Tag Archives: Federal Reserve

Which part is the Fed trying to play, Dumb or Dumber?

If you believe the newspapers, the Fed has begun a “tightening cycle.” It is on course to raise its key interest rate, little by little, in quarter-point increments.

It has to know this is a perilous thing to do. After so much market manipulation over a very long period, prices all up and down the capital structure – from junk bonds to quality stocks and solid real estate – have been bent and distorted.

After all, that was the idea: drive up the price of stocks and bonds by driving down interest rates. People would be forced to spend or invest their money rather than save it. And higher financial asset prices would make the rich feel even richer.

Walking down the street, the dollars would overflow from their pockets like turnips rolling off the back of a produce truck.

They’d feel so flush, they’d buy, buy, buy… sending the plain people into a flurry of trucking, toting, and busting their humps to provide them with goods and services.

Then, after the rich were fully satiated (how many martinis can the 1% drink?), they’d have to invest.

Cash would flow into money-losing startups like Tesla and Snapchat. Headline acquisitions, such as Amazon’s purchase of Whole Foods, would keep stock prices bubbling higher. And trillions of dollars in stock buybacks would make the rich even richer still!

But the feds could only work this miracle by buying bonds. And the feds didn’t have any money. What could they do?

No problem! They used their fake money, the post-1971 credit dollars – trillions of them — money they could create at will.

From the post-crash bottom in 2009 to today’s top, U.S. stocks and bonds registered a cumulative increase of about $21 trillion. And upon that mirage now rest the hopes, dreams, and contentment of millions of people all over the planet.

One has planned his retirement based on his gains over the last eight years. Another has taken out a loan against his stocks to fund his business. Still another – a major player on Wall Street – has a billion-dollar hedge fund portfolio… a leveraged bet on “low vol,” which depends on further support from the Fed.

And look at super investor Warren Buffett…the latest headline news tells us his gifts to charities now top $27 billion. The money is to be used to fight illness and poverty worldwide. But the gifts came in the form of Berkshire stock – not cash. Imagine how the halt and the hungry will suffer if the stock goes down!

Which brings us back to our question: How dumb is the Fed?

As you can see from the foregoing, the boom of 2009–17 was wrought by the Fed and paid for with fake money. It is a classic credit bubble, in other words – not genuine prosperity.

Almost all the new jobs created during this period were low-wage or part-time jobs in health care or government, not high-value jobs in manufacturing. That’s why real earnings, per family, have scarcely improved… and real employment (as a percentage of the available workforce) has gone down.

All the bubbly action, in other words, is in the financial markets, not the real Main Street economy. And as the Austrian School economists tell us, every boom not financed on real savings must end in a bust.

Nothing comes from nothing. Fake money produces fake prosperity. Take away the fake money… and the fake prosperity goes “poof,” too.

Which is why the Fed will never, voluntarily, stop manipulating prices. It can’t let the markets return to “normal” price discovery.

Because the markets are likely to discover prices a lot lower than Dow 20,000.

“Normal” may be a lot higher than a 2% yield on a 10-year Treasury yield, too.

“Normal” may mean a deep depression as the economy shakes off the foolish investments and misallocations of the last eight years. “Normal” would also mean the disgrace of Janet Yellen and Ben Bernanke, who are largely responsible for this bubble.

But “normal” won’t stop there. The crisis of 2008–09 was a repudiation of the Fed’s fake-money debt bubble. The stock market crashed as the bubble deflated, just as it normally does. But then central banks went back to work, doubling down on their error with more hot air than ever before.

Federal debt alone almost doubled from about $10 trillion to about $20 trillion. Worldwide, $68 trillion in debt has been added since 2007 – a 45% increase – bringing the debt-to-GDP ratio to 327%.

All of this debt now hangs on the feeble reed of more ultra-low interest rate policies.

The Fed says it is going to return its interest rate policy back to normal…

No chance. It’s not that dumb.

 

[From an article written and published by Bill Bonner of Bonner and Partners]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

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How to fix the US economy? Shut down the Federal Reserve and tell the Treasury Dept. to issue new debt-free dollars…

If Donald Trump truly wants to fix the economy, he must shut down the Federal Reserve.  If he just tries to patch up our current system, he will fail, because the system has been fundamentally (and intentionally) flawed from the very beginning.

A little over a century ago, very powerful forces on Wall Street convinced Congress to completely restructure our financial system.  An immensely powerful central bank known as the Federal Reserve was created, and the goal was to transform the U.S. dollar into a debt-based currency that would continuously be inflated, thereby creating an endless debt spiral from which the federal government could never possibly escape.  Sadly, they were successful on both counts.  Since the creation of the Federal Reserve, the value of the U.S. dollar has declined by approximately 98 percent and our national debt has gotten more than 5000 times larger.

Americans tend to give most of the credit or most of the blame for the performance of the U.S. economy to our presidents, but the truth is that an unelected, unaccountable group of central bankers has far more power over our economy than anyone else does.  The Federal Reserve has become known as the fourth branch of government, but unlike the other branches of government we are told that the Fed’s decisions are “above politics” because they are “too important”.  Fed officials fiercely guard their “independence”, and they fiercely resist any “interference” from Congress, the President, or the American people.

Donald Trump can try to lower taxes and reduce regulations, but what he will be able to do to influence the economy pales in comparison to the immensely powerful tools that the Fed wields.  The Fed controls interest rates, the Fed controls the money supply, and the Fed regulates the banks.

To get an idea of how enormously powerful the Fed is, pull out a dollar bill.  As you look at that dollar bill, notice that it says “Federal Reserve Note” right at the top.  In the financial world, a “note” is an instrument of debt, and the truth is that our system was designed to create as much debt as possible.

So why are we using debt-based “Federal Reserve Notes” in the first place?  Shouldn’t Congress have control over our currency?

According to Article I, Section 8 of the U.S. Constitution, it is Congress that has the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So how did the Fed get involved?

