
What the punters don't understand is this mechanism isn't guaranteed. The players getting the freshly created dough don't have to buy stocks or junk bonds. They only do so when they are confident that there are plenty of greater fools at the tables to buy these assets at higher prices.
The pool of greater fools is drying up, and so the Fed has been forced to start buying its own gambling chips directly. This is an act of complete desperation, yet the punters at the tables who smell the smoke don't yet realize the fire is out of control and the entire casino will soon be engulfed in flames.
Here's the thing about gambling: risk cannot be made to disappear, it can only be transferred to others. The absence of risk in the Fed's casino is an illusion. The Fed's casino has transferred all the well-hidden risk to the entire financial system, which is now in danger as the Fed's burning casino triggers a conflagration few even imagine and virtually none think is possible.
So by all means, believe the soothing words of Head Tout/Fixer Jay Powell if you want, but realize that words and digitally printed currency won't make risk disappear. Rather, they only increase the risk of the fire spreading to the entire financial system.
A Reverse Wealth Effect? (41:52)
My COVID-19 Pandemic Posts
My recent books:
Audiobook edition now available:
Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
(Kindle $6.95, print $11.95) Read the first section for free (PDF).
Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).
The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)
Money and Work Unchained $6.95 (Kindle), $15 (print)
Read the first section for free (PDF).
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Gary R. ($50), for your splendidly generous contribution to this site -- I am greatly honored by your support and readership.
Thank you, John S. ($50), for your magnificently generous contribution to this site -- I am greatly honored by your steadfast support and readership.