End of the Debt Supercycle

"The mother of all evils is speculation. Leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

Great interview with David Stockman. Many issues touched here under the general thesis that we're at the end of a multi-decade debt supercycle.

Stockman points out something that we noted months back: Austerity is not an elective course of action. It is something that happens when you are broke. He notes, "austerity is what happens when you break the rules." He is referring to economic rules: you can't forever consume more economic resources than you generate in income.

Spending cuts, defaults, falling prices, rising savings rates all constitute corrective measures for the economic system to get back in balance.

He fingers the Fed as a primary culprit in creating the problems that we face today. Discretionary meddling in the money markets have distorted decisions far and wide. At the very least, we should end the interventionary actions of the FOMC. Should we not dismantle the institution entirely, the Fed could provide a 'last ditch' source of liquidity (per Bagehot), but that liquidity should be priced appropriately for markets under big-time stress (in other words, super high rather than super low interest rates)

As Stockman states, capital markets need "an honest interest rate." Right now we have no interest rate, so we solve nothing. Instead, we are subject to "the monetary Politburo of the Western world" engaging in "Ponzi economics."

Near the end of the interview Stockman reveals his personal positioning. Cash (T-bills) with gold for insurance. He shuns all "securities markets" because he does not think the risk in the current system is worth it. He suggests that when the curtain closes on the Treasury market, all asset classes will be sold as "the great margin call in the sky comes down." To him, the 2008 credit crisis was "just a warm up."

What he's describing is major league deflation.

position in SPX, gold

"This is a Giant Ponzi Scheme"

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Cavuto chats with David Stockman about the state of our current financial system. Stockman has written a new book that is drawing fire from both Left and Right--a sure sign that he is right on track.

We have reflected on Stockman's thoughts on these pages before. His message to Cavuto, who obviously is uncomfortable with what Stockman is saying, is that we've created a gigantic Ponzi scheme built on debt and leverage with little underlying equity.

Central banks reside at the epicenter of the Ponzi which is best expressed currently in the bond market where the Fed is buying $85 billion/month of our own debt with money printed out of thin air.

In his view, a major dislocation awaits us within the next two years. I, of course, wonder if it will not be sooner...

position in SPX, Treasuries

Monetary Terrorists

"My counsel says we were not aware of the extermination of the millions. He would give you the excuse: We were only aware of the extermination of the hundreds. Does that make us any less guilty? Maybe we didn't know the details. But if we didn't know, it means we didn't want to know."
--Ernst Janning (Judgment at Nuremberg)

David Stockman suggests that Ben Bernanke and other central bankers are among the most dangerous men walking the earth. There are few places that these purveyors of monetary ruin will not ultimately impact.

Unfortunately, because they don't shoulder rifles or explode bombs, central bankers are not perceived as dangerous. However, the consequences of central banker actions surely do amount to aggression against the human rights (also known as property rights) of others. Their reach far exceeds that of any recognized terrorist group on the planet.

It should be noted, however, that central bankers are not principal actors. Instead, they are agents--hired guns--contracted by others to act in their favor. Stated differently, central bankers would not exist without principals who want to hire muscle.

As Stockman concludes, "when all of this blows sky high it is to be hoped that the war crimes tribunal in the Hague will see fit to expand its remit to include economic crimes against humanity."

If not here on earth, then the monetary terrorists--Bernanke and other central bank agents alongside their principals--will stand accountable during the ultimate tribunal to be held on Judgment Day.

Deep State Retaliation

"People should not be afraid of their governments. Governments should be afraid of their people."
--V (V for Vendetta)

David Stockman suggests that the recent indictment of a young Trump campaign foreign policy official by special prosecutor Robert Mueller is part of a retaliatory effort by the Deep State. Deep State bureaucrats resent Trump's efforts to pursue foreign policy without them.

It is becoming obvious to all how the Deep State seeks to use legal machinery to get Trump. Dig up any dirt that you can find on low-level personnel and then, using the plea bargaining mechanism, which is akin to blackmail, make your way as far up the chain of command as possible toward the ultimate target.

One of the many grand follies of this entire charade, as Stockman notes, is that it pretends that interference in elections is frowned upon in Washington. This is the height of hypocrisy because "meddling in the political life, elections and governance of virtually every nation on planet earth--enemy, foe, rival, neutral, and friend, alike--is what Imperial Washington does."

Here's hoping that the Deep State's blatant attempt to sanction those who seek to defy its institution continues to open eyes.

Trump's Truth

Well I've heard lots of people say
They're gonna settle down
You don't see their faces
And they don't come around
--Lynyrd Skynyrd

David Stockman observes that, despite Donald Trump's many wild pitches, his recent comments concerning US debt were right down Broadway. Were he president, Trump said that he would seek to negotiate 'discounts' on paying back the debt.