Well, it is a very long and convoluted story, and if you are interested in the history behind it, read an excellent book by C. Edward Griffin entitled “The Creature from Jekyll Island: A Second Look at the Federal Reserve“.  Basically, big money interests on Wall Street got their hooks into the White House and Congress, and they rushed through legislation right before Christmas in 1913 that created this insidious central banking system that was designed to slowly but surely take wealth from the American people and put it into their own hands.

Sadly, most Americans don’t even realize that we have a debt-based currency, nor do they understand where our money comes from.  Money is normally created by the Federal Reserve under our current system.

When the U.S. government decides that it wants to spend another billion dollars that it does not have, it does not print up a billion dollars.

Rather, the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve.

The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds.

The Federal Reserve takes the U.S. Treasury bonds that it receives in exchange for the “Federal Reserve Notes” that it gave to the government and it auctions off those bonds to the highest bidder.  But of course this process always creates more debt than it does money…

The U.S. Treasury bonds that the Federal Reserve receives in exchange for the money it has created out of nothing are auctioned off through the Federal Reserve system.

But wait.  There is a problem.  Because the U.S. government must pay interest on the Treasury bonds, the amount of debt created by this transaction is greater than the amount of money that has been created.

So where will the U.S. government get the money to pay that debt?

Well, the theory is that if we can get money to circulate through the economy really, really fast and tax it at a high enough rate, the government will be able to collect enough taxes to pay the debt.

But that never actually happens, does it?

And the creators of the Federal Reserve understood this as well. They understood that the U.S. government would not have enough money to both run the government and service the national debt. They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game.

So our debt just keeps going up and up and up.  While Barack Obama has been in the White House our national debt has risen by more than 9 trillion dollars, and at this moment it is sitting just under the 20 trillion dollar mark.

But we shouldn’t be surprised by this, because this is precisely what the Federal Reserve system was designed to do to us.  Many conservatives still hold to the mistaken illusion that we could somehow pay all of this debt back someday, but this is mathematically impossible to do.  If the government went out today and grabbed every single dollar in existence we could not pay back the national debt, and of course we also have trillions of dollars of household debt, trillions of dollars of corporate debt, and trillions of dollars of state and local government debt that we need to pay back as well.

Under the current system our only hope is to keep the wheel spinning by continuing to devalue the dollar and by continuing to go into even greater amounts of debt.

And of course it isn’t just the United States that is in this predicament.  At this point, almost every single nation on the entire planet has a central bank.

Even though there are extremely sharp disagreements among nations on virtually everything else, somehow central banking has achieved nearly universal adoption.   (As you read this article, well over 99.9% of the population of the globe lives in a country that has a central bank.)

Do you think that is just a coincidence?  There are still a few very small countries such as the Federated States of Micronesia that do not have a central bank, but the only big nation not to have one is North Korea.  And you would literally have to be insane to want to live in North Korea.

But now we have an opportunity to get free from this insidious system.  The truth is that we don’t have to have a central bank.  In fact, the greatest period of economic growth in U.S. history was when there was no central bank.

We don’t need central planners to set our interest rates and to manipulate our money supply.  They will never admit this, but the reality of the matter is that their interference in the economy often creates tremendous economic busts.  (Since the Federal Reserve was created in 1913, there have been 18 distinct recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.  Considering their track record, don’t you think it’s time for a change?)

And we don’t have to have a debt-based currency.  In fact, not too long ago we had a president who decided to start issuing debt-free “United States Notes”.

Back in 1963, President John F. Kennedy issued Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were directly created by the U.S. government.  He was assassinated shortly thereafter.

 

NORM ‘n’ AL Note:  Maybe now you can add one and one and get two when you think about the Kennedy assassination.  There has always been a “it just doesn’t make sense” aspect to that terrible event in our history, but when you factor the Federal Reserve and its tremendous power into the equation, it certainly makes more sense than it ever did previously.  Would the Fed actually kill a sitting American president to assure its own powerful existence continued unchanged?  Seems like the answer to that question is more than obvious.

 

Most Americans don’t realize this, but many of the debt-free United States Notes that were issued under President Kennedy are still in circulation today, and President Trump could take similar steps.

But will he?

It has been said that the borrower is the servant of the lender, and the Federal Reserve system has turned all of us into debt slaves.

Debt is a form of social control, and the global elite use all of this debt to dominate the planet.  The total amount of debt in the world just hit a brand new record high of 152 trillion dollars, and the longer we allow the central banks to control the system the bigger this debt bubble will become.

There is a way out, and here in the United States that starts with shutting down the Federal Reserve and issuing debt-free currency.  It would take someone very bold to make a move like this.  Let us hope we just elected a man with enough guts and courage to make it happen.

 

[From an article published by The Economic Collapse Blog]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

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2007 All Over Again: US heading into yet another banking crisis

Latest Fed data shows US banking system deteriorating fast:

Fed economic data graph

The green line tracks fluctuations in the US yield curve, defined as the difference in yield between 10-year and 2-year Treasuries. When the yield curve is steeply positive, banks are able to borrow short at low rates and lend long at higher rates, earning a nice return and in the process driving economic growth. When the yield curve flattens the opposite occurs, with banks unable to make money and becoming reluctant to lend. So a flattening yield curve implies a slowing economy. Note the similarity between the past few years’ spread contraction and the one that began in 2004 and culminated in the Great Recession.

Now check out the red and blue lines representing different measures of credit quality. The lower they are, the fewer loans are in various categories of “non-performance,” and vice versa. What’s happening now is similar to the spike in bad loans that started in 2005.

The implication: Despite the headline numbers (like Friday’s largely-fictitious jobs report) that imply a stable, modest expansion, under the surface the financial system — composed of business loans, bank profits, etc. — is deteriorating fast.

And since interest rates have fallen rather than risen post-Brexit, causing yield curves around the world to flatten further, it’s safe to say that these trends are accelerating.

That would explain why so many iconic money managers and speculators have turned publicly bearish recently. The latest is Jeremy Grantham of Boston-based hedge fund GMO. Here’s an excerpt from a MarketWatch article on his firm’s current stance:

Investment firm that called the 2008-09 crash doesn’t like most stocks or bonds

You need a portfolio of at least $5 million to get in the door as a client at Boston-based money management firm GMO.And with some reason. The firm is famous for predicting the last two financial crashes ahead of time, and firm chairman Jeremy Grantham is a legendary figure on Wall Street. His quarterly letters are required reading by anyone managing other people’s money.

