Permanent
Recession
Short-term financing costs unexpectedly jumped this week, raising
questions about the health of a vital part of the economy.
By J.M. Hamilton (9-22-2019)
If the definition of insanity is
doing the same thing repeatedly w/ the same result, and expecting a different
outcome, then central bankers around the globe should be headed for psych
wards & padded cells. Since the 2008
financial crisis, central bankers have: flooded the global economy with
inexpensive liquidity; purchased bonds, securities, and even stocks; and
backstopped bond markets, stock markets, & artificially inflated asset
prices. Last week, here in the US, the
Fed came to the rescue of the repo market or the overnight commercial &
investment lending market. (It seems
that whenever the Federal Reserve makes any move towards normalization, a
tantrum ensues… did a tantrum occur in last week’s repo market? Capital strike? Note too: The last time the
aforementioned repo market seized up, as it did last week, and on this order of magnitude, it was a bellwether for the 2008 Great Recession, when the debt/real estate bubble burst.)
Meanwhile, current inflation remains well below the target of two percent, and the binary economy, enabled
by central banks, remains in full force.
Central banks – with their common
mandate of price stability - continue to use the inflation trope, as a means to
justify the continuation of ultra-accommodative monetary policies, despite all
evidence that central bank policies have fueled, or have certainly been
accompanied by, disinflation. If central bank policies have fueled
disinflation, why do they continue to engage in the same tired accommodative policies
infinitum, since 2008? To answer that
question, we must identify who or what benefits from central bank policies in
force for the better part of a decade (and in the case of the BOJ decades), and
who does not. But first some interesting
statistics.
Over in Euroland, the ECB has setup a negative rate regime, w/ some 17 trillion in negative yielding European debt. In these United States, the Total Credit Market Debt (corporate, consumer, and public debt combined) is now north of 350% of GDP (that’s up significantly from 2008). The derivatives market, as recently as 2018,
was said to be worth 1.2 quadrillion… that’s far too many zeros for products
often utilized to gamble. And the BOJ,
which set the template, has been engaged in monetary insanity longer than any
central bank, going back to the ’92 real estate crash.
Can you say, “debt bubble?”
Obviously, someone or something
is benefiting from Fed and central bank policies as they race each other to the
bottom for lowest yields. Let’s identify
some of the parties who benefit.
Zombie banks and corporations –
who would likely collapse under normalized monetary policies – are certainly
beneficiaries. Included in the mix are
many Euroland national banks that European state leaders and the ECB are
reluctant to see go under.
Private equity, the bane of the global economy, uses cheap debt to fund LBOs.
Private equity is often known for stripping otherwise healthy companies -
or financially healthier than before private equity ownership arrived – of their assets and
their credit lines, faster than one can say, “Chapter Seven.” Central banks driving debt to record low yields, push investors into underpriced junk & private equity debt. And
yet, investor money continues to flow into nihilism defined: private equity
bonds, funds, and equities.
High net worth individuals (and many multinationals engaged in financial engineering) saw
their asset values soar, via central bank intervention, post 2008 crash, and
the number of newly minted millionaires and billionaires continues to climb (while gross global wealth remains relatively stable).
In short, thanks to central bank policies, the number of wealthy individuals continues to grow by taking a much larger slice of the global income & wealth pie (much of this wealth has been created out of escalating debt and speculation). Here, too, thank consolidation, financial engineering, M&A, the monopoly economy, and opportunity crushing private equity... fueled by central bank easy money policies.
And certainly, another key
beneficiary of central bank largesse are Western governments, and the US
government is no exception. As long as
the Fed funds trillion-dollar deficits as far as the eye can see, and America’s
$22 trillion national debt, the political duopoly doesn’t have to make tough
policy decisions. For instance, it
doesn’t have to choose between blowing a trillion dollars, per annum, on the
DOD/MIC and continuing entitlement spending.
Hence, the status quo Congress – w/ the sideshow of petty bickering – is
conveniently maintained thanks to the Fed.
That is to say, tax cuts for the wealthy, war w/out end, and corporate
welfare… all continue unabated. But
conveniently, never a dime for expanding the safety net, public sector job
creation, infrastructure, financing a Green New Deal – while the planet burns,
or retiring student debt (despite the obvious benefits such programs would have
for citizens and the US economy).
