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If The Federal Reserve Loses Control ...

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  • Reynolds
    Moderator
    • Oct 2018
    • 3264

    If The Federal Reserve Loses Control ...


    David Stockman On What Could Happen If The Fed Loses Control




    The truth is, in an economy encumbered with nearly $78 trillion of debt already—including $16.2 trillion on households, $16.8 trillion on business, $23 trillion on governments—the last thing we need is even lower interest rates and even bigger incentives to take on debt and leverage. In fact, in a debt-saturated system, the Fed’s massive bond purchases never transmit anything outside the canyons of Wall Street. This money-printing madness only drives bond prices higher and cap rates lower—meaning relentless and systematic inflation of financial assets’ prices. As a practical matter, of course, the bottom 90% don’t own enough stock or even inflated government and corporate bonds to shake a stick at. The Fed is now a completely rogue institution that is a clear and present danger to the future of prosperity and liberty in America. The tragedy is that the clueless speculators on Wall Street and politicians in Washington don’t even get the joke. International Man: So far, the Fed has been able to successfully manipulate interest rates to historic lows. What are some catalysts that could cause the Fed to lose control and interest rates to spike?

    David Stockman: They are chasing their tail, faster and faster. The more they expand their balance sheet, thereby injecting into the bond pits a massive artificial bid for governments, corporates, munis, commercial paper and junk, the lower the yields go, and the demand for more debt becomes greater. So, the Fed and its fellow-traveling global central banks are setting up our Humpty-Dumpty economy for a very great fall. That is to say, what will cause the central banks to lose control is the greatest wave of debt defaults in recorded history... Total public and private debt on the US economy now stands at $77.6 trillion ...


    Recall that we supposedly got a wakeup call back in 2008, when the economy plunged into financial crisis and the worst recession since the 1930s But back then, total debt outstanding was just $52.6 trillion, meaning that during the last decade of purported recovery, the US economy actually took on $25 trillion of new debt—a 48% increase. Moreover, big-spending politicians were not the only culprit. On the eve of the Great Recession, for example, total business debt (corporate and non-corporate) stood at $10.1 trillion and has subsequently soared to $16.8 trillion. This orgy of borrowing also means that business debt over the past 13 years has grown by 66.5%—far more than the 46.7% expansion of nominal GDP. Accordingly, the business debt burden on GDP has now gone off the charts, and at 78% of GDP, is more than double the pre-1970 level:


    But it also needs to be recalled that even as the interest rate clubbers at the Fed fostered a massive explosion of business debt after the 2008 financial crisis, it did not translate into any growth in productive investment at all. In short, the Fed has fostered a zombie economy, and it is the collapse of the zombies that will eventually take it down. The Fed has printed more money in recent months than it has for its entire history. The government is spending as if trillion is the new billion ... By contrast, the Donald has borrowed nearly 4X that in the last 90 days! Read more ...


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