GMO is usually seen as too bearish, but in an industry that is generally far too bullish that’s no bad thing. And often forgotten is that the firm has made some terrific contrarian buy recommendations too — such as emerging markets and value stocks at the start of the last decade, and of stocks generally in the wake of the 2008-09 crash.

But for those of us who don’t have $5 million or $10 million knocking around, what’s GMO’s best advice at the moment? To find out, I spoke to Matt Kadnar, a member of the firm’s asset allocation committee. Here’s what he said about how GMO perceives the current global investing environment:

1. The overall investment outlook is really, really dismal. “There is no asset out there that is cheap,” Kadnar says. None.

2. The outlook for U.S. stocks is terrible. GMO’s central forecast — which is a directional estimate more than a precise prediction — warns that U.S. large- and small-cap stock indices are now both so overpriced compared to history that they will probably lose value, compared to inflation, over the next seven or so years.

3. In the wake of the emerging markets slump and now Brexit, investors are becoming almost as dangerously fixated on U.S. stocks as they were (disastrously) in 2000, according to GMO. Kadnar says that once again, clients are starting to ask why anyone needs to own anything other than the S&P 500.

4. Investors also are likely to end up losing — after inflation — over the next seven years or so on U.S. bonds, cash, and small-cap international stocks, GMO’s current central forecast predicts. The firm also sees minuscule post-inflation, or “real” returns, on both international large-cap stocks and emerging-market bonds.

Things will apparently be pretty rough again in the financial sector. Hang on tight.

 

[published by DollarCollapse.com]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

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Good news: Employed people up by 67,000 in June. Bad news: Unemployed people up by 347,000 in June.

Head of Federal Reserve says “As people retire, they work less.”  (Well gosh, we thought that was the POINT of retiring, so you COULD work less. Guess Janet Yellen really nailed that one…people who are retiring are working less. Better alert the media for that news flash.)

 

The civilian labor force expanded in June, adding 414,000 people, the Bureau of Labor Statistics reported today.

The number of employed people increased by 67,000 to 151,097,000 in June, but the number of unemployed people increased even more, by 347,000 to 7,783,000.

The unemployment rate ticked up two-tenths of a point to 4.9 percent.

BLS said 94,517,000 Americans were not in the labor force in June, a slight improvement from May’s record 94,708,000; and after dropping for three straight months, the labor force participation rate increased a tenth of a point to 62.7 percent in June.

In September 2015, the labor force participation rate hit 62.4 percent, its lowest point since 1977. So the June participation rate was only three-tenths of a point off its record low.

The economy added 287,000 jobs in June, the Labor Department said, a rebound from the extremely weak 11,000 (revised from 38,000) jobs added in May and the revised 144,000 jobs added in April.

In June, according to the Labor Department’s Bureau of Labor Statistics, the nation’s civilian non-institutional population, consisting of all people 16 or older who were not in the military or an institution, reached 253,397,000. Of those, 158,880,000 participated in the labor force by either holding a job or actively seeking one.

The 158,880,000 who participated in the labor force equaled 62.7 percent of the 253,397,000 civilian non-institutional population.

Last month, Federal Reserve Chair Janet Yellen told Congress the Fed is keeping a close eye on the labor force participation rate. She said she expects that rate to “continue declining in the coming years because we have an aging population.”

As baby-boomers retire, “they work less,” she noted, even though younger people “participate more.”

People who have not actively looked for work in the previous month are not counted as participating in the labor force. Yellen told Congress that “a sign of a strengthening labor market is to see people who were discouraged brought back into the labor force.”

The Bureau of Labor Statistics counted 5,692,000 people in June as “persons who currently want a job,” down from the 5,923,000 in May.

Yellen was asked last month why workers are not being hired for those millions of available jobs:

“There are an enormous number of job openings, and there is a certain degree of mismatch of workers who are looking for work with the job openings that are available,” Yellen said.

She pointed to the shift from unskilled workers to the demand for skilled labor. “The consequence of that has been rising inequality, a high return to education and downward pressure on the wages of those who are less skilled and middle income.”

 

[by Susan Jones, writing for CNS NEWS]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

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Indisputable confirmation that a new recession has already begun

Temporary Help Services

A  new economic downturn has already begun.  Last Friday, the government released the worst jobs report in six years, and it has a lot of people really freaked out.  But when you really start digging into those numbers, you quickly find that things are even worse than most analysts are suggesting.  In particular, the number of temporary jobs in the United States has started to decline significantly after peaking last December.  Why this is so important is because the number of temporary jobs started to decline precipitously right before the last two recessions as well.

When economic conditions start to change, temporary workers are often affected before anyone else is.  Temporary workers are easier to hire than other types of workers, and they are also easier to fire.

In this chart above you can see that the number of temporary workers peaked and started to decline rapidly before we even got to the recession of 2001.  And you will notice that the number of temporary workers also peaked and started to decline rapidly before we even got to the recession of 2008.  This shows why the temporary workforce is considered to be a “leading indicator” for the U.S. economy as a whole.  When the number of temporary workers peaks and then starts to fall steadily, it’s a major red flag.  And that is why it is so alarming that the number of temporary workers peaked in December 2015 and has fallen quite a bit since then.

Temporary Help Services

In May, the U.S. economy lost another 21,000 temporary jobs, and overall we have lost almost 64,000 since December.

If a new economic downturn had already started, this is precisely what we would expect to see.  The following is some commentary from Wolf Richter

Staffing agencies are cutting back because companies no longer need that many workers. Total business sales in the US have been declining since mid-2014. Productivity has been crummy and getting worse. Earnings are down for the fourth quarter in a row. Companies see that demand for their products is faltering, so the expense-cutting has started. The first to go are the hapless temporary workers.

