This Credit Event Could Crush the Stock Market

Now our nerves are settled. We can sleep at night. There's nothing more to worry about. Christine Lagarde, head of the IMF, has reassured us. Madame Lagarde tells us that further scaling back of QE won't mean a thing, as long as the Fed goes about its tapering in a gradual, measured way, which of course it will.

"We don't anticipate massive, heavy and serious consequences," she said.

But wait …

She must be wrong about that. If the Fed were to continue to cut back its bond-buying, the stock market and the economy would go into withdrawal shock. The economy would wobble. Stocks would fall. And Janet Yellen would promptly go into a huddle with other Fed governors and come out with an announcement: more QE!

 

A New Depression?

We don't know whether Madame Lagarde is aware of it or not. Fed economists must be. They must know that the only thing keeping the economy from slipping into recession is the Fed's EZ credit. The following figures were shown to us by economist and author of The New Depression: The Breakdown of the Paper Money Economy, Richard Duncan. He spelled it out for us …

Since the 1980s, we have had an economy that grows on credit. In 1964, the global economy owed only $1 trillion. By 2007, total global credit had expanded to $50 trillion. The global economy depends on it. But instead of stimulating a real, healthy recovery, the Fed has only been able to simulate one. When credit growth slows, so does the economy.

How much credit growth does it take to keep the economy chugging ahead? Duncan says it needs an increase of at least 2% after inflation, or the economy goes backward. Every time credit growth has fallen below 2%, he says, we have had a recession. No exceptions.

A growing, expanding economy naturally leads to more credit. Households borrow for new homes and appliances. Businesses borrow for new plants and machinery. Investors borrow to finance start-ups and speculations. Government borrows, too, to cover deficits. And all this borrowing is what leads to new demand, new jobs and new output.

But instead of stimulating a real, healthy recovery, the Fed has only been able to simulate one. The real economy limps along. Real per capita disposable income has risen just 0.7% a year over the last five years. The personal savings rate is only 4%. (It was 10% in the 1980s.) And although the consumer deleveraging cycle is over (for now) much of the new credit creation is once again in the subprime category. (Last year, Wall Street secured $20 billion in sub-prime auto loans!)

Although the Fed has been unable to do much about the real economy … in the financial economy it's wrought wonders! That's the secret to understanding the markets, Duncan explains. It depends on the difference between how much credit the economy needs and how much it gets. The excess is what drives up asset prices.

 

The Rich Get Richer

That's why the rich have gotten so rich lately …

The markets take excess credit and use it to bid up asset prices. Stocks rise. Real estate prices go up. (The average house price is back at over $200,000.) Household net worth – heavily concentrated in the upper reaches of the socio-economic pyramid – rose $8 trillion in the last 12 months. It's now greater than it was in 2007. And that huge increase appears to be the only thing keeping the economy from sinking.

Take away the QE, and you take the biggest single buyer out of the bond market. Bond prices fall (and yields rise). Stocks fall. Housing prices fall. And the economy, no longer buoyed up by the phony "wealth effect," is suddenly pulled under by a real "poverty effect."

Duncan tells us that all borrowers put together are likely to ask for $2.2 trillion worth of credit this year. That is a 3.8% increase. But that's before inflation. Take off 2% for rising prices, and the real increase falls short of the 2% needed to avoid recession.

So, here's what happens. The Fed has to keep peddling cheap credit, or the economy falls into recession. Some of it is absorbed by the bond market (mostly US federal deficits). Anything more than is needed to fund credit demands is the "excess liquidity" that drives the asset markets. Stocks soared in 2013 because the Fed overfunded US credit demands (the US budget deficit declined).

"The Fed is driving the economy," says Duncan.

The feds broke it. Now, they own it. Over the next six months, Duncan sees no problem. There will be enough excess liquidity to keep asset prices moving up.

But then, watch out.

 


 

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners.

