A Nation of Junkies: The Empty Future of a Stimulus-Speculation Economy

Now that the US economy is totally dependent on trillions of dollars in stimulus and speculative gains reaped from the stimulus, there is no Real Economy left to pick up the pieces when the credit-stimulus-speculation bubbles all pop.

When economists speak of organic growth, they're referring to growth that arises naturally from population expansion, advances in productivity gained from better training and wise investments, and the fruits of innovation.

Organic growth doesn't need constant stimulus or depend on speculation. It doesn't need to be juiced by central banks and the government to function. In an economy that isn't dependent on stimulus, the role of central banks is limited to being the lender of last resort in periodic financial crises, and the government's role is to serve the common good by funding what fosters the common good but isn't profitable enough for private companies to pursue, for example, rural electrification and critical infrastructure.

Compare this Real Economy with the Artificial Economy we now have that is completely dependent on the central bank and government stimulus and rampant speculation. If either the stimulus or speculation disappeared, the economy would collapse. Without constantly increasing monetary and fiscal stimulus, the asset bubbles inflated by stimulus would collapse.

Every decision in this stimulus-speculation-dependent economy is keyed off of Federal Reserve stimulus or federal spending guarantees. Consider the decision to buy or build a residence to live in or hold as an investment. This decision is now keyed to Federal Reserve manipulation--scrape away the sugar-coating, and this is what it is--of mortgage rates and the market for mortgages (mortgage-backed securities) and federal government backstops and guarantees.

Glance at the first chart below of the Fed's "intervention" in the mortgage market: somehow, the housing/mortgage market survived without the Fed owning any mortgage-backed securities before 2009, but now the Fed must intervene to the tune of trillions of dollars to keep the housing/mortgage market from imploding.

All this stimulus is sold as "help," but it all ends up "helping" the wealthiest few at the expense of the bottom 90%. Look at the two charts below of the percentage of wealth held by the top 1% and the percentage of wealth held by the middle class, those households between 50% and 90% in terms of household income. Every new Fed / federal stimulus pushes the wealth of the 1% higher and the wealth of the middle class lower.

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To those pushing the stimulus, the soaring wealth of the top 1% is "success" because that's their circle of colleagues and pals. If we're doing great, everyone must be doing great. Such is the hubris and denial of our financial and political leadership.

Three charts display parabolic rises: the Fed balance sheet, federal debt, and total debt. The primary form of stimulus is credit: expand the availability of credit and (until recently) make it cheaper to borrow by manipulating interest rates lower.

All this "free money" fueled a dependency on speculation for "growth," a dependency that has hollowed out the economy. As a direct result of all this stimulus/credit, corporations have bought tens of thousands of homes as rentals, inflating another housing bubble. Investors have snapped up tens of thousands of dwellings to cash in on the short-term rental (AirBnB (NASDAQ:ABNB) etc.) boom, effectively distorting the long-term rental markets and pushing rents higher.

Debt and stimulus tracing parabolic ascents cannot end well. Eventually, they collapse under their own weight.

Every junkie has an excuse. Every junkie proclaims I can stop at any time. Now that the US economy is totally dependent on trillions of dollars in stimulus and speculative gains reaped from the stimulus, there is no Real Economy left to pick up the pieces when the credit-stimulus-speculation bubbles all pop.

And so we're treated to the infantile charades of the Federal Reserve and our elected officials, both bleating how wonderful everything is while in private, with the mics safely muted, they're desperate to push the inevitable implosion off just a few more months. They have no alternative and no way to return to an unmanipulated economy that isn't dependent on ever-larger injections of stimulus and parabolic increases in debt.

The problem, friends, is that the US economy has run out of veins for the coming stimulus injections. The costs of dependency on artifices of stimulus and mood enhancement--everything's wonderful!--are coming due, as they always do.

Unfortunately, there's no solution other than Cold Turkey, the collapse of all stimulus, and all speculation. We're about to discover just how unpleasant Cold Turkey can be, and babbling denial rants will only make it worse.

Written By: Charles Hugh Smith