Another indicator which is pointing to big trouble for American workers is the Fed Labor Market Conditions Index.  Just check out this chart from Zero Hedge, which shows that this index has now been falling on a month over month basis for five months in a row.  Not since the last recession have we seen that happen…

Fed Labor Market Conditions MoM

Of course I have been warning about this new economic downturn since the middle of last year.  U.S. factory orders have now been falling for 18 months in a row, job cut announcements at major companies are running 24 percent higher up to this point in 2016 than they were during the same time period in 2015, and just recently Microsoft said that they were going to be cutting 1,850 jobs as the market for smartphones continues to slow down.

The exact same patterns that we witnessed just prior to the last major economic crisis are playing out once again right in front of our eyes.

Perhaps you have blind faith in Barack Obama, the Federal Reserve and our other “leaders”, and perhaps you are convinced that everything will turn out okay somehow, but there are others doing what they can to get prepared in advance.

It may surprise you to learn that George Soros is one of them.

According to recent media reports, George Soros has been selling off investments like crazy and has poured tremendous amounts of money into gold and gold stocks

Maybe the best argument in favor of gold is that American legendary investor and billionaire George Soros has recently sold 37% of his stock and bought a lot more gold and gold stocks.

George Soros, who once called gold ‘the ultimate bubble,’ has resumed buying the precious metal after a three-year hiatus. On Monday, the billionaire investor disclosed that in the first quarter he bought 1.05 million shares in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund, valued at about $123.5 million,” Fortune and Reuters reported Tuesday.

George Soros didn’t make his fortune by being a dummy.  Obviously he can see that something big is coming, and so he is making the moves that he feels are appropriate.

If you are waiting for some type of big announcement from the government that a recession has started, you are likely going to be waiting for quite a while. (The government never wants to release that dreaded “announcement” until the facts are obvious to everyone who still has a pulse.  Back in mid-2008 Federal Reserve Chairman Ben Bernanke insisted that the U.S. economy was not heading into a recession even though we found out later that we were already in one at the moment Bernanke made that now infamous statement.)

You can be like Ben Bernanke in 2008 and stick your head in the sand and pretend that nothing is happening, or you can honestly assess the situation at hand and adjust your strategies accordingly like George Soros is doing.

Of course I am not a fan of George Soros at all.  The shady things that he has done to promote the radical left around the globe are well documented.  But they don’t call people like him “the smart money” for no reason.

Down in Venezuela, the economic collapse has already gotten so bad that people are hunting dogs and cats for food.  For most of the rest of the world, things are not nearly that bad, and they won’t be that bad for a while yet.  But without a doubt, the global economy is moving in a very negative direction, and the pace of change is accelerating.

 

[from an article by Michael Snyder in The Economic Collapse Blog]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

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Losing ground in America’s heartland, continued…

(THIS IS A LONG ARTICLE, BUT WELL WORTH READING.)

 

The Fed’s crusade to pump-up inflation toward its 2.00% target by hammering-down interest rates to the so-called zero bound is economically lethal. The former destroys the purchasing power of main street wages while the latter strip mines capital from business and channels it into Wall Street financial engineering and the inflation of stock prices.

In the case of America’s 80 million working age adults (25 or over) with a high school education or less, the Fed’s double whammy has been catastrophic. As we demonstrated yesterday, the employment-to-population ratio for this group has plummeted from 60% prior to the great recession to about 54% today.

In round terms this means that the number of job holders in that pool of the less educated has shrunk from 49.4 million to 43.5 million since early 2007. That’s nearly 6 million workers gone missing or 12% of the total from just nine years ago.

And as we documented yesterday this plunge is not due to aging demographics. The MSM meme that it’s all about the baby boomers hanging up their spikes doesn’t wash; the labor force participation rate of persons over 65 has actually increased sharply in recent years.

Shrinking Pool Of Workers With High School Education Or Less

But even those who have managed to stay employed have suffered a devastating reduction in purchasing power. In fact, based on our Flyover CPI, each dollar of wages would buy 3.1% less annually or a cumulative 70% less since 1999.

And that assumes just 65% of the budgets of these lower-wage households are consumed by the four horsemen of inflation—-food, energy, medical and housing. There can be little doubt that they actually spend a materially greater share on these necessities than we have allocated to them in our index.

Flyover CPI Since 1999

By contrast, nominal wages rates for the high school and under workers have risen by less than 50% over the same period. That means drastic purchasing power compression.

In fact, flyover America’s vast cohort of less educated workers has experienced an approximate 1.1% decline in their real weekly wages every year this century. In 2015 dollars of purchasing power, average pay has declined from $475 per week to $397 per week.

That’s right. When viewed on an annualized basis, households which were scrapping by on $24,700 per year in 2000 have seen the purchasing power of their pay checks drop to $20,600 today or by nearly 17%.

Yet the house of academic fools in the Eccles Building keep insisting that we have insufficient inflation!

Likewise, the all knowing pundits of the Acela Corridor (Washington/Wall Street) can’t figure out why Donald Trump has come roaring out of nowhere.

Real Weekly Wages- High School Graduates, No College

 

That gets us to the Wall Street/Keynesian cult of consumer spending. The latter holds that Americans who “shop until they drop” are the mainspring of the US economy based on the silly observation that personal consumption expenditures (PCE) comprise 70% of the GDP accounts, which themselves are a Keynesian construct.

Then again, no one told them that fully $3.5 trillion or 28% of total PCE consists of imputed housing consumption via OER (owners equivalent rent) and health care costs heavily funded by third-parties such as government entitlements and employer-based health insurance plans.  No one “shopped” to fund either of these huge PCE components, but self evidently someone worked to pay the taxes and premiums.

That is, real capitalist growth and prosperity stems from the supply-side ingredients of labor, enterprise, capital and production, not the hoary myth that consumer spending is the fount of wealth.

Yet even within the framework of our Keynesian monetary central planners, how did real PCE grow so strongly during the last two decades when real incomes for a huge share of the work force were falling so sharply?

In a word, debt. The flip-side of the Greenspan/Bernanke/Yellen wage crushing operation was a national LBO in the household sector.