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 


 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “This Credit Event Could Crush the Stock Market”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Japan: It isn’t What the Media Tell You
      Known for Being Terrible For the past few decades, Japan has been known for its stagnant economy, falling stock market, and most importantly its terrible demographics.     A chart of Japan's much-bewailed demographic horror-show. Most people consider a declining population to be a bad thing due to the implications for assorted state-run pay-as-you-go Ponzi schemes, primarily those related to retirement. It is hard to be sympathetic, since it would have been possible to...
  • Bitcoin Facts
      A Useful Infographic When we last wrote more extensively about Bitcoin (see Parabolic Coin – evidently, it has become a lot more “parabolic” since then), we said we would soon return to the subject of Bitcoin and monetary theory in these pages. This long planned article was delayed for a number of reasons, one of which was that we realized that Keith Weiner's series on the topic would give us a good opportunity to address some of the objections to Bitcoin's fitness as a medium of...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • An Update on Polly: She May be Coming Back to Life
      A Twitch of a Toe In our recent update on credit spreads we proposed to use the seemingly deceased  Monty Python parrot Polly as a stand-in for the suspicion of creditors in today's markets.  The question was whether Polly was indeed dead or merely in a deep coma. Depending on this, one should be able to gauge how powerful a miracle will be required to resurrect her.   Meet Polly. Is she alive?   In the first half of November there was actually a small sign that...
  • The Complete Idiot’s Guide to Being an Idiot
      Style Over Substance There are many things that could be said about the GOP tax bill.  But one thing is certain.  It has been a great show. Obviously, the time for real solutions to the debt problem that’s ailing the United States came and went many decades ago.  Instead of addressing the Country’s mounting insolvency, lawmakers chose expediency without exception.  They kicked the can from yesterday to today.   The empty chairs meeting – this is slightly...
  • Lessons from Squanto
      Standing In Your Way Governments across the planet will go to any length to meddle in the lives and private affairs of their citizens.  This is what our experiences and observations have shown.  What gives? For one, politicians have an aversion to freedom and liberty.  They want to control your behavior, choices, and decisions.  What’s more, they want to use your money to do so.   As this by now famous cartoon implies, the State is essentially a gang of criminals...
  • Precious Metals Supply and Demand – Thanksgiving Week
      Grain of Salt Required The price of gold fell $7, and that of silver 24 cents. This was a holiday shortened week, due to Thanksgiving on Thursday in the US (and likely thin trading and poor liquidity on Wednesday and Friday). So take the numbers this week, including the basis, with a grain of that once-monetary commodity, salt. We will keep the market action commentary brief.   Relatively modern examples of salt money which was widely used in African countries until the...
  • The Precious Metals Bears' Fear of Fridays
      Peculiar Behavior In the last issue of Seasonal Insights I have shown that the gold price behaves quite peculiarly in the course of the trading week. On average, prices rise almost exclusively on Friday. It is as though investors in this market were mired in deep sleep for most of the week.   The title of this blog post is a play of words on the title of an early Wim Wender movie, The Goalkeeper's Fear of the Penalty, which in turn is based on a famous novel by Peter Handke...
  • What’s the Point? Precious Metals Supply and Demand Report
      Questions and Answers A reader emailed us, to ask a few pointed questions. Paraphrasing, they are:   Who cares if dollars are calculated in gold or gold is calculated in dollars? People care only if their purchasing power has grown. What is the basis good for? Is it just mathematical play for gold theorists? How does knowing the basis help your readers? Is it just a theoretical explanation of what has already happened? Prove that if someone has known the basis...
  • The Zealous Pursuit of State-Sponsored Collapse
      When Bakers Go Fishing Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force.  But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.  The United States government is no exception.   From the “When the government helps the economy” collection: Breaking a few eggs while baking the bridge to nowhere omelet. [PT]   Over the...
  • The Party of Spend More vs. the Party of Tax Less
      Eternal Spendathon The Senate just passed a 500-page tax reform bill. Assuming it lives up to its promise, it will cut taxes on corporations and individuals. Predictably, the Left hates it and the Right loves it. I am writing to argue why the Right should hate it (no, not for the reason the Left does, a desire to get the rich).   The Federal debtberg has grown beyond all measure since Nixon's gold default. So has the money supply and the amount of private debt. No-one...
  • The Santa Claus Rally is Especially Pronounced in the DAX
      The Gift that Keeps on Giving Every year a certain stock market phenomenon is said to recur, anticipated with excitement by investors: the Santa Claus rally. It is held that stock prices typically rise quite frequently and particularly strongly just before the turn of the year.   Unbeknown to many, Santa Claus paid a high price for enriching investors [PT]   I want to show you the Santa Claus rally in the German DAX Index as an example. Price moves are often...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com