The Conference Board – a nonprofit think tank that delivers cutting edge research – recently published its latest Leading Economic Index (LEI) for the United States. The findings were a giant bummer. In December, the LEI dropped for the tenth consecutive month.
The LEI, if you’re unfamiliar with it, consolidates various measures of economic activity, including credit, interest rate spreads, consumer expectations, building permits, new orders of goods and materials, and several other items, to assess which way the economic winds are blowing. Over the past six months, the LEI has fallen by 4.2 percent. This is the fastest six-month decline since the great coronavirus panic.
This week, the Bureau of Economic Analysis provided its advance estimate of Q4 U.S. gross domestic product (GDP). For the final quarter of 2022, real GDP increased at an annual rate of 2.9 percent.
How could it be that GDP is expanding while the LEI is contracting?
The most probable answer we can think of is the massive expansion of consumer debt. For example, credit card balances hit a new record of $866 billion during Q3 2022. That marks a year-over-year increase of 19 percent.
Americans are borrowing from their future to make ends meet today. This may give GDP the appearance that it’s expanding. But, in reality, the GDP expansion is merely a measurement of the rate that consumers are going broke.
The fact is the U.S. economy is traversing headlong into a recession at the worst possible time. We expect things will get especially ugly, as consumers are operating in a world of chaos…
World of Chaos
In a centrally planned economy, decisions are not made between individuals through free market mechanisms. Instead, they’re made by politicians and bureaucrats through policies of mass market intervention.
The elites pass down their edicts. Thou shall not use gas burning stoves, for example. Or though shall burn corn in their gas tank.
The central planners, many of which are unelected administrators, force the decrees upon the populace. Programs, forms, penalties, and whatever else are imposed. Pounds of flesh must be exacted at every turn.
The real tragedy, however, the very thing that makes ultra-mega governments possible, is the monopoly on the control and issuance of money that’s granted to central bankers. Without the Federal Reserve, the central bank to the U.S. government, and its seemingly endless supply of fake money, it would be impossible for Washington to cast its wide nets across the entire planet.
Feeding the Leviathan is only a small part of what the Fed does. Through its control of the money supply the Fed causes a world of chaos to storm through the economy and financial markets. When the money supply is inflated, a false demand is signaled. Businesses and individuals change their behavior to exploit the apparent demand.
Then, when the money supply is contracted, and the rug is yanked out from under the false demand, disaster strikes. Businesses go bankrupts. People lose their jobs. Stocks and real estate prices crash.
In short, the Fed’s money games make it exceedingly impossible for a wage earner to save, invest, and build real wealth. The uncertainty this provokes turns regular wage earners into speculators and gamblers. Here’s why…
Uncertainty and Instability
In a centrally planned economy, like America and most countries today, where people are compelled by legal tender laws to use fiat money, people must work, save, and invest with the recognition that the government will continue to arbitrarily change the rules. The Fed may command ultra-low interest rates one year. The next year it’s jacking them up by hundreds of basis points.
We know that central planners change course at whim and often for political reasons. Where did the most campaign contributions come from? Their decisions can be downright suicidal.
The 1930 Smoot-Hawley tariffs, for instance, turned a routine recession into the Great Depression. Likewise, Fed tightening of monetary policy in 1987 drove interest rates up and triggered a massive stock market crash.
The great consumer price inflation of 2021 into the present marked the highest rate of inflation in 40 years. And now it’s providing an instructive lesson to individuals and organizations about the uncertainty and instability that’s inherent to centrally planned economies.
As the Fed hikes rates and tightens its balance sheet in the face of a recession, many overleveraged businesses and individuals find themselves wholly unprepared for the central planner’s new set of rules. Decisions were made in 2021 under a framework that’s radically different today.
Consider real estate investors. Over the last decade, as interest rates were artificially suppressed by the Fed, their businesses flourished. They could easily borrow money to buy properties to refurbish and resell at a profit.
But then raging consumer price inflation, which was manufactured by the Fed in the first place, became politically indefensible. So, the Fed had to move to rein it in by restricting the money supply. This pushed interest rates relatively higher and undermined the real estate market.
Investors who had planned for mortgage rates at 3 percent are being absolutely destroyed by mortgage rates at 6 percent. Suddenly their investments don’t pencil out. Real estate agents and mortgage brokers may find the years ahead to be extraordinarily challenging.
Are You the Collateral Damage of Central Planners?
When the Fed inflates the money supply it also inflates asset prices, including stocks, bonds, and real estate. When it then yanks the rug, and contracts the money supply, businesses and investors face big losses. And employees become collateral damage.
According to tech job tracker layoffs.fyi, there have been more than 200,000 technology jobs lost since the start of last year. What’s more, in 2023 alone, not even one month into the New Year, technology companies have laid off over 67,000 employees. What’s going on?
Right now, technology companies like Meta, Google, Microsoft, and Amazon, are discovering that the world they knew and loved over the last decade no longer exists. As the supply of money has tightened, and the flow of speculative money into technology stocks has dried up, these companies have learned they have far too many employees who produce far too little value.
Coding senseless applications and widgets may be a viable job when there’s a seemingly endless supply of the Fed’s cheap credit being pumped into financial markets. Take the money away, however, and those jobs are incapable of standing on their own two feet.
The point is in a centrally planned economy people are continually misled about how they should go about working, saving, and investing for the future.
Just asked the former code cruncher who was RIFed after two decades of Googling all day. They thought they were set for life.
Instead, whether they know it or not, they’re the collateral damage of central planners. Are you the collateral damage of central planners too?
[Editor’s note: You may not know it. But you could unwittingly be wiped out be the schemes and designs of central planners. One way to avoid becoming their collateral damage is to significantly increase your wealth. The decks stacked against you. But it can be done. If you’re interested in learning how, take a look at my Financial First Aid Kit. Inside, you’ll find everything you need to know to prosper and protect your privacy as the global economy slips into a worldwide depression.]
Sincerely,
MN Gordon
for Economic Prism
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