Submitted by Stephanie Pomboy of Macro Mavens
Actions have consequences. Even for the Fed.
That’s not a reference to the market’s grumpy reaction to the central bank’s continued rate hikes and quantitative tightening. No. The impact of both on financial assets were as obvious as they were inexorable. To be sure, Wall Street’s resident soothsayers had a good run spinning tales that ‘this time’ was different. A tightening Fed, we were assured, was a good thing—a ringing endorsement of the economy’s indefatigable strength. But, in the end, there was simply no way around the basic fact: Just as rate cuts and QE were designed to expand the pool of credit and incent the embrace of risk, so would rate hikes and QT necessarily beget the reverse. And so they have.
But while the impact of receding liquidity and the reduced reward for reckless speculation and risk-taking have finally begun to play out on Bloomberg screens everywhere, the real devastation has yet to be revealed. In the ensuing weeks and months the full and lugubrious legacy of the Fed’s great monetary experiment of the last decade will finally come into view.
Beyond inflating and bursting a bubble in corporate debt (with leveraged loans acting as posterchild), the Fed’s decade-long financial repression has had a far larger and more sinister impact: It has silently bankrupted the US pension system.
Sound overly dramatic??
Here are the numbers from no lesser authority than the institution responsible for this destruction itself: the Federal Reserve. By their calculations, at the end of the 3rd quarter, the funding shortfall of U.S. pension plans (public and private) stood at -$6.18t. That’s trillion, with a capital ‘t’. To put that in perspective, that’s roughly 30% of GDP:
But that’s not even the scary part. The scary part is that this is the funding deficit NOW…after a decade of rampant financial asset inflation and a 10-year economic expansion. One shudders to imagine what the picture will look like as these tailwinds reverse. If the last two cycles are any indication, it won’t be pretty. The DotCom bust sent the cumulative deficit from -$1.2t to -$3.1t and the GFC saw it swell from -$2.9t to -$5.3t.