$8 Trillion Transfer
RHINEBECK, New York – It is a beautiful autumnal day here in upstate New York. The trees are red, brown, and yellow. Squirrels hop across the lawn, collecting their nuts. Unseasonably warm the last few days, rain showers are moving in from across the Hudson, driven by a chilly wind.
But today, we talk about money. After all, that’s our beat here at the Diary. Money. Money. Money. We’ve seen how the feds created fake money after ditching the Bretton Woods gold-backed money system in 1971.
And we’ve seen how this fake money perverted, distorted, and corrupted our economy, our government, and even our family lives. We pause here to recall how it even dodged the Constitution.
“Money matters” are supposed to be decided by the people’s representatives in the House, and then discussed and approved by the Senate. After all, it’s voters’ money.
But the Fed – without so much as a by-your-leave or a thank-you note – took it upon itself to decide the fate of more than $8 trillion. That is a rough estimate of the amount not paid to savers over the last eight years as a result of the Fed’s ultra-low interest rate policy.
The total transfer is much greater – since stock, bond, real estate, and other asset prices all rose in response to the trillions of dollars of new credits the Fed was putting into the system. This enriched their owners and made those who didn’t own them relatively poorer.
Wall Street Bonus Plan
The Fed worked out its own income redistribution plan – from savers to borrowers – without even any public discussion. Had it been put before the House for a vote, it might have been called the “Rich Get Richer Program.” Or maybe the “Wall Street Bonus Plan.” Or perhaps the “Mislead Consumers, Investors, and Businesses by Mispricing Credit Act of 2009.”
How can you not like this free money shower? It all depends on when you get the new money – if you get it at all.
Cartoon by Lisa Benson
You can imagine how this kind of legislation would go down in the nation’s capital.
But fortunately for the rich, Wall Street, the Deep State, and the entire debtor class, the plan needed no votes from the people’s representatives, neither in the House nor the Senate.
Nor did the president of all the Americans ever have to sign the final legislation. All it needed was the approval of the 12 unelected members of the Fed’s decision-making body, the Federal Open Market Committee – and the deal was done.
In his recent article in The Economist (the subject of yesterday’s Diary), President Obama acts as though the Fed’s plan – which he must have approved, though we don’t recall him saying so – was a great success.
Everybody has their own facts. But we wonder in what looking glass Mr. Obama found his. He sounds as though the economy was like a house plant that he inherited when he moved into the White House. By his account, it was wilting when he found it; he gave it water… and it flourished.
But GDP growth during the eight years of the Obama administration averaged half the rate of the Clinton years and only one-third the rate of the Kennedy and Johnson years.
Economic expansions since the end of WW2 – over time, economic statistics have practically been tortured to death to produce results flattering the government and its central planning minions; and yet, output growth has steadily worsened for decades. Obama’s much-heralded recovery was the weakest of the entire post WW era – click to enlarge.
And if we calculate “real,” or inflation-adjusted, economic growth under Obama’s two terms according to the methodology used during the Reagan administration, we see that Obama’s growth disappears completely!
We’ve been writing about it for the last 15 years… puzzling over it… trying to connect the dots to see what was really going on. But only recently have we turned the light on the real culprit: the money system.
Fake money caused fake and fragile growth. In effect, the feds’ fake money created a hothouse economy – protected from the real world by artificial money lent at artificially low rates. You see plants that look lush and green, leafy and fulsome. But they couldn’t survive a single night outside in the real world.
That is the “macro” picture – the big picture. But it’s important for investors to think about. Because macro has a way of turning micro. The big, wide world tends to have a crushing effect when it falls on your stocks and bonds.
The fake dollar distorted everything. If you own a $100 stock, for example, behind it is a company whose sales were artificially inflated by fake money. Its customers thought they were richer than they really were – thanks to fake asset values.
Its borrowing costs went down because of the Fed’s fake interest rates. Its profits went up, thanks to higher sales and lower costs. Even the value of its shares are a mirage – puffed up as they are by share buybacks – funded, of course, at near-zero rates.
And when the cycle turns – when credit markets tighten – the hothouse glass cracks. And then shatters. The gentle climate of mutually supported fakeness turns to bitter-cold reality. Higher interest rates put pressure on the whole system.
Customers lose their houses, their jobs, and their cars. Store parking lots are empty. Their cash registers are silent. Sales go down. Profits tumble. Stock prices collapse. Unable to pay their corporate debts, the companies default. Bond prices – for all but the best bonds – fall. Spreads widen.
A heads-up: The first cracks have already appeared. Since its low this warm summer, the yield on the 10-year Treasury note – a key bellwether for borrowing costs across the economy – has risen almost 52%.
We may – finally, after 35 years – have seen the bottom in bond yields, the end of the bull market in bonds that began in 1981. The wind may be picking up. Make sure you have a scarf.
