Key Words

Dec. 28, 2019, 4:10 p.m. EST

Beware of the ‘toxic concoction’ that could finally crush the U.S. economy

‘We live in a bizarre world dominated by magical-thinking’

By Shawn Langlois, MarketWatch


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‘If money doesn’t loosen up, this sucker will go down.’

President George W. Bush famously uttered those words a decade ago as the U.S. government was scrambling to restore liquidity and calm panicky markets during the upheaval of the financial crisis.

A few years after that, Berkshire Hathaway’s (NYS:BRK.A) Warren Buffett hailed Bush’s comment as “the greatest economic statement of all time.”

At the time, Buffett said Berkshire always has at least $20 billion in cash. “Some day in the next 100 years when the world stops again, we will be ready,” he explained to a group of M.B.A. students in 2013 . “There will be some incident, it could be tomorrow — at that time, you need cash. Cash at that time is like oxygen.”

Read: One look at this and you’ll get why Buffett sits on a record cash pile

Fast forward to this week, and that day could soon be upon us, according to Charles Hugh Smith of the Of Two Minds blog , who warned that this “sucker is finally going down” and no amount of “loose money” will be able to stop it.

“We live in a bizarre world dominated by magical-thinking,” he wrote in his latest post, “a world in which the Federal Reserve creating more dollars out of thin air is supposedly the solution to everything.”

But that’s clearly not the case.

There are several “knotty structural problems” that he says can’t be helped by an accommodative monetary policy, including unsupportable pensions, mounting consumer debt, a health-care system that’s bankrupting the country, outrageous student loan debt, funding unwinnable wars, etc.

The “loose money” approach is actually “metastasizing” a new set of problems that will ultimately “bring this sucker down.” All that free-flowing Fed cash is nothing more than “socially useless financial activity” that, he says, enriches a few at the top and leaves the rest of the country behind.

It all adds up to what Smith sees as the same “toxic concoction” that has led to the destruction of economies throughout history.

“The great karmic irony is [the banks and financiers] rigged and gamed the system so rapaciously, absolutely confident there’s no end to the loose money, that they’ve overlooked the increasing fragility of the entire system they’ve ruthlessly exploited,” he wrote. “This sucker is going down, and sooner than we think.”

Meanwhile, the market held steady on Wednesday, with the Dow (DOW:DJIA) shaking off early declines to sneak into positive territory.

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