Jerome Powell is leading the Federal Reserve down an unprecedented path of monetary policy. The end result could be a debt bubble that even the Fed can’t prevent from popping. | Image: Eric BARADAT / AFP
- The Federal Reserve has committed $4 trillion to save the economy.
- But one analyst says we’re doomed anyway.
- He argues there’s one critical factor monetary stimulus can’t fix.
The Federal Reserve is going billions on this economic and financial crisis. But that figure of speech is actually incorrect. The Fed is going trillions on it.
The central bank’s balance sheet just shot above $5 trillion for the first time — ballooning 12.4% in just a week to get there. When all is said and done, the Fed has planned a $4 trillion monetary intervention to save the economy.
But one analyst tells CCN.com these efforts are doomed to fail.
While he’s certainly not alone in making dire predictions for the economy, research analyst Murray Gunn says for all its trillions, the Fed is “shooting pool with a wet spaghetti noodle.”
Gunn is the Head of Research for Elliott Wave International’s “Global Market Perspective.” EWI is the largest independent financial analysis and market forecasting firm in the world. Gunn says the economy is doomed.
A Three-Wave Stock Market Crash
Murray Gunn says no amount of money “printing” by the Fed can restore badly shaken confidence. This confidence problem will hold back economic growth despite the unprecedented monetary stimulus:
The stimulus efforts by central banks and governments around the world, but particularly in the U.S., will prove to be unsuccessful because no matter how much money they throw at the problem it can’t solve the basic issue – confidence has disappeared.
Elliot Wave International uses social mood as the barometer of economic health:
Our model analyses the cycles of social mood, which is the underlying driver of the economy, and we have been warning our subscribers for some time that social mood, having been negative in Europe from 2000 and in China from 2007, was in the process of turning negative in the U.S.
Specifically, Gunn forecasts the Fed’s actions will lead to a partial retracement in stock prices against some of the recent losses. He says it’ll be enough for the Fed and U.S. government to believe they have averted disaster. But after this false start, the bear market will continue in another wave of devastating capitulation:
During the bounce that is coming we have no doubt that central banks and governments will think that they have, once again, saved the world. But just as the 1929 crash retraced half of its fall only to then decline by 86% between 1930 and 1932, we see a similar dynamic here.
Gunn sees debt-deflation ahead that will be “epic in scale” as a debt bubble on a decades-long cycle bursts. The Fed’s cash pump won’t help because people will hoard it rather than spend or invest.
The Fed vs. “Social Mood”
Social mood is central to Elliot Wave’s outlook, and the Fed can’t make it better:
Socionomic theory proposes that social mood governs the character of social events, not the other way round as most people think.
A gloomy social mood make for a dire economy, Gunn elaborates:
Periods of negative social mood… tend to be associated with a host of social phenomena, such as falling stock prices, rejection of incumbents, discord, increasing regulation, and the popularity of darker colors and longer skirts.
According to the theory, events do not influence social mood. It moves independently of shocks like the coronavirus, or headwinds like the Fed’s trillion dollar stimulus efforts. Social mood, on the other hand, does determine how society responds to events:
Although social mood governs social events, it fluctuates independently of such events. In other words, wherever mood goes, the character of events will follow. But the events themselves have no impact on the direction of social mood; there is no feedback loop.
This is a mainstream economic idea. In fact it’s essentially a description of the “animal spirits” John Maynard Keynes spoke of in his 1936 book “The General Theory of Employment, Interest and Money.”
Keynes wrote that,
a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations.
He concludes that most of our decisions to take action of economic importance “can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction.”
It seems no amount of money from the Fed would stop a bear from hibernating.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.
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Last modified: April 5, 2020 4:51 PM UTC