Charts by: St. Louis Federal Reserve Research, Econsnapshot, StockCharts
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.
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 “The Fed’s “Hothouse” Is in Danger”
Most read in the last 20 days:
- Gold – An Overview of Macroeconomic Price Drivers
Fundamental Analysis of Gold As we often point out in these pages, even though gold is currently not the generally used medium of exchange, its monetary characteristics continue to be the main basis for its valuation. Thus, analysis of the gold market requires a different approach from that employed in the analysis of industrial commodities (or more generally, goods that are primarily bought and sold for their use value). Gold's extremely high stock-to-flow ratio and the main source of...
- Doomsday Device
Disappearing Credit All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Ambrose Evans-Pritchard writing for British newspaper The Telegraph: Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard. Data from the U.S. Federal Reserve shows that the $2 trillion market...
- India – Is Kashmir Gone?
Everything Gets Worse (Part XII) - Pakistan vs. India After 70 years of so-called independence, one has to be a professional victim not to look within oneself for the reasons for starvation, unnatural deaths, utter backwardness, drudgery, disease, and misery in India. Intellectual capital accumulated in the West over the last 2,500 years — available for free in real-time via the internet — can be downloaded by a passionate learner. In the age of modern technology, another mostly...
- Pulling Levers to Steer the Machine
Ticks on a Dog A brief comment on Fed chief Janet Yellen’s revealing speech at the University of Michigan. Bloomberg: “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Yellen said Monday in Ann Arbor, Michigan. The Fed is now trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.” […] “The appropriate stance of policy now is closer to, let me call it...
- Credit Contraction Episodes
Approaching a Tipping Point Taking the path of least resistance doesn’t always lead to places worth going. In fact, it often leads to places that are better to avoid. Repeatedly skipping work to sleep in and living off credit cards will eventually lead to the poorhouse. Sometimes the path of least resistance turns out to be problematic The same holds true for monetary policy. In particular, cheap credit policies that favor short-term expediency have the...
- Cracks in Ponzi-Finance Land
Retail Debt Debacles The retail sector has replaced the oil sector in a sense, and not in a good way. It is the sector that is most likely to see a large surge in bankruptcies this year. Junk bonds issued by retailers are performing dismally, and within the group the bonds of companies that were subject to leveraged buyouts by private equity firms seem to be doing the worst (a function of their outsized debt loads). Here is a chart showing the y-t-d performance of a number of these...
- Mea Culpa – Precious Metals Supply and Demand
Input Data Errors Dear Readers, I owe you an apology. I made a mistake. I am writing this letter in the first person, because I made the mistake. Let me explain what happened. The wrong stuff went into the funnel in the upper left-hand corner... I wrote software to calculate the gold basis and co-basis (and of course silver too). The app does not just calculate the near contract. It calculates the basis for many contracts out in the distance, so I can see the...
- French Election – Bad Dream Intrusion
The “Nightmare Option” The French presidential election was temporarily relegated to the back-pages following the US strike on Syria, but a few days ago, the Economist Magazine returned to the topic, noting that a potential “nightmare option” has suddenly come into view. In recent months certainty had increased that once the election moved into its second round, it would be plain sailing for whichever establishment candidate Ms. Le Pen was going to face. That certainty has been...
- The Cost of a Trump Presidency
Opportunity Cost Rears its Head Last Thursday’s wanton attack on a Syrian air field by the US and its bellicose actions toward North Korea have brought the real cost of candidate Trump’s landslide victory last November to the forefront. It didn't take long for Donald Trump to drop his non-interventionist mask. The decision was likely driven by Machiavellian considerations with respect to domestic conditions, but that doesn't make it any better. Unlike...
- Heavily Armed Swamp Critters
Worst Mistake GUALFIN, ARGENTINA – By our calculation, it took just 76 days for President Trump to get on board with the Clinton-Bush-Obama agenda. Now there can be no doubt where he’s headed. He’s gone Full Empire. Not that it was unexpected. But the speed with which the president abandoned his supporters and went over to the Deep State is breathtaking. Once there was only a Trump fragrance called Empire... now he has gone full empire himself Among the noise...
- Hell To Pay
Behind the Curve Economic nonsense comes a dime a dozen. For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.” She even told the University of Michigan’s Ford School of Public Policy so earlier this week. Does she know what she’s talking about? Somehow, this cartoon never gets old... If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does. The unemployment...
- Trump Is An Insider Now
Conspiracy of the Few GUALFIN, ARGENTINA – “U.S. stocks fall on Trump talk…” began a headline at Bloomberg. Or it may be Trump action. We had already counted six major campaign promises – including no O’care repeal and no “America First” foreign policy – already buried (some for the better). A bunch of campaign promises get the MOAB treatment... A great many theories have been proposed to explain Trump's recent series of u-turns: 1. he is in thrall to...