For over a year, the Federal Reserve ignored myriad warning signs and continued injecting money into the economy. The result was the appearance of robust economic growth and a surge in demand, especially in the labor market, which ushered in decades-high inflation. But as the Fed belatedly raises rates, the veil is falling, and financial markets with it.
Oscar Wilde’s "The Picture of Dorian Gray" offers a striking parallel to our situation. The novel’s eponymous protagonist has a portrait that ages and decays while he remains youthful and vibrant. But his health is an illusion, while his portrait — hidden from view — contains the truth.
The massive liquidity infusions by the Fed have created a mirage of economic health. Large nominal gains in corporate earnings, asset values and even wages made the economy appear healthy. But after adjusting for the inflation caused by creating too much money, these economic figures are at best disappointing and at worst negative.
