Grotesque Mutants

BALTIMORE – Let’s see… U.S. corporate earnings have been going down for three quarters in a row. The median household income is lower than it was 10 years ago. And now JPMorgan Chase has increased its estimated risk of a recession to about one in three.


MutantsFrom the grotesque mutants collection

Image via


These things might make sober investors wonder: Is this a good time to pay some of the highest prices in history for U.S. stocks? Apparently, they don’t think about it…

Last week U.S. stocks rose again, after the Fed announced that it would go easy on “normalizing” interest rates. The Dow rose 156 points on Thursday, putting it in positive territory for 2016.


1-DJIA, dailyDow Jones Industrial Average, daily – boosted by loose Fed talk – click to enlarge.


Hooray! Investors – at least those who passively track the index – are even for the year. And with more central bank fixes, maybe they’ll be able to keep their heads above water for the rest of 2016. Good luck with that!

You may recall our prediction: The Fed will never return to a “normal” interest rate. Why not? Many Wall Street analysts say the Fed’s move to bring interest rates to a more normal level – after seven years of ZIRP (zero-interest-rate policy) – was “too early.”

We think it was too late. The Fed has already distorted too much for too long. Its EZ money policies have created a hothouse of speculation, mistakes, and misallocation of resources.

The financial plants that grew up in that environment – grotesque mutants that require huge doses of liquidity – cannot survive a change of seasons. But these plants are big. And powerful.

Washington… the health care industry… housing… Wall Street… They control the U.S. government, the bureaucracy, and major economic sectors – notably the $1 trillion-a-year security industry.

What they need – what the entire economy needs – is a correction. Excess debt must be purged. That’s what credit cycles, bankruptcies, and depressions are for.

“Normal” includes corrections. But the feds can’t let it happen.

They’ve staked their careers – and their fortunes – on the myth that they can tame the credit cycle… and prevent serious setbacks. They’re not going to give up now and admit defeat. They’re not going to let their major crony friends –or their campaign contributors – go broke.


Freaky Finances

Yes, the feds created this freakish financial world. They cannot fix it because they want it to stay broken. So what if it doesn’t make the typical family better off? It makes THEM – the feds and their cronies in the Deep State – better off. And that’s what really matters.

In these Diary entries, we have shown how the system has become “extractive” rather than productive. In a normal, healthy economy, people work, save, invest, and build real wealth one dollar at a time. But today’s dollar is different. And the economy is different, too. It runs on credit, not real savings, and builds debt – not wealth.

Instead of encouraging savings – which is what you need to make progress – it penalizes thrift. Over the past 10 years, U.S. savers have lost nearly $8 trillion, extracted from them by the Fed’s ZIRP. While savers were punished, borrowers were rewarded.


2-total credit market debtWhat’s a little debt among friends… – click to enlarge.


Since 1980, the U.S. economy has added about $50 trillion in excess debt – above and beyond the real output that can comfortably sustain it. This $50 trillion came not from honest work and saving. Instead, it was conjured up by banks – out of thin air.

And now, the productive Main Street economy must pay interest… and principal… on that debt – effectively extracting real wealth from the real economy and sending it to Wall Street and other favored industries.

The scam is so elegant that not one person in 1,000 understands how it works. We’ve been studying it for years, and we’re still in awe. But the result is obvious: Honest working people struggle to stay in the same place, as real wealth goes to the elite.


Scammy Policies

The plain people may not understand it, but they don’t like it. And they count on Donald J. Trump to do something about it. Alas, even the best swindle runs into trouble. The debt burden crushes the life out of the real economy. Productive sectors sink into the mud. Manufacturing disappears. Business slows. Trade slows. Borrowing slows.

And soon, the feds are paying people to borrow! As Chris Lowe reported in Wednesday’s Market Insight, about one-third of developed country government debt – worth roughly $7 trillion – is now trading at negative yields. And then, even more elegance. With the world economy slowing down, central banks adapt to the world they created. How? With more scammy policies.

Global risks bring Fed into line… ,” reads a headline in the Financial Times. The Federal Reserve has scaled back its forecasts for lifting interest rates this year, coming closer into line with market expectations for two quarter-point rises as it flagged up risks to the U.S. outlook from global, financial, and economic developments.


rate_hike_cartoon_10.15.2015_largeThe punchline…


See how it works? Central banks destroy the real economy with cheap money and extractive policies. Then, as the economy slumps, they need to bring their policies in line with the slumping economy. They need to swear off raising rates back to normal.

And since their policies can never produce real prosperity, they can never produce an economy that can support normal interest rates. Normal? Forget it. Eventually, normal will make a comeback. But not because the Fed wants it. Instead, the markets will normalize – brutally ­– over the Fed’s dead body…which is just the way we’d like it.


Charts by: StockCharts, St. Louis Federal Reserve Research


Chart and image captions by PT
The above article originally appeared at the Diary of a Rogue Economist, 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.



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3 Responses to “Interest Rates Are Never Going Back to Normal”

  • therooster:

    Wmbean …. Ahhhh, but there is a carrot. It’s called bullion in the role of a currency, but that carrot must come from the marketplace in association with market governed change and rate of change. It’s the only way an asset based currency can be introduced (in real-time) without risking a huge crash in the fiat currency market , based on the market’s lack of recognition that what’s developing in the TOTAL and COMPLETE currency model is a yin-yang of liquidity … a hybrid.

    The Yin is as important as the Yang and consistent with creation, we have light coming out of darkness, of course. Nothing new .

    I cannot imagine the damage that could take place if asset based currency were to be brought about by fiat or legal proclamation from a top-down point of view …… you ? It would be total madness.

    We must be as wise as serpents, yet as gentle of doves. Time to hit the books again, possibly ?

  • wmbean:

    There is no carrot. The FED not making a decision to raise rates is a decision. Unfortunately for them it is a decision to let others make the decision for them. The FED has almost reached “The Twilight Zone”. It should raise the interest rate by a quarter of a percent three more times this year. Unfortunately it won’t until the markets force it to do so.

  • therooster:

    Nice article written from the “dark side” of a developing currency yin-yang. Why does Bill Bonner assume that liquidity must be debt based when the use of debt-free liquidity (gold) is gaining more traction with each passing week ?

    We’ve seen a great deal of “the stick”. Where’s the “carrot” ?

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