This post will prove, with data, among other things, that contrary to the popular teachings and narrative, the economy does not perform better with assistance from the Federal Reserve(FED) or from raising debt. In fact, to produce a robust and better economy than today’s, debt raises must be forever ceased, to which the FED needs to be abolished in order to enable the former. As explained in the January 12th, 2021 edition of David Stockman’s Contra Corner,
As Stockman explains, in Q4 2007, the Fed’s balance sheet stood at $890 billion, while today it rounds to $7.4 trillion. The implied 13 year growth rate is thus a staggering 17.6% per annum.
Since that latter compares to a nominal GDP growth rate of just 2.9% per annum during the same period, the question recurs: Where did all that putative “stimulus” go?
Indeed, the contrast between the expansion of the Fed’s balance sheet and the change in both nominal and real GDP is so staggering. See Below:
Change per Annum, Q4-2007-Q4 2020:
- Fed balance sheet: 17.6%;
- Nominal GDP: 2.9%;
- Real GDP: 1.3%
Alas, when the main street target (nominal GDP) of all this monetary muscling grows at only 16.5% of the rate of stimulus applied, something is slipping big time between the monetary cup and the economic lip.
And that’s especially the case when the ultimate target of all this central bank stimulus—real GDP—has grown at only 1.3% per annum, thereby marking the worst trend growth rate in US history, and by a country mile at that. See Below:
Let’s now compare the past 13 years described above to the 17 years preceding that. As Stockman explains,
he Fed’s balance sheet grew at only one-third the rate of the past 13 years, while both nominal and real GDP expanded at rates 2-3 times higher.
Change Per Annum, Q2 1990-Q2 2007:
- Fed balance sheet: 6.3%;
- Nominal GDP: 5.3%;
- Real GDP: 3.0%.
In short, this time is different because the fact that Fed credit injections into Wall Street which were 3X larger than during 1990-2007 generated barely one-third of the real GDP growth on main street is dramatic evidence that money-pumping, also known as Quantitative Easing(QE), is losing its macroeconomic efficacy, that is assuming money-pumping has any macroeconomic efficacy at all, which it doesn’t. In fact, by the data above, the growth of the FED’s balance sheet and GDP, both nominal and real, are negatively correlated. Sure, the FED’s injections of liquidity, known as Quantitative Easing(QE), which essentially means the FED creating new U.S. Dollars and then lending that newly created money to, primarily, the U.S. treasury, big investment banks. and financial institutions, helped the stock, bond, and other financial instrument markets. However, the outputs of QE only benefit 1% of the population’s wealth, at most. 1% of the population refers mainly to Wall Street bankers, government officials connected to them, and other wealthy high-profile connected insiders, not the general population, who has continued to suffer more and more poverty for several decades, and counting. For the rest of civilization, the FED’s “help” fails to boost their wealth; in fact, it diminishes it thanks to inflation.
In fact, both real and nominal GDP grew 2.6X faster during 1990-2007 than during 2007-2020. Furthermore, from 1953-1990, nominal GDP actually grew faster than the Fed’s balance sheet.
What none of the Wall Street stimulus hounds or Keynesian economists–as the case may be—can explain, is why the allegedly recession/deflation/low-flation addled US economy did not roll-over and die during the golden era when the Fed’s balance sheet grew by only 5.0% per annum over the entire 37-year stretch.
Change Per Annum, Q2 1953-Q2 1990:
- Fed balance sheet: 5.0%;
- Nominal GDP: 7.6%;
- Real GDP: 3.4%.
If in the old days of 1953-1990, economic growth was more robust WITHOUT immense “help” from the FED, and with absolutely zero QE, the latter of which didn’t exist until Barack Obama became president, then, by historical economic data, civilization has empirical proof that economies don’t grow or attain a robust status from QE or any sort of money-printing. In fact, the way the FED should help is to cease QE, and then become extinct, as explained here.
In addition to abolishing the FED and reinstating a legitimate gold standard, the way to improve the economy and maintain its robust status is to lower taxes, ideally eliminate them, and repeal unreasonably lengthy and costly regulations on enterprises, which, unlike politicians and regulatory departments, generate the engine of wealth growth for civilizations. In past decades, taxes were lower, regulations were less strict, and QE was non-existent; and yet, the economy was more robust, despite the absence of today’s highly advanced and sophisticated technology. There is no reason the economy today can’t be robust, given the more sophisticated technology than past decades. However, if taxes are not reduced, or ideally, eliminated, if regulations are not repealed, and/or if the FED continues to exist, civilization should not expect the economy, outside the 1% bubble of the financial trading markets, to improve, even inconsequentially. The latter will be true even if all the unreasonably sever restrictions and shutdowns of main street commerce(restaurants, bars, gymnasiums, night clubs, etc.), illegitimately justified because of COVID-19, are lifted. Lifting those restrictions would only be the first critical step. Abolishing the FED is indispensable, that is, if civilization truly does care about enhancing wealth and its standard of living, in addition to diminishing poverty.