Freaky Finances, Grotesque Mutants, & Scammy Policies

Why Interest Rates Are NEVER Going Back to Normal.

By Bill Bonner, Chairman, Bonner & Partners:

Let’s see… U.S. corporate earnings have been going down for three quarters in a row. The median household income is lower than it was 10 years ago. And now JPMorgan Chase has increased its estimated risk of a recession to about one in three.

These things might make sober investors wonder: Is this a good time to pay some of the highest prices in history for U.S. stocks Apparently, they don’t think about it…

Grotesque Mutants

Yesterday, U.S. stocks rose again, after the Fed announced that it would go easy on “normalizing” interest rates. The Dow rose 156 points, putting it in positive territory for 2016.

Hooray! Investors – at least those who passively track the index – are even for the year. And with more central bank fixes, maybe they’ll be able to keep their heads above water for the rest of 2016. Good luck with that!

You may recall our prediction: The Fed will NEVER return to a “normal” interest rate.

Why not? Many Wall Street analysts say the Fed’s move to bring interest rates to a more normal level – after seven years of ZIRP (zero-interest-rate policy) – was “too early.”

We think it was too late. The Fed has already distorted too much for too long. Its EZ money policies have created a hothouse of speculation, mistakes, and misallocation of resources. The financial plants that grew up in that environment – grotesque mutants that require huge doses of liquidity – cannot survive a change of seasons.

But these plants are big. And powerful.

Washington… the health care industry… housing… Wall Street… They control the U.S. government, the bureaucracy, and major economic sectors – notably the $1 trillion-a-year security industry.

What they need – what the entire economy needs – is a correction. Excess debt must be purged. That’s what credit cycles, bankruptcies, and depressions are for.

“Normal” includes corrections. But the feds can’t let it happen.

They’ve staked their careers – and their fortunes – on the myth that they can tame the credit cycle… and prevent serious setbacks. They’re not going to give up now and admit defeat. They’re not going to let their major crony friends – or their campaign contributors – go broke.

Freaky Finances

Yes, the feds created this freakish financial world. They cannot fix it because they want it to stay broken. So what if it doesn’t make the typical family better off? It makes THEM – the feds and their cronies in the Deep State – better off. And that’s what really matters.

In these Diary entries, we have shown how the system has become “extractive” rather than productive.

In a normal, healthy economy, people work, save, invest, and build real wealth one dollar at a time. But today’s dollar is different. And the economy is different, too. It runs on credit, not real savings, and builds debt – not wealth.

Instead of encouraging savings – which is what you need to make progress – it penalizes thrift. Over the past 10 years, U.S. savers have lost nearly $8 trillion, extracted from them by the Fed’s ZIRP.

While savers were punished, borrowers were rewarded. Since 1980, the U.S. economy has added about $50 trillion in excess debt – above and beyond the real output that can comfortably sustain it.

This $50 trillion came not from honest work and saving. Instead, it was conjured up by banks – out of thin air.

And now, the productive Main Street economy must pay interest… and principle… on that debt – effectively extracting real wealth from the real economy and sending it to Wall Street and other favored industries.

The scam is so elegant that not one person in 1,000 understands how it works. We’ve been studying it for years, and we’re still in awe. But the result is obvious: Honest working people struggle to stay in the same place, as real wealth goes to the elite.

Scammy Policies

The plain people may not understand it, but they don’t like it. And they count on Donald J. Trump to do something about it.

Alas, even the best swindle runs into trouble. The debt burden crushes the life out of the real economy. Productive sectors sink into the mud. Manufacturing disappears. Business slows. Trade slows. Borrowing slows.

And soon, the feds are paying people to borrow! As Chris Lowe reported in Wednesday’s Market Insight, about one-third of developed country government debt – worth roughly $7 trillion – is now trading at negative yields.

And then, even more elegance… With the world economy slowing down, central banks adapt to the world they created. How? With more scammy policies.

“Global risks bring Fed into line… ,” reads a headline in yesterday’s Financial Times

The Federal Reserve has scaled back its forecasts for lifting interest rates this year, coming closer into line with market expectations for two quarter-point rises as it flagged up risks to the U.S. outlook from global, financial, and economic developments.

See how it works?

Central banks destroy the real economy with cheap money and extractive policies. Then, as the economy slumps, they need to bring their policies in line with the slumping economy. They need to swear off raising rates back to normal. And since their policies can never produce real prosperity, they can never produce an economy that can support normal interest rates.

Normal? Forget it.