Flabbergasted, pundits associated 'discounts' with 'restructuring' (a.k.a. 'default'). Trump later said that outright default is not what he meant: "First of all you never have to default because you print the money I hate to tell you, so there is never a default."

Stockman notes that central banks led by the Fed have been doing precisely this for years: buying government debt with the click of a mouse:

"The world's central banks own more than 50% of the publicly traded US debt of $13.5 trillion, and not one single penny of it was purchased with real savings or anything which remotely resembles honest money. It was all scooped up when central banks hit the 'buy' key on their digital printing presses."

The government and Wall Street have been in on this scam from the beginning. Governments can finance profligate spending cheaply when central banks buy their paper below free market rates, and financial racketeers get rich peddling information, services, and securities that would never be in demand under sound money regimes.

Creditors, meanwhile, get paid back with inflated currency that purchases less than when 'contract' between lender and borrower was established.

Indeed, paying back the national debt with 'discounts' is already official policy and has been for decades. Like all statists, Trump wants to perpetuate the practice.

Independence Meme

Jim Malone: What I'm saying is, what are you prepared to do?

Eliot Ness: Anything within the law.

Jim Malone: And THEN what are you prepared to do?

--The Untouchables

In his commentary following yesterday's farcical congressional testimony of former FBI director James Comey, David Stockman discusses Comey's repeated invocations of the FBI's 'traditionally independent status in the executive branch.'

This is a false and dangerous view of any agency within the federal government--particularly one that possesses extraordinary police power. As these pages have recently observed, when federal bureaucrats are not directly accountable to voters, they are free to pursue their own agendas. They govern without 'consent of the governed.' 

Agencies such as the FBI must be politically accountable lest they become a policing arm of the deep state reminiscent of J. Edgar Hoover's feds.

As Stockman observes, however, Comey's behavior over the past year suggests that he doesn't believe the independence meme himself. He has subordinated his actions and those of the bureau to the political will of others. Indeed, it was his violation of protocol for the sake of politics that merited his dismissal by not one but two presidents.

Comey's behavior and his subsequent termination suggests that the state may not be as deep as some may presume.

Full Employment?

Standing in line, marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & the Range

Several nice points made here by David Stockman regarding so-called claims of 'full employment.' One reiterates what these pages have previously discussed. There continues to be a huge divide between the 'headline' unemployment number (a.k.a. 'U3') and the labor force participation rate.

The number of people currently out of the work force amounts to nearly 17 million. More noteworthy is that that number has not declined despite 'generational lows' in the U3 number.

One would also think that if, as former Fed chair Alan Greenspan claims--that this is truly the tightest labor market that he has ever seen--that wages would be quickly rising per ECON 101. But that's not what we see. Average hourly earnings hourly earnings have gone nowhere for decades.

Full employment? Things just don't add up. Stockman suggests the problem relates to how unemployment is measured, which we'll discuss in an upcoming post.

Healthcare Slaves

Walking on the streets
It's really all the same
Selling souls, rock-n-roll
Any other day
--Huey Lewis and The News

David Stockman shares an interesting chart that contrasts government vs out-of-pocket healthcare expenditures.

Since 1960, government healthcare spending has increased from about 15% to about 50% of total expenditures, while out-of-pocket spending has fallen from about 48% to 10%.

As Stockman correctly observes, healthcare markets no longer do what they do best--efficiently allocate scarce resources--when buyers no longer have out-of-pocket incentive to seek satisfaction at prices perceived as attractive. Lower quality, less innovation, less capacity, higher prices are predictable and inevitable under these circumstances.

What he doesn't note is the moral decline that accompanies the above trends. More government spending and less out-of-pocket spending on healthcare essentially means that more people are being forced to produce healthcare goods and services for others. The above chart suggests that nearly half of all healthcare output is produced under conditions of force.

More people are being enslaved as healthcare resource providers.

Inconvience Stores

"Klipspringer has been here since a party I threw in April. I didn't even realize he was here until two weeks ago."
--Jay Gatsby (The Great Gatsby)

David Stockman employs some data to counter ongoing claims from the Krugmans and the Stiglitzes that the Depression was 'caused' by a lack of government spending. He notes that government spending back then was tiny, clocking in at about 3% of GDP vs over 25% today. Totally eliminating the fiscal budget back then was insignificant compared to 40%+ haircut that GDP took from 1929 to 1932.