During the 21 years between Greenspan’s arrival at the Fed in August 1987 and the early 2008 peak, household debt erupted from $2.7 trillion to $14.3 trillion or by 5.3X.

To be sure, nearly $12 trillion of extra debt, representing an annual growth rate of nearly 8.5%, speaks for itself in terms of the implied monumental excess. But our Keynesian witch doctors have a way of attempting to minimize the import of it by what we call the “inflation lockstep fallacy”.

That is to say, there is purportedly not so much to see here because much of this huge gain represents inflation; and, of course, wages and incomes were inflating over this 21 year period, too. What counts, or so claim our Keynesian bettors, is “real dollar” amounts as computed by their bulimic inflation indices.

Au contraire!

Wages in the Chinese export factories were not being set by the PCE deflator less food and energy as confected and tabulated by some GS-16s in the BLS’ statistical puzzle palace. On the margin, the “China price” in the world’s labor market was less than $1 per hour equivalent during most of that time.

And that’s a full stop. Constant dollar statistical deflators had nothing to do with it.

The Fed’s policy of systematically and massively inflating the domestic cost of living and household debt, therefore, resulted in a giant economic deformation—-one even greater than that implied by the parabolic debt gains through 2008 shown above.

Indeed, the full import can only be grasped by considering the sound money contrafactual case. To wit, as we demonstrated in an earlier post on this topic the CPI would have declined by 1-2% per year under a sound money regime after the early 1990’s when China’s export machine took off.

That means that even under a scenario of 3% labor productivity growth and constant household leverage ratios (i.e. debt-to income), total household debt would have grown by perhaps 2% per annum.

So by 2008 outstanding household debt would have been in the range of $4 trillion, not $14 trillion.

That’s right. Thanks to the utterly wrong-head monetary policies of Greenspan and his successors, US households ended up with $10 trillion of extra debt to lug around. And in the bargain, they got bloated nominal wage rates, which resulted in the massive off-shoring of their jobs, and shrinking purchasing power, which lowered the living standard of the less educated flyover zone work force by 17% just since the turn of the century.

The extent of this destructive household sector LBO is hinted at in the graph below. Historically, the ratio of household debt—-mortgages, credit cards, car loans and the rest—–was under 80% of wage and salary income.

After Nixon pulled the props out from the last vestiges of sound money at Camp David in August 1971 and turned the Fed loose to print at will, however, the ratio began to creep steadily higher.

Yet it was only after the arrival of Greenspan in the Eccles Building that the household leverage ratio went virtually parabolic, climbing from about 100% of wages and salaries to nearly 225% by the early 2008 peak.

We have called this a one-time parlor trick of monetary policy because while the leverage ratio was rising, it did permit households to supplement spending from their current wages and salaries with the proceeds of incremental borrowings. Undoubtedly, this artificial goosing of living standards by the central bank money printers did help insulate flyover America from feeling the full brunt of its shrinking job opportunities and  the deflating purchasing power of its pay checks.

No more. The household LBO is over and done, but the slightly declining leverage ratio shown in the chart is not a measure of progress; it’s an indicator of the distress being felt by households that have been forced to cut their consumption expenditures to the level of current earnings, which, in turn, are not rising nearly as fast as the 3.1% inflation rate afflicting flyover America.

Household Leverage Ratio

There is no secret or mystery as to how America’s working households were led into this appalling debt trap. The fact is, the befuddled Greenspan actually bragged about it when he celebrated the higher consumption levels that were being funded by MEW or mortgage equity withdrawal.

That was just Fedspeak for the fact that under its interest rate repression policies, American families were being massively incentivized and encouraged day and night by cash-out mortgage financing ads ( e.g “Lost another one to Ditech!”) to hock their homes to the mortgage man and splurge on the proceeds. This reached nearly a $1 trillion annual rate and 9% of disposable personal income at the peak just before 2008.

That Greenspan took great pains to track the data and publish the above chart is a measure of how far the Fed had descended into “something for nothing” economics.

Did they think that the leverage ratchet would never stop rising? Did they not recognize the fundamental economic fact of the present era? Namely, that there is a massive 80-million strong baby-boom generation heading for retirement and that for better or worse, home equity accumulation owing to the deductibility of interest has been its primary vehicle of savings?

Well, apparently not in the slightest. Here is what was happening behind the screen during Greenspan’s spurious MEW campaign. American households were strip-mining the equity from their homes and burying themselves in mortgage debt.

Total mortgage debt outstanding soared from $1.8 trillion to $10.7 trillion or by nearly 6X during this 21 year period. And even though housing prices more than doubled, the ratio of equity to owner-occupied housing asset value plunged from 67% to 37% over the period.

Here’s the thing. The MEW party ended nine years ago, but virtually all of Greenspan’s MEW is still there. Flyover America may not know exactly how it got buried in such massive debts, but it knows that the current Washington/Wall Street Bubble Finance regime has left it high and dry. It now suffers a relentless shrinkage of living standards even as these contractual debt obligations chase the huge cohort of baby-boomers right into their retirement golden years.

The only thing worse than the MEW legacy plaguing seniors is what’s happening on the other end of the demographic curve. Among student age Americans, the degree of debt enslavement has become even more draconian.

In the last decade alone, total student loans outstanding have nearly tripled, rising from $500 billion in 2006 to $1.34 trillion at present. And for reasons laid out below, a disproportionate brunt of this massive student loan burden is being shouldered by flyover America.

That’s mainly because the preponderant share of the nation’s 25 million higher education students comes from the flyover zones. Those precincts still had a semblance of a birth rate 25 years ago, unlike the culturally advanced households of the bicoastal meccas.

Stated differently, these staggering debt obligations were not incurred by Wellesley College art history majors or even needs-based diversity students at Harvard Law School. They are owed by the inhabitants of mom and pop’s basements scattered over the less advantaged expanse of the land.

After all, the Ivy league schools including all of their graduate departments account for only 140,000 students or 0.5% of the nation’s total. Even if you add in the likes of MIT, Stanford, Caltech, Northwestern, Duke, Vanderbilt and the rest of the top 20 universities you get less than 250,000 or 1% of the student population.

