The Price of Easy Money Now Coming Due
The Crazy Stuff & Asset Prices that arose during Easy Money are coming unglued as Easy Money ended.
The era of money-printing and interest-rate repression in the United States, which started in 2008, gave rise to all kinds of stuff, and the easy money kept going and kept going, and all this money needed to find a place to go, and then money-printing went hog-wild in 2020 and 2021. And the stuff it gave rise to just got bigger and bigger, and crazier and crazier. And much of this stuff is now in the process of coming apart, I mean falling apart, or getting taken apart in a controlled manner, and some stuff has already imploded in a messy way. And we’ll get to some of this stuff in a minute.
All this money-printing and interest rate repression finally gave rise to massive consumer price inflation, and now we have a real problem, the worst inflation in 40 years, and way too much money still floating around all over the place with businesses, with consumers, with state and local governments. This means that this raging inflation has lots of fuel left to burn, and the government is making it worse by handing out hundreds of billions of dollars for all kinds of stimulus spending, from the new EV incentives to $50 billion handed to the richest semiconductor makers.
And some state governments are handing out inflation checks or whatever – in California, households can get up to $1,000. And they’re all spending this money, and thereby throwing fuel on the inflation fire. We’ve already seen automakers raise the prices of their EVs to eat up the EV incentives, and there we go, more inflation.
The poor Federal Reserve has to deal with all this, and it’s out there raising interest rates far more than anyone expected a year ago, and it’s doing quantitative tightening, and it’s saying all kinds of hawkish things, but the markets are blowing it off, and they’re not taking it seriously, which means that the cold water the Fed wants to throw on financial conditions, and therefore on inflationary pressures, isn’t getting there, and it has to throw a lot more cold water on it, so higher rates for longer, and maybe for a very long time.
So now we got all the stuff that money-printing and interest-rate repression gave rise to, and this stuff must have continued money-printing and interest-rate repression to exist, but now we have soaring interest rates and the opposite of money-printing: quantitative tightening.
Perhaps the most spectacular creation of the money-printing era is crypto. It started with bitcoin in early 2009, just after the Fed’s money-printing got started. And the promoters fanned out all over the social media and everywhere and touted it as an alternative to the dollar and to fiat currency in general and to what not, and people started hyping it, and promoting it, and they’re trading it, and the price shot higher.
And then come the copycats since anyone can issue a cryptocurrency. Suddenly there were a dozen of them, and then there were 100 of them then 1,000, and suddenly 10,000 cryptos, and now there are over 22,000 cryptos, and everyone and their dog is creating them, and trading them, and lending them, and using them as collateral, and all kinds of businesses sprang up around this scheme, crypto miners, crypto exchanges, crypto lending platforms, and some of them went public via IPO or via a merger with a SPAC.
And the market capitalization of these cryptos reached $3 trillion, trillion with a T, about a year ago, and then when the Fed started raising its interest rates and started doing QT, the whole thing just blows up. Companies go like POOF, and the money is gone, and whatever is left is stuck in bankruptcy courts globally possibly for years. Cryptos themselves have imploded. Many have gone to essentially zero and have been abandoned for dead. The granddaddy, bitcoin, has plunged by something like 73% from the peak. The whole crypto market is also down about 73%.
Crypto was one of the places where liquidity from money printing went to, and now that the liquidity is being drained ever so slowly, the whole space started to collapse.
Another thing that came about during the era of money printing was an immense stock market mania, and when the money printing went hog-wild starting in March 2020, the stock market mania went hog wild with it.
We at Wolf Street tracked a bunch of these stocks, crazy IPO stocks, and stocks that went public via a merger with a SPAC over the past few years, and they shot higher and they spiked on a wing and a prayer with nothing there, companies that were losing tons of money, that didn’t have a business model, that didn’t have anything, and they were suddenly worth $10 billion or $30 billion or whatever.
It was all driven by what I call consensual hallucination and the effects of money printing and interest rate repression. Those were the fundamentals.
But then in February 2021, when inflation started to heat up, causing the Fed to brush it off, well that February 2021 was when that craziness peaked, and many of these stocks then collapsed by 70% or 80% and over 90%. We tracked over 1,000 stocks traded in the US that have imploded by 80% or more from their highs within the past couple of years…..
Continue reading this article at Wolf Street.