As Mr Stockman observes, the big categorical declines during this period occured in private fixed investment (-92% wow), consumption (-61%), and exports (-65%). All of these were the result of binging during the 1920s. And, as this author and others observe, this binging can be directly tied to the easy monetary policy of the Fed (e.g., Anderson, 1949; Phillips, McManus, & Nelson, 1937; Rothbard, 1963).

The classic 'crack up boom' followed by the inevitable bust.

The evidence is clear for those who want to see it. Obviously, many do not.

References

Anderson, B.M. 1949. Economics and the public welfare. New York: D Van Nostrand & Co.

Phillips, C.A., McManus, C.F., & Nelson, R.W. 1937. Banking and the business cycle. New York: The Macmillan Company.

Rothbard, M.N. 1963. America's Great Depression. Princeton: D Van Nostrand & Co.

Financial Harakiri

"You watch your back, cowboy."
--Nick Conklin (Black Rain)

David Stockman discusses the ritual financial suicide taking place in Japan. Declining savings:

Increased spending versus income:

Debt going parabolic vs output--to the extent that the BOJ is essentially buying all new government issues:

As he observes, this is not just a Japanese phenomenon. We could substitute similar charts of the US with similar effect.

Path of Addiction

You see the signs
But you can't read
You're running at
A different speed
--Robert Palmer

We have employed the addiction analogy many times on these pages to describe our unbreakable habits of borrowing and spending. The theme surfaced again this week as onlookers described the Fed's inability to cut back ('taper') its stimulative bond buying known as quantitative easing (QE).

Stan Druckenmiller laments the Fed's 'no taper' decision, observing that the central bank could have initiated the process to get us "off the dope." Others, of course, believe that the Fed could not cut back if it wanted to and has effectively trapped itself in a corner.

Parenthetically, Druckenmiller also observes that the Fed's decision not to taper is "fantastic for every rich person" and thinks that this monetary stimulus program amounts to "the biggest redistribution of wealth from the middle class and poor to the rich ever." This is a point these pages have made many times as well.

David Stockman thinks that "we're stumbling into the endgame" as Ben Bernanke hands the baton to (presumably) current Fed vice chair Janet Yellen. Yellen "has no clue how to wean Wall Street from its pathetic addiction to easy money."

The addiction is not just Wall Street's, of course.

There are only two paths for the addict: pull back and kick the habit, or escalate and crash.

Which path is ours?

Credentialed Fools

"Back where I come from, we have universities, seats of great learning, where men go to become great thinkers. And when they come out, they think deep thoughts, and with no more brains than you have. But they have one thing you haven't got: a diploma."
--Wizard of Oz (The Wizard of Oz)

It is usually best to leave fools, even credentialed fools like Paul Krugman, to their folly. Why waste valuable time on mindless blather?

Every now and then, however, it does seem worthwhile to bookmark the blather, such as Krugman's recent NYT op-ed "Debt is Good," as examples of just how far off the rails viewpoints followed by many can get. Dave Stockman does a nice job hammering it into the ground, but it some ways it seems like overkill on such drivel.

Some fear that people like Krugman are a threat to freedom and prosperity. Only to weak minds wishing to remain weak by outsourcing their brains to fools with credentials.

In Plain Sight

There's a room where the light won't find you
Holding hands while the wall come tumbling down
When they do I'll be right behind you
--Tears for Fears

David Stockman gave this talk the day after the FOMC QE-Infinity announcement earlier this month. As he notes, he was preparing to talk about his upcoming book, he opted to "launch into a full strength tirade about the Fed."

He clearly believes that the recent Fed action is not just another interventionary program. It is time, he urges, for "street fighting" to oppose the destruction of what remains of capitalism.

This is an outstanding speech, and worth watching multiple times.

If (when) the system comes apart, there will surely be many who feign surprise. They will suggest, as they did when the 2008 meltdown occurred, that no one could have forecast such a '100 yr flood.' They are either being ignorant, or hope you are.

The warnings have gone up, and they are in plain sight.

Crack Up

There's a room where the light won't find you
Holding hands while
The wall come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Several excellent points made in this interview with David Stockman, including:

Many people who opposed the bailouts of 2008/2009 seem to have no problem with suppressing interest rates for extended periods of time. These people do not appear to realize that extended interest rate suppression policies are essentially prolonged bail out programs favoring one group (foolhardy borrowers and lenders) at the expense of another (savers).

The collapse of the US shale oil patch is just another example of the boom/bust pattern put in motion by central bank easy money policies.

Extreme move by central banks like NIRP are a sign that we are entering the 'crack up' phase. CBs have painted themselves into a corner that they know no way out of. They are now stepping on the gas out of desperation.

Expect huge market volatility following periods of calm and complacency. The discounting mechanism has been broken and market participants are reactive--meaning little warning will precede sharp declines.