The other 24 million are victims of the feckless Washington/Wall Street ideology of debt and finance. To wit, tuition, fees, room and board and other living expanses have erupted skyward over the last two decades because Washington has poured in loans and grants with reckless abandon and Wall Street has fueled the madcap expansion of for-profit tuition mills.

Even setting aside the minimum $50,000 annual price tag at private institutions, the tab has soared to $20,000 annually at public 4-year schools and nearly $30,000 per year at the tuition mills.

These figures represent semi-criminal rip-offs. They were enabled by the preternaturally bloated levels of debt and finance showered upon the student population by the denizens of the Acela Corridor.

So the former now tread water in an economic doom loop. Average earnings for 35 year-olds with a bachelors degree or higher are $50,000 annually, compared to $30,000 for high school graduates and $24,000 for dropouts.

Thus, the sons and daughters of the flyover zones feel compelled to strap-on a heavy vest of debt in order to finance the insanely bloated costs of higher education. But once so “educated”, the overwhelming majority end up with $30,000 to $100,000 or debt or more.

In this regard, the so-called for-profit colleges like Phoenix University, Strayer Education and dozens of imitators deserve a special place in the halls of higher education infamy. At their peak a few years ago, enrollments at these schools totaled 3.5 million.

But overwhelmingly, these “students” were recruited by tuition harvesting machines that make the all-volunteer US Army look like a piker in comparison. To wit, typically 90% of the revenues of these colleges were derived from student grants and especially loans——-hundreds of billions of them—-but less than one-third of that money went to the cost of education, including teachers, classrooms, books and other instructional costs.

At the same time, well more 33% went to SG&A and the overwhelming share of that was in the “S” part. That is, prodigious expenditures for salesmen, recruiters, commissions and giant bonuses and other incentives and perks.

Needless to say, this made for good growth and margin metrics that could be hyped in the stock market.  In fact, after the cost of education and all of the massive selling expense to turbocharge enrollment growth was absorbed, there was still upwards of 35-40% of revenue left for operating profits.

That’s right. For a decade until the Obama Administration finally lowered the boom after 2011, the fastest growing and most profitable companies in America were the for-profit colleges.

In short order they became a hedge fund hotel, meaning that the fast money piled into the for-profit college space like there was no tomorrow. So doing, they often drove PE ratios to 60X or higher, bringing instant riches to start-up entrepreneurs and top company executives, who, in turn, were motivated to drive their growth and profit “metrics” even harder.

At length, they became tuition mills and Wall Street speculations that were incidentally in the higher education business, or not. The combined market cap of the six largest public companies went from less than $2 billion to upwards of $30 billion in a decade.

The poster boy for this scam is surely Strayer Education. Between 2002 and the 2011 peak, its sales and net income grew at 25% per year and operating profit margins clocked in at nearly 40%.

Not surprisingly, Strayer was peddled as the second coming of “growth” among the hedge funds. The momo chasers thus pushed its PE ratio into the 60-70X range in its initial growth phase, and it remained in the 30-40X range thereafter.

Accordingly, its market cap soared by 7X from $500 million to $3.5 billion at the peak. The hedge funds made a killing.
STRA Market Cap Chart

STRA Market Cap data by YCharts

Then the Federal regulators threw on the brakes, and it was all over except the shouting. Total market cap of more than $27 billion disappeared from the segment within three years after 2011 and the hedge fund hotel experienced a mass stampede for the exits.

What was left were millions of flyover zone thirty-something’s stuck with crushing unpaid loans, educations of dubious value and a lot more years in mom and pop’s basement.

Should any of these tuition mills have even existed, let alone been valued at 60X earnings——-earnings that did not derive from real economic value added and which were totally at the whims of the US department of education?

Of course not.

But then again, after 20 years of radical financial repression the Wall Street has been turned into a casino that scalps the flyover zone whenever it gets half the chance.

 

[by David Stockman, writing for DAVID STOCKMAN’S CONTRA CORNER]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

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Financial time bombs hiding in plain sight…

“The Fed is operating a giant monetary sump pump for no rational purpose whatsoever, and it’s based on pure financial fraud to boot.”

 

Monetary central planners are pushing on a credit string to no effect except to further drastically deform and destabilize a financial system that is already on the verge of implosion.

 

The bear will soon be arriving in earnest, marauding through the canyons of Wall Street while red in tooth and claw. Our monetary central planners, of course, will once again—for the third time this century——be utterly shocked and unprepared. That’s because they have spent the better part of two decades deforming, distorting, denuding and destroying what were once serviceably free financial markets. Yet they remain as clueless as ever about the financial time bombs this inexorably fosters.

The sum and substance of Keynesian central banking is the falsification of financial prices. In essence, this means pegging interest rates below market clearing levels on the theory that more borrowing and spending will thereby ensue.

To this traditional credit channel of monetary policy transmission has been added in recent years the notion of an FX channel, which works through currency depreciation and export stimulus; and the wealth effects channel, which seeks to levitate the paper wealth of the top 10% of households so that they will feel emboldened to spend more at luxury retail emporiums, BMW showrooms and upscale vacation spots.

Needless to say, currency trashing might work for a tiny export economy like New Zealand. But on a global scale among the big national economies, it’s just a recipe for a race to the bottom. Ultimately it leads to nothing more than the inflation of imported commodities and goods and the reallocation of income and wealth from domestic industries and households to exporters and their shareholders.  Japan proves that in spades.

With respect to the false FX channel, even Black Rock’s chief big thinker, Peter Fisher, hit the nail on the head last week on Bloomberg:

“But let’s be clear, negative rates for the FX rate is about a race to the bottom of competitive devaluation,” he asserted. “The International Monetary Fund was established to try to prevent us from doing that again, what we did in the 1920s and ’30s that were such a disaster.”

It is a measure of the political euthanasia induced into American politics by 20 years of central bank dominance that the so-called wealth effects channel is even taken seriously. It amounts to a massive fiscal transfer and trickle-up to the most affluent 10% of US households who own 85% of financial assets.

