The Flywheel effect is a concept developed by the renowned author, Jim Collins. The idea is you have this giant, heavy wheel which at first is difficult to turn, but once it gains momentum, it becomes easier and easier and feeds on its own momentum to build even more momentum.
The Federal Reserve has developed its own flywheel that the financial markets absolutely are feeding on. At this point, there is likely no stopping it. Here is the detail behind it:
- The Fed only looks at wage growth and commodity prices to measure “inflation”.
- The Fed thinks high financial asset prices support the “wealth effect” which will lead to “inflation”.
- The Fed signals to the markets that it will do whatever it takes to support high financial asset prices until it sees wage growth and commodity price inflation.
- The Fed buys bonds to artificially lower interest rates.
- Corporations are now incentivized to borrow massive sums of money.
- In competitive industries, the borrowings are used to produce more supply which depresses prices.
- In non-competitive industries, the borrowings are used to become more efficient with fewer workers which increases profits without impacting prices and depresses wage growth.
- In all industries, the borrowings are used to enrich executives and shareholders through incentives, options, dividends, and buy backs without trickling down to employee wage growth.
- The borrowings create their own flywheel of “hot potato” financial asset inflation where no one wants to hold cash.
- Financial assets get inflated to never-before seen levels but this is excluded from the Fed’s measure of inflation.
- The returns on the corporate borrowings are not sufficient to service the new debt.
- Financial asset prices start to go down.
- Corporations should be going under, get restructured, or be broken up to reduce supply and reduce their power over the market and influence over politics.
- Executives, shareholders, and bondholders should be losing money from their poor use of borrowings but instead get bailed out because it impacts the Fed’s “wealth effect”.
- Employees have no way to get ahead because they have no ability to negotiate for higher wages, no ability to buy financial assets at affordable prices, no ability to gain political influence, and no ability to start their own businesses to compete against mega corporations.
- There is no wage growth or increase in commodity prices because there has been no gain for employees and no supply reductions.
- The Fed only looks at wage growth and commodity prices to measure “inflation”, and the flywheel starts over again.
Those in control don't want to stop this flywheel because they are the ones directly benefiting from it. So the only way to stop this flywheel is (1) to see if the national debt and Fed money printing has a limit or (2) to remove ourselves from the Fed's game. Start voting with your dollars by first finding a way to not need as many dollars and second by supporting community and small businesses, not the mega corporations. I’d also say vote but it appears both major parties put corporate interests above all else so a vote for either of them is a vote for the status quo.