Like a drug dealer injecting a stranger with large doses of heroin over a long period of time without the latter's consent, the Fed has been for decades juicing the economy such that it has undergone cycles of euphoria followed by horrible withdrawal. The Fed's policy of flooding the economy with liquidity started with Alan Greenspan in the 1980s, but the real juicing and subsequent disasters didn't begin in earnest until Greenspan's tech bubble. The U.S. economy hasn't been right since. Since the late 90s, the "fine folks" of 20th Street and Constitution Avenue have been continuously inflating bubbles that have burst and crashed the economy, leading to protracted periods of high unemployment. The bubbles--the "heroin highs"--have been getting larger and larger, and the crashes--the "heroin withdrawals"--have been getting more and more profound.The Fed is currently inflating what Roubini is calling "the mother of all bubbles". Since this bubble is the result of a liquidity infusion several times larger than the infusion that resulted in the housing bubble and subsequent 5 year economic depression we are currently undergoing, the next crash and period of withdrawal will surely be an event that eclipses even these dark times. And, next time, there won't be enough money left with which to bail out the U.S. financial system, which is currently leveraged as much as it was in the months leading up to the 2008 financial crisis.)
Former Reagan budget director David Stockman shares my dire long-term economic outlook and outright disdain for the Federal Reserve's ruinous monetary policy. According to Stockman, the current asset bubble the Fed is inflating--the largest yet by a factor of 5--will eventually burst and lead the country to what he has described as "economic sunset". In a recent op-ed in the New York Times, Stockman laid out the gloom in no uncertain terms. Some highlights (bold by me):
Mr. Obama’s hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour. Fast-money speculators have been “purchasing” giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets.So...
If and when the Fed — which now promises to get unemployment below 6.5 percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.And Stockman's summation of the damage:
THE state-wreck ahead is a far cry from the “Great Moderation” proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown “seems likely to be contained.” Instead of moderation, what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices — a form of inflation that the Fed fecklessly disregards in calculating inflation.Lest we forget the Fed's own economists' warning about "explosive inflation" to begin sometime in the not-too-distant future. This period of high inflation will be an unintended consequence of the "mother of all bubbles" Roubini is warning us about. The worst economic damage, however, will still be yet to come when the bubble bursts.
Here's Stockman discussing his op-ed with Fox Business: