David Stockman: Global Economy, More Unstable and Incendiary by the Day

o-GLOBAL-ECONOMY-facebookIt’s getting downright hazardous out there, and not just because the robo-machines were slamming the “sell” key today. The real danger comes from the loose assemblage of official institutions which claim to be running the world.

They might better be referred to as “can kickers united.” It is now blindly obvious that they have lapsed into empty ritualism, contrivance and double-talk in the face of a global economy and financial system that is becoming more unstable and incendiary by the day.

Who in their right mind would pile $95 billion of new debt on the busted remnants of Greece? Likewise, how can Japan possibly consider enacting still another round of fiscal stimulus when it already has one quadrillion yen of debt? And what geniuses are trying to fix the bankrupt finances of China’s local governments by swapping trillions of crushing bank loans for equivalent mountains of new municipal bonds?

Turning to the the home front it is more of the same. By what rational calculus can it be said, as the Fed did in its meeting minutes, that 80 months of free money has not quite yet done the job? And that is exactly what these mountebanks had to say:

The Committee concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met. Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range.

Say again! We are now 74 months into a so-called “recovery” cycle that is well longer than the post-war average, yet the Fed is still manning the emergency fire hoses:

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Even its own research department at the St. Louis Fed has just confessed that the whole rigmarole of QE and ZIRP has had no favorable impact on the main street economy. In a White Paper dissecting Fed actions since the financial crisis, Stephen D. Williamson, vice president of the St. Louis Fed opined that,

…….. the zero interest rates in place since 2008 that were designed to spark good inflation actually have resulted in just the opposite. And he believes the “forward guidance” the Fed has used to communicate its intentions has instead been a muddle of broken vows that has served only to confuse investors. Finally, he asserts that quantitative easing, or the monthly debt purchases that swelled the central bank’s balance sheet past the $4.5 trillion mark, have at best a tenuous link to actual economic improvements……..”There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” Williamson wrote.

Self-evidently there is no main street emergency, but it is undeniable that ZIRP is the mother’s milk of Wall Street speculation. After all, the money market is where dealers and hedge fund gamblers finance themselves and put on their carry trades. That’s because no one with productive inventories of raw materials, work-in-process and finished goods would be foolish enough to fund their working capital in the overnight markets.

By contrast, speculators in tradable financial assets are thrilled to do that all day and night. They know that the shills who run the central bank’s printing press would never allow the money market to be parched for liquidity. Bernanke’s hair on fire panic in September 2008 proved that beyond a shadow of a doubt.

They also know that the Keynesian scholastics on the FOMC are so utterly naïve that they believe telegraphing to traders exactly what the intend to do for months in advance is an effective form of “policy”. Well, thank you Ben, Janet, et. al. for removing risk entirely from the oldest sin of finance—–that is borrowing short and hot and investing long and less liquid.

So the Wall Street gamblers back up their trucks and load-up all they can get of whatever is on offer in the casino. As long as it has a yield or a short-run appreciation potential, it is a no brainer to fund such “assets” in the zero rate money markets with repo, options and more exotic forms of bespoke leverage.

This creates unspeakable windfalls to the fast money which plays in the casino, of course. And it also generates enormous incentives for rank gambling in the capital markets and an endless inflation of financial asset prices. Indeed, it sucks endless capital, credit and collateral into the gambling enterprise that is enabled by contemporary Keynesian central banking, while depriving the real economy of true risk capital.

Needless to say, for the third time this century we have arrived at a bubble extreme. In fact, the aggregate market cap of the Russell 5000 at 133% of GDP is now higher relative to national income than even during the dotcom bubble (112%) and the housing blow-off (104%).

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But that’s what ZIRP does—-it inflates financial bubbles. It is more than obvious by now that the household credit channel of monetary policy transmission is broken and done.

US households reached peak leverage in 2008, and have been struggling ever since to work out from under the mountain of debt that was created after Alan Greenspan arrived in the Eccles Building and discovered the printing press in the Fed’s basement could make him an enormously popular man about town.

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But does it take a PhD in econometrics to read the obvious message of the above chart on total household debt. During the entire 80 months of ZIRP and country our brilliant monetary politburo has been pushing on a string. At the end of Q1 2015 there was still less mortgage, credit card, auto, student and other consumer loans outstanding than there were in Q4 of 2007.

Indeed, not a net dime of the massive $3.5 trillion of new liabilities created on the Fed’s balance sheet during that period ever escaped the canyons of Wall Steet. So read the Fed’s minutes of its latest meeting and weep: These fools are waving their arms at invisible Humphrey Hawkins goal posts and claim to be making steady, measureable progress toward the end zone.

The truth is, the Fed’s endless blathered about its 2% inflation target is a colossal hoax. In the first place there is no evidence whatsoever that real output and wealth increase faster at 2.0% inflation than the do at 1.0%—-or at any inflation rate at all. In fact, the Fed’s claim that it is still well shy of achieved its inflation target is the overriding reason why it keeps shoving zero cost credit into the money market.

Well, here a chart of inflation since the year 2010. The heavily medicated CPI published by the BLS has risen at a 1.8% compound rate and the core consumer component of the PPI has risen at a 2.6% annual rate. Only the PCE less food and energy has fallen appreciably below the Fed’s ostensible target, and that’s entirely due to the phony housing deflators on which it is constructed.

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(Re-posted with permission, “David Stockman: Global Economy, More Unstable and Incendiary by the Day”, originally appeared HERE)

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