That's very interesting, could you answer a few questions, or point me to some resource which explains in more detail?
1. How does this story end?
2. Which Fed announcement are you referring to? That rates will be raised? What do you mean the party's over, that speculation will decrease and prices will drop?
3. "This impacts tech stocks which are not making money and not likely to make money" You mean that this will impact stock of tech companies which are not profitable, since their stock values are speculative, and not that tech stocks won't make money, right?
4. So that means the Fed has chosen to crash the stock market and save the real economy, right? And by that statement, you mean that the Fed will curb speculation in order to stop price increases in food and other commodities?
5. How and why does rises in prices of risky speculative assets trickle down to rises in food and commodities prices? Is this because some part of the market gets out of the high risk assets and start bidding up lower risk assets? Is this true in general, that price increases due to too much speculation in one part of the market will eventually spread to everything else?
1. IMO it ends in inflation and crisis or stock crash and crisis, it's created a very unstable system addicted to fed stimulus. Possible of course that the fed can keep printing and try to prolong the agony a little longer.
2. For the last few months and more strongly recently the Fed has been signalling that they are going to taper stimulus, hence the rocky ride in the US stock market (driven to spectacular highs over the last decade by Fed purchases of treasuries and even corp bonds).[1]
3. US stocks in particular have not been valued on fundamentals in a long time - the indexes are propped up by a small group of tech stocks which are very overvalued, even world indexes are imbalanced in this way (50% US, 2% Apple for VWRL for example).
4. Well so far, they will doubtless have some wobbles on the way and may even reverse position completely as they have in the past (see 2013 and 2018 withdrawal of QE below [2]). This prevarication IMO just makes the eventual shock when they have to withdraw it even greater, and/or devaluation of the currency worse. They may choose to devalue the currency further so that nominally stock prices stay level, but that leads to inflation...
5. I don't think the two are linked, save that commodities are also linked to monetary and fiscal policy which has bid them up to unsustainable highs and led to unrest around the world (after 2008 and now again as price inflation rises). Sorry if that was unclear, I meant the Fed policies were starting to feed through to inflation.
To be fair to cryptocurrencies like Bitcoin, this is precisely the sort of market distortion and financial repression it was created in reaction to and attempts to solve, it's just unfortunate it was unsuited to use as a currency and has been taken over instead by speculative carpet baggers intent on fleecing others.
The last point you made about cryptocurrencies fleecing others bit built with intent to prevent market distortion is dead on.
People getting into crypto in fratboy style have gone on the rollercoaster and often are pushing it to their desires.
In the history of money (I'm talking U.S. at this point but other countries have their story) this carpet bagging happened earlier on... we've just been using it long enough that the story was forgotten and long before our time.
I'm referring to the Gold Reserve act Executive Order 1602 of 1933 where gold was required by law to be turned in at an exchange of $20/oz and a year later jacked up to $35/oz an ounce.
This decoupled the Federal Reserve from backing credit with gold, etc. The story continues but you get my point.
So the key relation you need to pay attention to is in growth of the money supply compared to growth in the real economy. If they are growing at the same rate, prices will be stable forever. If one is growing at a slower rate, you will see a bubble in that side.
And the secondary thing you need to keep in mind, when the money supply is growing at a rate faster than the real economy, and the value of that money is pushed into either consumption(CPI) or investments. But because the Fed explicitly outlaws more than 2% inflation, it must therefore be in investments. Those investments can be anything, from houses to stocks to tulips to receipts of monkey jpegs.
The third thing you need to realize is that once an asset is above their 'true' value, there is no rule that better assets will grow more. What actually happens is those which have the least supply and largest marketing raise the most. So you see houses go up, you see buyback stocks go up, you see collectables go up.
So next you need to look at, how is the money supply going up? The money supply goes up when interest rates fall. Wealthy people who have good credit take out more and more money to buy more and more assets. As the wealthy don't use this new wealth to consume, as they already consume as much as they want, inflation doesn't occur. This is the savings glut of the rich[0]. When this happens, because we don't get inflation, this pushes the Fed to allow even more money printing to occur to allow inflation to hit their 2% target. It becomes a vicious cycle of more wealth inequality begets more interest rate reductions.
But with interest rates at 0%, the Fed is no longer able to move the money supply anymore. Now they need to do it directly. When they were doing it indirectly, they had that indirect buffer, "that's just how the way the world works", but when they do it directly, suddenly they have accountability. So instead of 90% of new money going to the wealthy, maybe only 50% goes to the wealthy and 50% is spread around to the non-wealthy.
So once the Fed starts Monetary Policy 2, now we see inflation. And once inflation kicks in, the Congress and others will see the hurt that is occurring to normal people, and they will push for even more policies that trigger inflation even more. This is what happened in the 70's.
So the Fed needs to put a stop to the bubble, just as they did in the 70s, so they will raise rates. Those raised rates will push the balance to currency, and money managers will work out that fact, and more a bigger and bigger percentage of their investments into this area. This will crush all of that extra value, and boom will go the inevitable cyclical money velocity bubble. Houses will drop down to their fundamentals, stocks will correct, monkey jpegs will crash to 0.
The big thing we need to watch as this occurs is what happens to things that we thought were not correlated, but ended up correlated based on everyone buying into the bubble. What happens when people pull their broad index funds? When the index funds are net negative, how low can the market go? Can the Fed have the precision to crash the Bitcoin market, to slow down the housing market, and not allow the stock market to fall 90%? I guess we'll see.
1. How does this story end? 2. Which Fed announcement are you referring to? That rates will be raised? What do you mean the party's over, that speculation will decrease and prices will drop? 3. "This impacts tech stocks which are not making money and not likely to make money" You mean that this will impact stock of tech companies which are not profitable, since their stock values are speculative, and not that tech stocks won't make money, right? 4. So that means the Fed has chosen to crash the stock market and save the real economy, right? And by that statement, you mean that the Fed will curb speculation in order to stop price increases in food and other commodities? 5. How and why does rises in prices of risky speculative assets trickle down to rises in food and commodities prices? Is this because some part of the market gets out of the high risk assets and start bidding up lower risk assets? Is this true in general, that price increases due to too much speculation in one part of the market will eventually spread to everything else?