Moreover, this odious reverse Robin Hood feat is effected by 12 unelected apparatchiks who sit on the FOMC. From their august perches, they perform live monetary experiments on the American public with no accountability whatsoever.

That these depredations are fostering a hideously unjust redistribution of wealth from main street to a tiny elite of money shufflers, gamblers and silicon valley bubble-riders is attested to by the rise of Bernie Sanders, and Donald Trump, too. Besides stoking xenophobia and racial prejudice, The Donald is heading toward the GOP nomination because, ironically, he is self-funded and can loudly and honestly boast that he is not beholden to the Fat Cats who rule the country.

Besides the rank injustice, there is also the sheer stupidity of it. Implicit in the whole misbegotten wealth effects doctrine is the spurious presumption that the Wall Street gambling apparatus can be rented for a spell by the central bank. So doing, our monetary central planners believe themselves to be unleashing a virtuous circle of increased spending, income and output, and then more rounds of the same.

At length, according to these pettifoggers, production, income and profits catch-up with the levitated prices of financial assets. Accordingly, there are no bubbles; and, instead, societal wealth continues to rise happily ever after.

Not exactly. Central bank stimulated financial asset bubbles crash. Every time.

The Fed and other practitioners of wealth effects policy do not rent the gambling apparatus of the financial markets. They become hostage to it, and eventually become loathe to curtail it for fear of an open-ended hissy fit in the casino. Bernanke found that out in the spring of 2013, and Yellen three times now——in October 2014, August 2015 and January-February 2016.

But unlike the last two bubble cycles, where our monetary central planners did manage to ratchet the money market rate back up to the 6% and 5% range, by 2000 and 2007, respectively, this time an even more obtuse posse of Keynesian true believers rode the zero bound right to the end of capitalism’s natural recovery cycle.

Accordingly, the casinos are populated with financial time bombs like never before. Worse still, the central bankers are now so utterly lost and confused that they are all thronging toward the one thing that will ignite these time bombs in a fiery denouement.

That is, negative interest rates. This travesty reflects sheer irrational desperation among central bankers and their fellow travelers, and will soon illicit a fire storm of political revolt, currency hoarding and revulsion among even the gamblers inside the casino.

Besides that, they are crushing bank net interest margins, thereby imperiling the solvency of the very banking system that the central banks claim to have rescued and fixed.

We will treat with some of the time bombs set to explode in the sections below, but first it needs to be emphasized that the third bubble collapse of this century is imminent. That’s because both the global and domestic economy is cooling rapidly, meaning that recession is just around the corner.

Based on the common sense proposition that the nation’s 16 million employers send payroll tax withholding monies to the IRS based on actual labor hours utilized—-and without any regard for phantom jobs embedded in such BLS fantasies as birth/death adjustments and seasonal adjustments——my colleague Lee Adler reports that inflation-adjusted collections have dropped by 7-8% from prior year in the most recent four-week rolling average.

Federal Withholding Tax Trend - Click to enlarge

As Lee noted in his Wall Street Examiner:

The annual rate of change in withholding taxes for collections through Thursday, February 18, approached a level which signals not just recession but is within a couple of percent of indicating a full fledged economic depression. As of February 18, 2016, the annual rate of change was -5.6% in nominal terms versus the corresponding period a year ago. That’s down from -3.7% a week before, +0.6% a month before, +5.8% three months ago, and down from a peak of +8.7% in early February 2015…….Adjusted for the nominal growth rate of employee compensation, the implied annual real rate of change is now roughly –7.5 to -8% year over year.

So there will be carnage in the casino when it becomes evident that recession has again visited this fair land, but that the Fed is utterly out of dry powder. There is not a chance in the world that NIRP will work or even be permitted by what will be the suddenly awaked politicians of Washington.

Even Peter Fisher admitted that NIRP signals the end of the road for Keynesian central bankers:

Fisher believes that central bankers’ growing penchant for negative policy rates stems from a desire to avoid admitting that they’ve expended all of their monetary ammunition.

Yet what immense societal damage these fanatics have done charging mindlessly toward this dead end. In fact, our monetary central planners have become so self-deluded and drunk with power that they now dispense sheer nonsense with complete alacrity. Thus, the Fed’s actual printing press operator, Simon Potter of the New York Fed, relieved himself of the following tommyrot in a speech today at Columbia University:

The Fed used to use a scarcity of bank reserves to set monetary policy but has had to adopt new tools for raising rates with a balance sheet of $4.5 trillion.

“We have achieved excellent control over the effective federal funds rate, and we have done so while avoiding unintended effects on the financial system or financial stability,” Potter said.

Is this man kidding? There is no Federal funds market worthy of the name. The Fed’s massive bond purchasing program and the monumental excess reserves it generated obviated and destroyed the fed funds market long ago; and at a miniscule $45 billion, the residue of a market which trades virtually by appointment now amounts to just 0.3% of the footings of the US banking system.

Well, here are the Fed’s “new tools”. What they achieve is not a financial price or interest rate; what they produce is a purely counterfeit rate issuing from what amounts to a monetary circle jerk.

To wit, the Fed raised the cap on its domestic reverse repo bid from $300 billion to $2 trillion and set the yield at 25 basis points. On top of that, it has raised the foreign bank repo pool to $250 billion, where its now paying approximately 33 basis points. Finally, the interest rate it pays member banks with excess reserves (IOER) of approximately $2.5 trillion has been raised to 50 basis points.

Just call the combination of these three facilities the mother of all Big Fat Bids. And throw in the fact that the US treasury is now also flooding the market with T-bills. Under those conditions, how could it be otherwise than that money market rates, including federal funds, would settle in the FOMC’s 25-50 basis point target range?

So what? The Fed is operating a giant monetary sump pump for no rational purpose whatsoever, and it’s based on a pure financial fraud to boot.

On the former point, there is not a single rational business in America that would actually wish to fund its working capital or any other assets on an overnight tender. That’s why even floating rate revolvers have terms of a year or longer and contractual guarantees of availability if covenants are complied with.

