By Mike Holly

March 14, 2023

A study by Americans Against Monopolies warns investors that they better prepare for another crash of U.S. stock markets. The stock market declines of 2022 will soon extend losses into a severe and multi-year crash and economic recession. The conditions have aligned for a repeat of the five major crashes that have occurred since the founding of the U.S. Federal Reserve Bank (Fed) in 1913. Major crashes have always resulted when, and only when, the Fed raises interest rates significantly, while the government reduces deficit spending, with the goal of halting consumer and/or asset price inflation.

The Fed has been warning about the impending pain on the stock market and economy. However, the failure of the Fed to provide clear and comprehensive explanations has limited their credibility and made it appear that they just want to be able to claim they warned investors. The Fed should be explaining that the government response to the Covid pandemic and the Russian invasion of Ukraine likely just briefly accelerated existing price pressures, especially for homes, cars, oil, natural gas, and food. In addition, the Fed should warn that higher inflation can initially lead to an economy that appears healthy by encouraging more consumer spending, and the hiring of more workers by business, like today.

The crash of the stock markets and economy will ultimately be caused by government policies favoring special interests and especially monopolies. The government has been using existing and growing barriers to limit supply, even as consumer demand has been increasing, thus causing high prices and inflationary pressures perhaps even greater than those of the 1970s. Moreover, monopolization has required that the government prop up economic growth with low interest rates and deficit spending that have been inflating stock and home asset prices while piling up debt for decades.

Famous investor Warren Buffet admits he prefers investing in “near-monopolies.” The legal definition of a monopoly is “significant and durable market power, that is, the long-term ability to raise price or exclude competitors.” The legal term is more useful than the dictionary version for evaluating monopolies, stock values, economic ramifications, and policies.

Economists have failed to acknowledge the pervasiveness of these “legal” monopolies. Companies seek monopolies to stifle competition and limit supply, so they can relax and reduce the quality of goods and services, while increasing prices, profits, and stock values. Monopolies control virtually all U.S. industries, including banking, housing, health care, agriculture, energy, transportation, tech and education. In 2022, the Federal Reserve Bank of Boston found the U.S. economy is conservatively at least 50% more concentrated today than in 2005.

Economists are not even trying to determine the causal relationship between preferential government policies and monopolies. Politicians have received various campaign and personal contributions in exchange for awarding business interests with preferential policies. Examples include: bank charters, zoning for housing, the accreditation and licensing of health care professionals, price supports for favored farm crops, environmental exemptions favoring Big Oil & Gas over coal, various mandates, grants and tax credit subsidies for wind and solar energy, automaker bailouts, intellectual property protections for Big Tech, and taxpayer funding of education. Although preferential policies have clearly limited competition in virtually all industries, most economists blame market failures for monopolies, especially during ineffective antitrust lawsuits.

Economists have failed to recognize the “supply-push” price inflation and high prices caused by the limiting of supply by government-favored monopolies, especially in the six major consumer necessities. Since 1965, prices have inflated most rapidly for education offered by public and non-profit schools, and health care offered by restricted supplies of hospitals, practitioners, insurance and Big Pharma. Since 1970, home prices have inflated due to monopolies of landlords, construction, building materials and public financing. Since 1973, energy prices have inflated due to OPEC, Big Oil & Gas, and electricity and natural gas public utility monopolies. From 1973 to 1997, automobile prices inflated to today's high levels due to increasing manufacturing costs among the Big 3 automakers while under environmental regulations. In 2006, agricultural prices inflated to today's high levels after biofuel mandates favored production by the “King Corn” and soybean duopoly that had already been providing grains for processed and red meat foods.

Economists have also failed to recognize that inflationary pressures are growing as governments continue to favor monopolies using costly and depleting energy and material sources requiring inefficient and environmentally-destructive recovery. At least economist Mohamed A. El-Erian has expressed some concern that the clean-energy transition and redirected global supply chains may increase inflation.

Economists have failed to recognize that the supply restrictions and inflation caused by government policies favoring monopolies have resulted in wealth disparity that leads to stock market crashes and recessions/depressions in the short-term, and debt that threatens financial collapse in the perhaps not so long-term. High and inflating prices, along with taxes used to pay for government spending, squeeze consumers during booms until consumer demand, stock markets and the economy go bust. Mounting debt is squeezing productive spending, innovation and growth, and leading to eventual collapse. 

Since 1913, all five major stock market crashes were preceded by the Fed raising interest rates by three percentage points or more, along with reduced deficit spending by the government. These major crashes occurred in 1915, 1929, 1965, 2000 and 2007. Each time, the purpose of raising interest rates and reducing deficit spending was to reduce price and/or asset inflation caused by government policies favoring monopolies, low interest rates and deficit spending often on defense. All were followed by recessions that were usually severe. Moreover, every time the Fed reached its goal of reducing inflation by raising interest rates by three percentage points or more, the result has been one of these major crashes. There has never been a “soft landing” and a “Fed pivot” has always arrived after the crash.

Therefore, the government’s plan, starting in 2022, to stop inflation by raising interest rates and reducing deficit spending, is likely to end in a stock market crash and recession, if not worse. 

Moreover, most economists don’t even understand the significance of a federal debt that is already too large, growing exponentially, and accelerating with rising interest rates needed to reduce inflation. The federal debt is by far the highest in the nation’s history in nominal terms and will soon even exceed the highest debt levels as a percentage of GDP. The debt is leading to eventual financial collapse.

Finally, economists are not offering sustainable solutions. After the coming crash, the government will likely once again lower interest rates and increase deficit spending to gradually pump stock prices back up and even higher than before. This will depend on support from politicians and investors, even though the stock market will eventually crash again, as government debt piles up. The government could allow inflation to continue, like they did during the 1970s, but even that caused a stock market crash in real values and had to end in the severe recession of the early 1980s and subsequent deficit spending. The political far right would repeat the mistake that prolonged the Great Depression by restricting debt after the crash, while the far left would explode the debt.

The nation should be at least considering moving toward free market capitalism by eliminating government policies favoring monopolies, but economists are feckless, politicians serve the special interests and many voters are employed by monopolies.

Note: The preceding is a summary of the study found at the following link.