A Did Not Cause B

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Corona Economy SchiffGold | James Alexander Michie

A = coronavirus. B = economic meltdown.

A caused B.

That’s the mainstream narrative when it comes to the economic pain we’re feeling right now.

But in reality, A did not cause B. B was in the works long before A came along.

Of course, the mainstream never recognized the rot in the economy a few months ago. In fact, everything thing looked glowing on the surface. As economist Mark Thornton reminds us in an article published on the Mises Wire, on February 10, a mere 10 weeks ago, stock markets were at all-time highs. The unemployment rate was at an all-time low.

With interest rates near zero for an entire decade, the value of stocks, bonds, real estate, land, and virtually any asset was artificially inflated. As a result, total household net worth doubled, increasing from $60 trillion to $120 trillion!

People were saying that things were too good to be true. Everything from giggling about personal finances at the gym to people embarking on unlikely business projects, and business owners being shocked when told it would not last, and even record-breaking skyscrapers. Things were too good to be true.

According to the mainstream narrative, things were roaring right along until this pandemic hit. Governments shut down a strong economy to deal with COVID-19. Since the economic damage due to the COVID-19 shutdowns was self-inflicted, it’s not a real recession. It’s not a real economic collapse. And since governments shut things down, they can make a few pronouncements and fire things right back up.

That would be plausible if A caused B.

But as Thornton reiterates, A did not cause B.

The coronavirus did not cause B, the economic crisis; it merely triggered it, causing it to occur earlier than it would have. It may have also accelerated the collapse, and will likely deepen the trough of the crisis in business cycle terms. In other words, the economy was weak, not strong. The fundamentals were weak, not strong. Balance sheets were weak, not strong.

Peter Schiff has been saying the same thing in a different way. Coronavirus was merely the pin that popped the economic bubble. Getting rid of the pin doesn’t stop the air from coming out of the bubble. And yet everybody is still focused on the pin.

Ths signs of a bubble were there months ago if people knew where to look. President Trump signaled that there was a problem when he badgered Federal Reserve Chairman Jerome Powell as the central bank raised interest rates a mere 2%. Thornton said this was a clear sign of weakness.

The stock market thrived when interest rates were negative when adjusted for price inflation. However, when Powell pushed the inflation-adjusted rate to near zero, stock markets stalled and all political hell broke loose.”

In response, the Fed abandoned balance sheet reduction and cut rates three times in 2019. That’s not a sign of a healthy economy. In fact, Schiff said the bubble was already leaking air before the coronavirus pin popped it completely.

It’s not like the Fed was able to keep shrinking the balance sheet and keep raising interest rates and it had to abort that process because of the coronavirus. They had to abort the process before anybody heard of the coronavirus. So, it was already imploding. The bubble was already deflating before this pin, this other pin came and put another hole in it. So, if we couldn’t unwind the four-and-a-half trillion-dollar balance sheet, if we couldn’t normalize the debt levels that existed before the coronavirus, think about how much more difficult, if not completely impossible that process is going to be after the coronavirus. So, nobody is asking: what is the implication of a balance sheet that is so enormous that it would be so disruptive to shrink, or because it’s so enormous and can’t be shrunk? What does that mean about future inflation and the value of the dollar?”

And therein lies the rub. Since A didn’t cause B, solving A doesn’t necessarily solve B.

Thornton points out that the artificially low interest rate environment created by the Fed allowed consumers and businesses to pile up excessive debt. It also disincentivized saving.

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Source: Michael Maharrey | SchiffGold

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