Eventually, normal will make a comeback. But not because the Fed wants it. Instead, the markets will normalize – brutally ­– over the Fed’s dead body… Which is just the way we’d like it. By Bill Bonner, Chairman, Bonner & Partners

About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments who swear up and down that they’ll give them back less money sometime in the future. Yes, the boneheaded logic of negative interest rates. read…   A New Level of Absurdity

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.


  37 comments for “Freaky Finances, Grotesque Mutants, & Scammy Policies

  1. West
    Mar 18, 2016 at 3:09 pm

    I clearly recall late summer 2010, the economy was humming along OK and the media bandwagon of another slowdown began, QE2 was introduced, and the rest is history. Thinking to an alternate reality, if the Fed really wanted to pull forward demand, they could have just stated that starting January 2013, interest rates will be set at 3%, and rise 1/4% each quarter until they are normalized. This would have pulled massive demand forward to leverage up at cheap rates, and might have truly created a sustainable recovery.

    We are now too far gone to ever see real rates again without a major shock to the system, a shock that will wipe a lot of people out, but hopefully clean up the excesses and misallocations of the past 15 years.

    Alan G. spoke once of the “aftermath of mispriced risk”. Might have been the smartest thing he ever said.

  2. Merlin
    Mar 18, 2016 at 3:32 pm

    So how does Mainstreet avoid getting decimated? Help me out here, people, my crystal ball is dark…..

    • walter map
      Mar 18, 2016 at 4:26 pm

      “So how does Mainstreet avoid getting decimated?”

      It doesn’t.

      If you look closely, what Bonner is describing is a program to liquidate the U.S. economy. With debt, banksters can continue to plunder the U.S. until there’s nothing left to steal. And nobody is going to stop them.

      Greece was just for practice.

    • Ron
      Mar 20, 2016 at 9:13 pm

      Probably the best thing you can do is read “The Creature from Jekyll Island” – “A Second Look at the Federal Reserve” by G. Edward Griffin. It reads like a history book and doesn’t seem as conspiratorial as some claim it to be. It will clarify your vision of today’s reality.
      Also, after that, (if you want to get really mad about our bizarre world, read “The Best Enemy Money Can Buy’ by Antony C. Sutton.

  3. Timothy Julian
    Mar 18, 2016 at 3:42 pm

    Probably more of a question to you, Wolf. I read all your articles but normally I never bother commenting. However, should anyone pay any attention to government statistic? They are all “revised” which is another word for made-up. There are many people that put the true level of unemployment at 22%. I live in Spain, this recession is absolutely chronic. Nearly 8 years. This is no financial crisis, it is a trade crisis masquerading as a trade crisis. Until Spain produces far more of what it consumes things are never going to get better. But I can see no signs of factories being built.

    The UK reported a a budget deficit of 55bn GBP, ($100bn), UK consumer debt is sky rocketing (must be close to Canadian 160% of GDP). How much longer can this continue Wolf, until the UK is faced with the mother of all currency crisis? Things are far worse than 76? Do you believe in physical gold? Or is that just a giant bubble too?

    The Big Short, film – The trader wonderd why is massive short positions were losing back in 07, with subprime CDS. You explained perfectly, the market makers knew of his massive positions & were trying to force is hand. He didn´t understand how rigged the whole system was.

    • Mar 18, 2016 at 3:55 pm

      “…should anyone pay any attention to government statistic?”

      Good question, Timothy. And there’s not great answer.

      As you said, ALL data is suspect and contradictory. But I think we have to pay attention to it anyway – unless we’re willing to traipse around in the dark and rely on what we see in our own limited lives.

      Personal observations of real life are important, but they’re just too limited to draw conclusions for the overall situation in our country or around the globe. It’s important to try to see the big picture, and so we use (hopefully prudently) whatever data we can get and sort through to paint it.

    • william
      Mar 18, 2016 at 5:16 pm maintains a set of ‘real’ statistics.

    • MC
      Mar 19, 2016 at 2:46 am

      Government statistics are notoriously unreliable. I’d say looking at SEC filings and other corporate data is more useful.

      I was recently looking at official corporate data from China and my reaction was “My God, are we already so down the rabbit hole?”.
      COFCO is a giant Chinese State-owned corporation which mostly focuses on food products, from cooking oil to sweets. It present debt to EBITDA ratio is a headache inducing 52x. It means for every yuan it earns (before inflation, ammortization etc) it has 52 yuan in debt.
      I find it telling the central planners in Beijing saw no need to embellish COFCO’s balance sheets despite the power to do so.

      But one can always say “COFCO is State-owned, it has no need to be careful with money because Beijing will always bail it out”.
      So let’s look at Fosun, a privately owned Shanghai-based conglomerate which reminds me more and more of the Korean chaebol in the Park era.
      Fosun has a debt to EBITDA ratio of 55x, worse than COFCO. It’s literally an empire built upon a mountain of debt.

