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A recent paper from the Federal Reserve designed to assure nervous investors should there be another recession that the Fed had it covered instead sparked a maelstrom when the paper showed that the Fed was largely out of effective ammunition primarily because previous recessions had seen The Federal Open Market Committee cutting interest rates by an average of 5.5% over the last nine recessions in order to break the fall and stabilize the economy, something that is mathematically impossible with current rates at .5%. In fact, the ballooning of central bank balance sheets post 2008-2009 crisis, for Japan this dates to 1991, has failed to stimulate inflation or self-sustaining economic growth. Neither has encouraging private sector debt as a substitute for income, first with sub-prime and reckless real estate lending that precipitated the 2008-2009 financial crisis. Nor will reckless debt funded corporate share buy-backs, ballooning student and auto loan debt as these are the catalysts for the next great bust which I fear is uncomfortably close. Given the already negative mood on Main Street brought about by rising debt levels in an attempt to hold on largely driven by a lack of decent paying full-time employment, sub 5% unemployment rate notwithstanding. Socially and economically destabilizing asset bubbles are no substitute for income funded consumption. Something that occurs with income, debt or social welfare payments. Once debt saturation arrives, ala 2007, the result isn’t hard to figure out unless you’re an economist or Central Banker as almost none of them saw it coming prior to 2007 and the same is true today. Deficits and or debts do matter and you can’t fix the problems caused by too much debt with even more debt. The idea that you can borrow indefinitely to fund current consumption only works so long as borrowing costs fall meaning interest rates decline, and or income grows faster than debt service costs. This is why the game is up and consumption is being forced to realign with income, basic mathematics. Why it is that our economic and financial leadership can’t figure this out is beyond me.

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