A Futile Fed

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by David Stockman 

“Each of us is aware he’s a material being, subject to the laws of physiology and physics, and that the strength of all our emotions combined cannot counteract those laws. It can only hate them. The eternal belief of lovers and poets in the power of love which is more enduring than death, the finis vitae sed non amoris that has pursued us through the centuries, is a lie. But this lie is not ridiculous, it’s simply futile. To be a clock on the other hand, measuring the passage of time, one that is smashed and rebuilt over and again, one in whose mechanism despair and love are set in motion by the watchmaker along with the first movements of the cogs. To know one is a repeater of suffering felt ever more deeply as it becomes increasingly comical through multiple repetitions. To replay human existence – fine. But to replay it in the way a drunk replays a corny tune, pushing coins over and over into the jukebox?”

– Stanislas Lem, “Solaris” (1961)

“The Federal Reserve could take its benchmark interest rate below zero. And it could restart “quantitative easing” tomorrow. It still doesn’t have a prayer of creating inflation, let alone hitting with precision its specious 2.00% inflation target.

In an integrated global economy driven by monetary central planners, the bias of the global financial system is toward malinvestment and deflationary over-production. Easy money inherently careens toward massive over-indebtedness. That’s because, at bottom, there’s no economic magic at all in its tired brand of borrow-and-spend “stimulus.” That policy panacea just pulls economic activity forward in time, at the cost of relentlessly accumulating debt and ever-higher future preemption of income and cash flows for debt service.

The global economy is entombed in debt. And the truth is written all over the subway walls, as Simon & Garfunkel once put it…

Between 2001 and 2007, for example, global debt rose from $86 trillion to $116 trillion. Global nominal gross domestic product (GDP) increased from $33 trillion to $58 trillion during that six-year period. In other words, $30 trillion of new debt bought $25 trillion of new GDP.

Now, debt exploded again from a pre-crisis level of $116 trillion in 2007 to $244 trillion by 2019. Meanwhile, global GDP rose to just $85 trillion during the subsequent 11-year cycle. In other words, during this latest “recovery,” it took $128 trillion of new debt to generate just $27 trillion of additional GDP.

The household sector is at “Peak Debt.” And the business sector has been lured into massive financial engineering, not productive investment, by Wall Street.

 Oh, all that massive central bank stimulus did cause growth and inflation – but of financial asset prices only, and egregiously so.

Valuations are now precariously perched – not just stock prices, but bond prices too. The $17 trillion of negative-yield government and investment-grade bonds represents hideously overpriced instruments of rank speculation. But the charts reveal massive air pockets down below – say the 2,700, 2,800 level on the S&P 500 Index. Another shock – something else in the Persian Gulf; something new in the Taiwan Straits; the Chinese dump a couple billion bonds in an hour – could ignite a selloff that tanks the whole applecart.

Recessions don’t happen anymore because the Fed is tightening credit costs on Main Street. That’s the old days. That’s your grandfather’s economy. If the S&P drops 400, 500, 600 points, we’ll see another 21st century C-suite triggered recession.

CEOs and CFOs will suddenly wake up – like they did in October 2008 – and say, “Oh my God… we’ve got too much inventory… we’ve hoarded too much labor… we’ve got a lot of M&A assets that aren’t producing returns…”

What seems like the whole of Corporate America will roll out big, new restructuring programs… layoffs by the tens of thousands… plant and facility closures from sea to shining sea… asset write-downs in the billions…

All to please Wall Street. That’s how it happens these days. That’s Bubble Finance. The Fed inflates the financial system until it collapses. It spills onto Main Street through these C-suite panics. When the stock market cuts through those air pockets, the recession will happen instantly – just like in 2008. This time, though, the Fed just doesn’t have the juice. Bubble Finance is played out.”

- http://deepstatedeclassified.com/