      I find these statistics telling and a perfect explanation of the reason why so many people feel the 2008 depression has never ended despite rosey government statistics: savers, who invariably belong to the so called Main Street, are being punished to reward big spenders, who invariably reside in the local equivalent of Wall Street.
      Without the stealth taxation of savings, there’d be no way even China could sustain those debt to EBITDA ratios.
      No savings mean no capital accumulation, meaning the small guy will have to work twice as hard just to stay in the same place.

      Of course we are daily told there’s no need for savings because, thanks to the “heroic” monetary policies implemented by the ECB, the BOJ and the PBOC credit will flow like a river. Each time the ECB cut rates (and trust me on this: we haven’t seen anything yet), the propaganda machine gets into high gear and hammers home banks will open the spigots and bring about a new age of prosperity.
      They’ve been doing this for seven years and counting and the only thing they managed to is reversing the household deleveraging trends we had across Europe after 2008, with that new debt going in just two sectors: cars and housing. Neither are capital assets and neither can generate wealth. In fact cars can be considered consumer goods, as their value plummets the instant a registration plate is riveted onto them or the new model hits the market.
      In short that freshly printed money which trickles down into Main Street goes into buying non-productive assets whose value is completely at the mercy of a million factors (houses) and rapidly depreciating consumer goods (cars).

  4. Timothy Julian
    Mar 18, 2016 at 3:44 pm

    Should have read a trade crisis masquerading as a financial crisis.

  5. Bruce Adlam
    Mar 18, 2016 at 3:55 pm

    Yes you have hit the nail on the head and that is why i say the buck stops at the top. Obama and his administration.they say his hands are tied [ bullshit ] He can stand up and say this is not right and without tears like he did about gun controls. Hes to weak.The world is not stable its full of bad debt.Its a bit like saying lets not have at winter in Nevada or the the World eventually nothing will grow

  6. DanR
    Mar 18, 2016 at 5:04 pm

    I believe we have reached a permanently high plateau. Not sure where I picked up that phrase from.

      Mar 18, 2016 at 7:19 pm


      • Michael Gorback
        Mar 18, 2016 at 9:07 pm

        Irving Fisher

    • Chip Javert
      Mar 19, 2016 at 5:11 pm

      With all due fear & respect, I question the use of the word “permanently”

      • Michael Gorback
        Mar 19, 2016 at 9:42 pm

        He’s referring to a statement made by a famous economist, Irving Fisher, right before the market crashed in 1929.

  7. Ptb
    Mar 18, 2016 at 6:24 pm

    Debt can only be expanded with near zero interest rates. Then the cost of maintaining it is quite low. Our system only works with massive debt. So it must be supported at all costs.

  8. Mar 18, 2016 at 6:46 pm


    Again Congress is accountable. The FRB is a creature of Congress, and its charter/enabling legislation can (but won’t) be amended to make it reflect the real economy and work for the benefit of the majority of citizens, and hence the good of the Republic.

    Historically we have had civilian control of the military and foreign policy. It is not at all clear why we the people must tolerate financial and economic policies dictated by the un-elected self-selected elite of the FRB.

    • chip javert
      Mar 19, 2016 at 5:26 pm


      What do you mean by “SO MUCH FOR THE MYTH OF THE FREE MARKET!”

      1) The market is only “free” if interest rates reflect actual risks.

      2) What you are bemoaning is the “distorted market” – artificially low interest rates allowing ridiculously unproductive investing, thus destroying capital.

      3) The problem has 2 parts: the (pick one or more: corrupt, ignorant, unqualified; weapons grade stupid, rent-seeking) politicians who have delivered us to this point, and the citizens who are knowingly (wink, wink) allowing it to happen.

    Mar 18, 2016 at 7:15 pm

    It is easier than you all think. Economics apply in 2 “worlds”. The world works with precious metals (gold and/or silver) or it works with fiat paper currency. One, or, the other.

    Supply and Demand “laws” work ONLY with gold/silver. When the amount of money in circulation is “fixed” and can not be manipulated by private families, then the Law of Supply and Demand functions.

    BUT, when these private families, and their paid politicians, can create “credit” (currency) at will, then all is distorted. Because of that, one will never know the real price nor costs. All is distorted and perverted. One will never know the correct interest rate since the costs of REAL money (gold, or a fixed medium of exchange) is impossible when the Families can issue credit, currency, or notes, at will.

    “Money” has no value when it can be issued at will by those Families that control the Central Banks. When one can run off paper notes from their personal copy machine, why pay depositors any interest? When one can print their own “notes” why pay some idiot depositor?