Let’s see… so banks, hedge funds,
private equity, high net worth individuals, monopolies, markets (that the majority of
Americans don’t participate in), and the political class, including Trump, are
the exceptional beneficiaries of central bankers’ failed policies. It’s obvious then central bankers are being
disingenuous when they say their respective goals are price stability &
inflation, when the true beneficiaries of ultra-accommodative monetary policy –
for a decade and more - are the financial aristocracy and government officials
& politicians (who do not want to be held accountable for gross fiscal
mismanagement).
And who loses in the financially
engineered/monopoly economy, enabled by the Federal Reserve and central banks? Well, that would be the four in ten Americans who can’t meet a $400 emergency payment… that would be the one in five US children who live in poverty. This
segment of the population would be the economically and politically
disenfranchised. No few in number of the bottom half, said
no thanks to Obama and Hillary in 2016, and turned around and voted for
Trump.
This demographic scrapes by on
multiple jobs that often do not pay a living wage, and when there weren’t jobs
to be had, many became statistics in the nation’s opioid pandemic. You see, a crisis really is a terrible thing
to waste. As long as central banks
continue to flood markets w/ liquidity to prop up the house of cards that is our global economy, built upon a foundation of debt, nobody has time to ask the
really tough questions, like: What kind
of society do we want to live in? Does
the US want to be ruled by Tech and Wall Street oligarchs? What's the best way to breakup cartels and monopolies to ensure economic health? How do we handle the economic fallout from
AI, automation, globalization, the monopoly economy, private equity, and
cataclysmic debt… ? How do we fund a
Green New Deal to save the Earth, and create jobs when the inevitable recession
hits?
Don’t look for the US
Congress to address these issues, as long as they're enabled and saved by The
Federal Reserve, as well as, owned by the donor class (which merely wants to
maintain the status quo, that is the rigged system).
For these Americans – the forty
to fifty percent, who have no voice or representation in Congress - there
has never been an economic recovery, just a hand to mouth existence and the
constant poverty grind.
Instead, nearly half of
America has faced a permanent recession, from 2008 to the present day.
In the Fed we do
not trust.
The irony is, if central banks
really wanted to create inflation, they could start by clearing their balance
sheets of public sector debt.
That is to say, central banks could forgive US Federal, Euroland, and
Japan’s public debt, which would disassemble a ticking time bomb. This, in turn, would free up Western
governments to launch fiscal spending (i.e. spend money on infrastructure, saving the
planet, and creating a baseline of economic and medical support for all Western
citizens).
The debt write-down could be
coordinated among all central banks, or occur slowly via negative yields, as we
are seeing in the Euroland today. Problematic
public debt could be cauterized and set aside, under a good central bank and a bad
central bank scenario (or SPV model).
This would in turn, free up Western governments to engage in fiscal
stimulus, and by the looks of our present debt bubble, it appears that the
world is going to need expansionary fiscal policy, sooner rather than later.
A debt write-down or haircut
would also allow central banks to pursue monetary normalization. Presently,
interest rates no longer reflect the risk factor associated w/ lending… not
even close. Normalized interest rates,
set by competitive markets, instead of central banks, would, likely, mean: less money
allocated to private equity buyouts; possibly, less financial engineering and
M&A; it would force European banks to deal w/ their nonperforming loan
portfolios; and it would provide retirees and savers with incomes again. Governments,
too, depending upon who we elect, would be free to reset spending priorities (read Green New Deal). More money for an aging population, more jobs created under a
necessary Green New Deal… gee, that sounds like it could create real inflation
and a boost to aggregate demand.
With debt written down, it’s
true some of the aforementioned winners would have to adjust, but w/ proper
notice many individuals and institutions could prepare in advance for the
policy change. Banks should rejoice at the prospect of a public debt haircut,
because the monetary policy normalization that should ensue would likely lead
to rising interest rates.
If central banks claim forgiving
public sector debt is not in their mandate, the correct response is: was
negative yields or QE within their mandate?
Central banks have not achieved their inflation targets or stable price
mandate, and basically have been making it up as they go along. If they can conjure up QE and negative
yields, and backstop markets, then surely these same central banks can forgive public sector debt, in
the name of price stability and achieving inflation targets.
In the West – particularly the US
– it’s time for citizens from all backgrounds to free themselves from the
tyranny of a national debt that will never be repaid.
A national debt that was created to: bailout TBTF banks; finance tax
cuts for the wealthy; and fund unlimited warfare (now, some $6 trillion and
counting).
It’s time for greater
accountability from all central bankers, and more adept coordination of fiscal
and monetary policy… a coordination that benefits all, rather than a fortunate
few. It’s time to end America’s
permanent recession for forty to fifty percent of the population.
Copyright JM Hamilton Publishing 2019