The only beneficiaries of overnight money at 38 bps are Wall Street carry trade gamblers, and they would be just as grateful for an announced peg at 12 bps or 100 bps or even 250 bps. The only thing they really care about is short-run certainty about the cost of carrying their gambling chips—-something the Fed’s peg unfailingly provides. From the perspective of the main street economy, however, the whole federal funds targeting gambit is a thoroughly pointless farce.

So, yes, the Keynesian fools in the Eccles Building are mounting what amounts to a $6 trillion bid in order to peg with great precision a money market rate that is of absolutely no moment to the main street economy. That’s because the US household and business sectors are already at Peak Debt. Consequently, the old Keynesian credit channel of monetary policy transmission is over and done. The monetary central planners, therefore, are pushing on a credit string to no effect except to further drastically deform and destabilize a financial system that is already on the verge of implosion.

But what makes the world so dangerous is that they are doing it with a fraudulent Rube Goldberg Contraption that establishes beyond a shadow of doubt that the FOMC is lost in a monetary puzzle palace, and is capable of virtually any kind of desperate gambit. After all, just recall where this Big Fat Bid of $6 trillion equivalent comes from.

The $2 trillion overnight reverse repo facility essentially means that the Fed is hocking a part of its massive $4.5 trillion trove of treasury bonds and mortgage-backed securities to borrow cash that it doesn’t need. And, yes, this repo collateral was previously purchased with fiat credits that it had conjured from thin air and deposited into the bank accounts of Wall Street dealers who sold these securities to the Fed’s Open Markets desk via QE.

Then again, the banking system in aggregate didn’t have an immediate need for the new reserves injected via QE so they accumulated at the New York Fed, rising from a level just $40 billion in August 2008 to $2.5 trillion at present. Now, stacked as they are in towering digital piles at 33 Liberty Street, the second component of the Feds “new tools” keeps these previously inconceivable quantities of excess reserves happily sequestered. That is, they are bribed to stay put by 50 bps of IOER payments.

There shouldn’t be any confusion here. The Fed is gratuitously subsidizing its member banks to the tune of $13 billion annually for no rational purpose whatsoever except to keep these funds from leaking into the money market and quashing its pointless fed funds target.

And the same goes for the 33 bps being earned by offshore banks which have deposited $250 billion of excess cash in the NY Fed’s foreign repo pool. Surely Deutsche Bank, Barclays, BNP Paribas and the assorted other dinosaurs of European socialism are grateful for a better return on their idle cash than the negative yield on offer from their own NIRPing central bank in Frankfurt.

Yet does this goofball Simon Potter really think that this rank outrage is a measure of the Fed’s “excellent control” over its money market targets?

And that ain’t the half of it. All the bribes being paid through these three different channels in order to peg a completely pointless target for the non-existent fed funds market reduces the Feds annual “profit”.  And if the notion of profit, which lies at the very heartbeat of capitalism, ever needed to be qualified in quotation marks, this is the case.

The Fed earns revenue of approximately $120 billion per year from the $4.5 trillion trove of assets that it paid for with fictional credit rather than the proceeds of work, production and real economic value added. From that intake, it consumes $5-6 billion on its 22,000 staffers and army of contractors and consultants, many of whom otherwise pretend to teach “economics” in the nation’s colleges and universities. It now also spends upwards of $15 billion or so to pay the IOER and interest on its reverse repo borrowings and foreign bank depositors, resulting in net “profits” of about $100 billion.

This abortion of the very concept of profit is then recycled back to the US treasury as a giant bribe to keep the politicians at both ends of Pennsylvania Avenue pacified and out of its hair. Worse still, the Fed’s remanded profits are booked as an offset to the interest cost on the nation’s staggering $19 trillion of public debt, thereby enabling the politicians to believe there is a fiscal free lunch after all.

Unfortunately, all of this fraudulent monetary shuffling has a terrible consequence in the financial casinos here and aboard. It drives interest rates to sub-economic levels and triggers a massive hunt for yield among the world’s money managers and home gamers alike.

Today Bloomberg published a telling study of the baleful consequence this central bank fostered hunt for yield has had on the world’s energy and mining industries. To wit, it has enabled companies in what are highly cyclical, risky and volatile commodity industries to borrow heretofore inconceivable amounts of money, and plow it into massive malinvestments and excess capacity.

The bottom line is simple. The great wave of commodity and industrial deflation now sweeping through the world economy is the bastard offspring of the debt binge that was enabled by the central banks over the last two decades. Yet they now pretend that this massive headwind to growth originated in some exogenous force that must be counted with even more of the same monetary intrusion.

That’s how we get to the crime of NIRP. Keynesian central banks cannot imagine a problem for which more debt is not the solution. But is it not lack of “aggregate demand” which is idling an increasing share of the world’s oilfield drilling equipment; nor did it cause Caterpillar’s heavy mining machinery sales to plunge or the Baltic Dry index to plummet to 30-year lows.

What is driving output, wages and profits drastically southward throughout the materials and energy complex is drastically sinking profits and a desperate need to conserve cash flow in order to survive. The CapEx budget of global mining giant BHP is a proxy for what is becoming a global CapEx depression in the world’s industrial economy.

To wit, at the peak of the global credit boom and China/EM growth frenzy a few years ago, BHP’s capital budget was about $23 billion. This year, by contrast, it is expected to come in at just $7 billion and plunge further to only $5 billion in 2017.

Needless to say, it does not take much imagination to envision how a 78% cut in capital spending by a giant user of heavy machinery and engineered infrastructure like rail lines and port facilities will cascade down the supply chain. And since the top executives who ran these operations right over the credit bubble cliff are being fired right and left, another thing is quite certain.

That is, there are no takers for incremental debt at any price, NIRP or otherwise, in the global mining and energy industries. Epic damage has already been done, and the overhang of excess capacity and malinvestment will linger for years to come. Even then, hundreds of billions of the debt which funded this massive and mindless investment spree will be restructured or written off entirely, as is already emerging in the US shale patch.

These kinds of financial time bombs are lurking everywhere in the global economy——even if the central bankers don’t see them coming.

 

[by David Stockman, writing for David Stockman’s Contra Corner]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

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