    The cost of “money” (since it is NOT money) today is “0”. All banks today can issue credit at will. Why pay some fool depositor any % when you can create your own currency.

    Hell is coming.

    • John Doyle
      Mar 18, 2016 at 9:08 pm

      Banks, and the Fed, still can only create money if there is first a debt needing payment. But generally I agree with you.
      We cannot create our own currency. If we could everyone would be one minute a millionaire and the next bankrupt. Only Monetary sovereign entities have that luxury and it’s not unlimited. It is constrained by faith in the government, that it won’t let runaway inflation take hold.
      Right now it has so much fiscal space we could have full employment, totally free education, totally free healthcare, pay living wages for all etc.

  10. unit472
    Mar 18, 2016 at 8:43 pm

    Anyone who has not read some of Gail Tverberg’s thoughts on our situation really should.

    Her latest blog piece is reasonably short summarizes our predicament in terms of the inevitable outcome of the rising cost to produce energy and other commodities ( even as prices fall) while globalization drive wages down. Against these real forces Central Banks are powerless as the ‘system’ will inevitably collapse.

  11. Michael Gorback
    Mar 18, 2016 at 9:28 pm

    Does anyone else remember the days when if a company beat estimates the stock got punished because it didn’t beat it enough? Missing estimates by a penny was devastating even if there was good growth. Now we see generalized and persistent earnings decreases and the market levitates.

  12. Kyle
    Mar 18, 2016 at 10:13 pm

    I’m curious. Given your statement

    “they can never produce an economy that can support normal interest rates.”

    and the fact that you, Wolf?? and many others think that the Fed will never raise rates, wouldn’t it be prudent to invest in Stocks, Real estate and commodities?

    I don’t see where this ‘market correction’ will come from being that the market is set by the Fed. There is no longer a real market where price discovery is tied to limitations in supply and demand.

    The only take home from your analysis is to ride the tiger.

    • Mar 18, 2016 at 10:47 pm

      Kyle, Bill Bonner wrote this article, and so it represents his opinion.

      Concerning your statement about riding the tiger: Japan invented QE and has had ZIRP for two decades. Now it has NIRP. Stocks are down over 50% from their peak.

    • d
      Mar 19, 2016 at 8:06 am

      “I don’t see where this ‘market correction’ will come from being that the market is set by the Fed.”

      If you may have noticed, as wolf and others have.

      World trade has effectively stopped, everywhere, at once.

      Very unusual, and worrying.

      A new type of correction may be developing, induced by demand burnout, due to excessive credit fueled consumption, US QE, in the past.

      The horse is lying in the street drowning in its own blood, as the walls of its lungs burst due to excessive internal blood volume and pressure.

      IT will not get up, no matter how much more blood the PBOC and ECB force into its veins, and beat it, as excessive blood, (Liquidity), is a big part of the problem..

      The Japanese did the first QE experiment, which is not over, its effects stayed mostly in Japan.

      The US used QE to prevent an implosion, and probably directed QE II and III to the wrong place. We will probably not be sure about that until the 08 correction is well and truly over, we are in fact due to QE, still in the 08 correction.

      Now. The ECB and china are still in QE Mode. Even though the fed is trying to get out of it, and normalize interest rates. The fed still has to shrink its balance sheet, and eliminate all the crap in it. That simply should never have been put there.

      Maybe then FED was not completely wright with its QE. The ECB after nay-saying it for 6 + years has jumped on the QE band-wagon, when it is time to get off.

      The global financial system’s, have no chance, of stabilizing and normalizing.

      When the Major Economies CB’S, are all doing different things. At the same time.

      Even the chief Mafiosi at the ECB, now say’s Monetary policy alone can not resolve the issues.

      Effective an admittance of ECB FAILURE, of its economic policy’s, to revive the EU Economy.

      The EU economy will not revive, until the french, and club-med, zombie, company’s, banks, and their horrendous NPL’S, are eliminated.

      The chief Mafiosi at the ECB, is of course, still trying to bully Germany, into bailing out the french and club med banks(Particularly Italy’s) with German taxpayers money.

      China is, and will continue to, face the same Zombie NPL issues.

      NPL’S and zombies, (Company’s, Bank’s), Strangle and Drown Economy’s.

      Simply observe the first big QE Experiment. Which has been running the longest.

      25 years now, JAPAN.

