By David Stockman, David Stockman’s Contra Corner:
The level of complacency in world financial markets is downright astounding–even stupid. Today there are two more signs of extreme mania: a brokerage firm calculation that there are now $5.3 trillion of government bonds trading at negative yields, and the cross-over of eurolibor into the neither world of negative yields as well.
These deformations cannot be explained with reference to macroeconomic conditions, such as weak growth or a temporary spot of minimal CPI gains. Instead, they are the destructive work of central banks and a few hundred monetary mandarins who have literally usurped control of the entire world economy.
And they have done it through a deft maneuver. That is, by disabling the pricing system in financial markets entirely and displacing market forces with central command and control in the form of pegged money market rates, manipulated yield curves, invitations to speculators to front-run massive central-bank bond buying programs, and both implied and explicit promises that rising risk asset prices will be favored and facilitated at all hazards.
All of this monetary mayhem is being done in the name of an astoundingly primitive Keynesian premise. Namely, that there is insufficient “aggregate demand” in the world and too little inflation in consumer goods and services as measured by the CPI and other consumption deflators; and that these insufficiencies can be magically remedied by ZIRP, massive government debt monetization, and the rest of the easy money tool kit.
How? Why by inducing businesses and households to borrow more and spend more when they are otherwise not inclined to spend income they don’t have; and to rid them of a reluctance to spend even what they can afford because the price of toilet paper, tonic water, TVs, and trips to the mall may be going down tomorrow.
Here’s the thing. Both of these alleged barriers to spending are postulates of Keynesian economic models, not conditions extant in the real world. Upwards of 85% of US households, for example, are not borrowing because they are already tapped out and trapped in “peak debt.” Even the borrowing rebound that has happened since the 2008 crisis has occurred for reasons that are irrelevant to the central bankers’ Keynesian predicate.
The only debt that has surged in traditional recovery cycle fashion is student debt and auto paper. The former has nothing to do with ZIRP or any other Fed machination. As a practical matter, the $1.3 trillion of student loans outstanding represent the largesse of the state, not the workings of the credit markets, since the entire mountain of student debt is either government funded or guaranteed, and there is no credit analysis whatsoever.
In fact, 45% of student debt outstanding is in non-payment status, meaning that it functions as a cash stipend. Moreover, nearly one-third of the loans which are in payment status—that is, owed by borrowers who have run out of ways to prolong their “student” status—are delinquent. That the tens of millions of former student debt serfs can’t and won’t pay will become a huge political issue and social policy questions, but it has nothing to do with the machinations emanating from the Eccles Building.
The surge of auto loans—more than 30% of which are subprime—is consequent to Fed policy, but not in a good way. Through massive and sustained financial repression, the Fed and other central banks have produced a mindless and almost panicked stampede to “yield” among bond managers and homegamers alike.
This has generated a 40% gain in outstanding auto paper—from $700 billion at the post-recession bottom to nearly $1 trillion at present—but, again, none of it is based on credit analysis in the traditional sense. The entire boom in auto paper is being sold to yield-starved investors based on temporarily low default rates and exaggerated collateral values for the new and used cars being hocked. The latter assume, however, that there will never be another recession or that when interest rates eventually normalize that there will be enough new credit extension to support prices for the massive tranches of used vehicles which will be coming off leases and loans after 2015.
That is never going to pan out. There will be another subprime loan collapse—this time in the auto market. And in any event, the whole credit channel of monetary policy transmission is broken and done owing to peak debt. The central banks are just mechanically and blindly pushing on a string of monetary expansion that is levitating not the main street economy but only financial asset prices in the canyons of Wall Street.
Likewise, there is not a shred of evidence that consumers are hoarding cash and waiting for plummeting prices in order to spend themselves silly. The fact is, 50% of US households have no savings at all and live hand-to-mouth, paying the lowest prices they can find at the moment; and another 35% are spending what they can afford and need without regard to phony policy metrics like the GDP deflator less food and energy.
For crying out loud, the whole idea of hoarding among the 85% of households not invested in the casino is just plain implausible. In pretending they are attacking the phony scourge of “deflation” and “low-flation”, therefore, the central bankers are engaging in a deliberate ruse or they have fallen victim to ritual incantation.
The real victim, of course, is the world’s financial system and economy. The central banks have now succeeded in generating a planet-wide mania. Since the turn of the century that have expanded their collective balance sheets from $2 trillion to $22 trillion, causing the greatest falsification of financial prices in recorded history.
This has made cowards and crooks out of the political class and reckless gamblers out of the financial class. That’s the real meaning of the absurd position that banks with spare cash need to pay another bank to assume their excess monetary digits or that governments should be paid for the privilege of issuing debt that they can never repay.
In short, the financial system has gone nuts owing to the destructive domination of central banks and the tiny posse of Keynesian academics and apparatchiks which run them. Self-evidently, they have no intention of stopping; meaning that only an eventual thundering crash of the system will bring the madness to an end.
That may come sooner than you think. This morning’s survey by Zero Hedge of the sheer mania evident in markets around the world is a truly frightening portent of the brewing storm. By David Stockman, David Stockman’s Contra Corner
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