Whatever drives the 'weight of disbelief' in central bank omnipotence is what will kick volatility into high gear. While they can win a few rounds, central banks are certain to lose the ultimate confidence game in the end.

Greece's new found pushback against EU-imposed measures designed to keep holders of Greek bonds whole constitutes an important inflection point. Previous can-kicking exercises are wearing out. The new Greek government is now speaking the unspeakable: We're broke. We can't pay out debt back. If this message resonates, then the 'weight of disbelief' increases dramatically.

Political blowback from profoundly stupid and unsustainable fiscal and monetary policies is likely to increase. In previous episodes of blowback led to world war.

Warmonger in Chief

Guy de Lusignan: Give me a war.
Reynald de Chatillon: That is what I do.
--Kingdom of Heaven

David Stockman suggests that Barack Obama, the 'peace candidate of 2008,' is kowtowing to the influence of the warfare state with his recent comments aimed at the latest figment of terroristic fear presented before the American public: ISIS.

Perhaps. But another motive for beating wardrums could be that the president thinks he needs the ultimate distraction to divert attention from other issues, including a sputtering economy. He may even buy into the perverse logic employed by past presidents that war jump starts the domestic economy.

A deadly fallacy, quite literally.

Chance of war continues to increase.

Enabling the Great War

"Today, while the earth shakes beneath the heels of marching troops, while a great portion of the world trembles before the threats of acquisitive power-mad men, we of America have little time to remember an astounding era in our own recent history. An era which will grow more and more incredible with each passing generation until someday people will say it never could have happened at all. April 1918: almost a million American young men are engaged in a struggle which, they have been told, will make the world safe for democracy."
--Narrator opening lines (The Roaring Twenties)

David Stockman considers how WWI changed the world, and how different (better) things would be today had the Great War not occured.

WWI set in motion various arcs that would plague the world. Totalitarianism, the Great Depression, permanent warfare and welfare states, Keynesianism, bankrupt monetary and fiscal policies, chronic national debt.

However, it is doubtful that many of these consequences would have materialized had it not been for two policies that enabled the United States to enter the conflict with great strength in 1917. Those policies were both enacted in 1913, a year before the outbreak of war in northern France.

The Federal Reserve Act and the Sixteenth Amendment gave the federal government access to vast quantities of resources. Without such access, the US could not have funded the war effort.

Shut down the Fed and repeal the Sixteenth Amendment, and you'll keep vast quantities of resources away from the federal government.

Keep vast quantities of resources away from the federal government, and you'll keep the peace.

Zero Bound

Maybe someday
Saved by zero
I'll be more together
--The Fixx

One of the many nice points made by David Stockman here is that central banks do not balance monetary policy at neutral over the long haul. Instead, policy is biased toward 'easy.'

During the past 300 months (25 yrs), the Fed has either cut or kept Fed Fund rates flat 80% of the time. It has not raised rates in 108 months (9 yrs). Fed Fund rates have been essentially zero for 78 months (6.5 yrs).

After cutting rates, the Fed never raises rates back to where they were previously (as demonstrated in graph above). Over time, central bank policy migrates toward the zero bound.

We're there now. And it could have easily been forecast decades ago.

Corporate Bond Bubble

I'm not expecting to grow flowers in the desert
But I can live and breathe and
See the sun in winter time
--Big Country

David Stockman laments the corporate bond bubble which in turn has been funding the stock buyback bubble. He reports that corporate bond issuance is tracking at a staggering $1.4 trillion annual rate. Nearly all debt issuance proceeds are being used to buy back stock. In February, buybacks of S & P 500 company shares totaled a record $105 billion.

Meanwhile, real business net investment--what used to be the primary reason for borrowing--has been plunging.

Another massive misallocation of capital engineered by the Fed.

position in SPX

No US in WWI

"You've been given a great gift, George--a chance to see what the world would be like without you."
--Clarence Oddbody (It's a Wonderful Life)

David Stockman suggests many unpleasantries that would not have occurred had the US stayed out of WWI. German hyperinflation (Weimar) and Hitler's subsequent rise to power. The US boom/bust of the 1920s/1930s. WWII. The Holocaust. Atomic bombs dropped on Japan. The Cold War. US empire-building.

I would add domestic policies birthed during the period including Great Depression. Social Security. Oppressive government regulation. Fannie Mae. Various Federal Reserve actions.

In the classic film It's a Wonderful Life, George Bailey is allowed to see how different life would be had he not been born. We have been given a similar gift, reason, that we can apply to historical events and gain insight into the negative consequences of past acts of aggression.

Our challenge is to use this gift, and to apply what we learn.