  13. rich
    Mar 19, 2016 at 6:04 am

    “And soon, the feds are paying people to borrow! ”

    Well, not all people. The feds are charging grad students 6.84% on student loans. Real rates, the rates charged to the vast majority of American debtors, have not gone down. The big banks borrow at zero, but they lend the money back out, in the form of credit cards and sub-prime loans for used cars, at rates of between 15% and 30%. Mob loan sharks can only dream of running a racket like that.

    • Merlin
      Mar 19, 2016 at 8:18 am

      how can we foment mutiny among all college students to refuse to pay one cent back on their loans until the interest rate is reduced to 1%? If the lender is getting the money for free from the Fed, 1% should be enough profit.

      • d
        Mar 19, 2016 at 8:30 am

        dreams are free 1% dosent even cover the admin costs.

        With NIRP you will need to pay at least 4%. When you take into account defaults that will not be profitable just brake even, possibly.

      • Bruce Adlam
        Mar 19, 2016 at 8:37 am

        Merlin it’s in the to hard basket which ever way you look at it the market is rigged

      • Chip Javert
        Mar 19, 2016 at 5:36 pm


        Problem is the Federal Government pretty much forced out all the banks and funds student loans via taxpayer money (aka: OPM).

        If you are successful in getting the highly entitled little Johnny and Suzie to repudiate their $1T+ of student debt, then mommy and daddy (and others of the 53% who actually pay federal taxes) pick up the tab.

        No offense, but I’m hoping you’re not successful.

        • Merlin
          Mar 19, 2016 at 6:22 pm

          I want them to pay every damn penny of their principal but not all the loan shark interest.

          maybe a better idea is a Fall semester boycott until tuition is reduced by 75% and scads of admin are fired….

    • Chicken
      Mar 19, 2016 at 8:47 am

      “The feds are charging grad students 6.84% on student loans.”

      Someone has to pay the debt, why not students? (apparently)

      I’ve read accounts saying Corporate America’s balance sheet is in very good condition.

  14. Kreditanstalt
    Mar 19, 2016 at 12:24 pm

    The Fed will NEVER “shrink” its balance sheet. Why should it? The financial community can’t quite believe or comprehend this yet, but they will be forced to do so.

    The very nature of ‘money’ has changed: no longer a commodity of any real worth, it has become credit, the liquidity elixir.

    We now live in an era in which continued emission of this credit substitutes for real cash-flow earnings…real “growth” and real productivity…

  15. ML
    Mar 20, 2016 at 1:28 am

    In UK, business gers tax relief on interest so it can be set off against the tax that woukd be payable on profit.
    Taking on more debt, in other words banks lending more, is what banking is about. It doesn’t cost the companies anything.

    The only risk is that the companies do not generate enough surplus cash to service the debt. But that can be got round simply by floating the company on the stock market or having a rights issue or issuing a bond or convertible loan stock to get an injection of capital from investors.

    Investor expectation can when gain doesn’t materialise be explained away by blaming the markets. When rhe share price falls it soon bounces back on the strength of the companies positive statement about the future or contrived rumour of a take over bid. That way the truth that has dawned on investors is kept at bay.

    And so the merry go round can be kept going for another day.
    Were it not for short-term thinking none of that wouod be possible which is why live for today and let the future take care of itself is the name of the game.

  16. bud
    Mar 20, 2016 at 8:20 am

    You can trace it all back to the Clinton Administration, the most corrupt in American History and looking for a return to power.

    A Christmas present to America with the help of Phil Gramm and stupid Rudman, with the blessing of Greenspan to suck the last dime out of America’s working class.

    • d
      Mar 21, 2016 at 1:44 am

      Try a little touch of reality instead of, as its easy, Clinton bashing .

      The MIC Eisenhower railed at, that he observed growing after Korea, was in fact not a pure MIC but the beginnings of the globalized vampire corp orates. They killed Kennedy, with help, they jumped on Nixon opening to china with all appendages. They supported barney frank and his party, who blew the biggest chep credit NINJA credit, housing bubble on the planet, outside china.

      They are the Corporates that own American politics.

      The American electorate is wholly responsible, as it will not force its politician’s to enact, meaningful, restrictive campaign funding reform.

      America is not a Democracy, it is a Vampire global corporate owned oligarchy.

      The Vampire global corporate, oligarchy is an Allie, of china.

      The stupid American electorate is still committed to blaming banks and Clinton’s. Holding up trump and Sanders as the answers, which they are not.

      When the real problem is in the mirror. The answer is meaningful restrictive campaign funding reform.

  17. Keith
    Mar 21, 2016 at 4:47 pm

    Just read an article saying that the only new money in the stock market since 2009 has come from share buybacks.

    CEOs boosting the value of their remuneration packages.

    These share prices do make sense for some.

    When it goes wrong, someone else loses.

Comments are closed.