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"Why 'Easy Money'”

Monday, June 24, 2019 19:25

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“Why ‘Easy Money’”

by David Stockman

“The constant, obvious flattery, contrary to all evidence, of the people around him [Tsar Nicholas I] had brought him to the point that he no longer saw his contradictions, no longer conformed his actions and words to reality, logic, or even simple common sense, but was fully convinced that all his orders, however senseless, unjust, and inconsistent with each other, became sensible, just, and consistent with each other only because he gave them.”

– Leo Tolstoy, “Hadji Murat” (1851)

“Our monetary central planners insist that levitating the stock market is not their “third” mandate. And most of them appear to believe it. They also believe they can calibrate short-run inflation and economic growth rates. Wall Street preys on this faith. But the Federal Reserve has no magic wand. They’re incapable of making a billion prices salute to the second decimal place or trillions of gross domestic product spring to the next handle on the growth ladder. Their impact is all indirect.

Here’s what I mean… The Federal Open Market Committee (FOMC) establishes a “target range” for the federal funds rate. The fed funds rate is the rate at which banks and credit unions lend their excess reserve balances to other banks and credit unions on an overnight basis and with no collateral. This is the “interest rate channel” of monetary policy. “Transmission” to Main Street – of “easier” money, of late – “induces” households, businesses, and governments to borrow and spend more than they would otherwise.

This point is essential. So, let’s break it down. Capitalism generates an amount of aggregate output at any point in time. This aggregate output is simply the unplanned sum of contributions made by millions of workers, entrepreneurs, investors, savers, speculators, inventors, etc., each pursuing their self-interest across the warp and woof of an indescribably complex economic system. It is an eco-system… it’s organic, with life of its own.

The naturally occurring “macro” that presents to policymakers – monetary central planners, Members of Congress, Tweeters-in-Chief, and Deep State operators alike – is merely the sum of capitalism’s manifold, splendiferous “micros.” If they want more “macro” than market forces produce, they must get households and businesses to swap balance-sheet burdens tomorrow for more spending today. They induce them to steal from their own futures.

The problem is the Fed’s interest-rate tool’s been ground to a thin remnant. It just doesn’t work anymore for Main Street.

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We’ve talked about it in terms of “Peak Debt.” It means the balance sheet is saturated, so cutting interest rates produces more and more marginal increments of that “borrow and spend” effect. Households reached it on the eve of the Global Financial Crisis. The ratio of total debt to wage and salary income had reached 220%. The pre-Alan Greenspan norm was about 80%.

From 2000 to 2007, while interest rates were plunging, household debt was soaring from $6.5 trillion to $14.2 trillion. That’s 120%, about 8% to 11% per year. We saw partial normalization from 2004 through 2006. And, then, the next spasm of rate-cutting didn’t work. Money-market rates approached zero. Mortgage rates hit rock-bottom.

Household debt declined for several years after the crisis. And, even after tepid expansion returned in 2013, it never broke out of the 2% to 3% range. From the fourth quarter of 2007 through the first quarter of 2019, in fact, total household debt grew by only 10%.

During the most recent trailing-12-month period, ended March 31, 2019, the growth rate clocked in at just 2.8%. That’s marginally above the 2.27% inflation rate posted during the same period.

In summary, then, household debt grew by an average of 10.2% during the 2000-to-2007 cycle. But it’s only grown by an average of 0.8% during the 2007-to-2019 cycle. The fact of that radical deceleration is alone far more significant for the future than all the rubbish the Fed heads scribble into their monthly meeting statements.

Click to Enlarge

Whatever ails the U.S. economy at this moment or threatens worse down the road, it sure as hell isn’t interest rates. As a practical matter, we don’t even have any, let alone rates so “high” they’re biting into growth, jobs, and incomes. In fact, at last quote, the yield on the 10-year U.S. Treasury note was 2.03%. It’s crossed back under the inflation rate, at least as measured by the 16% trimmed-mean consumer price index, which posted at 2.27%. in April.

How in the world can anyone in their right mind be talking about cutting interest rates when the yield on even long-term money is negative after inflation? Well, our monetary central planners are so lost their puzzle palace that they’ve made themselves hostage to Wall Street’s, Bubblevision’s, and the Tweeter-in-Chief’s cries for “easier” money. And “easy money” is all they know at this point. So, that’s what they’ll do.”

- http://deepstatedeclassified.com/

Of course I know you’re not so naive as to believe any of that

”easy money” will be going to YOU, right, Good Citizen?

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/06/why-easy-money.html

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