No one, as David Stockman reminds us, is as dangerous as a well-educated fool, and Washington and Wall Street are full of them. From Stockman at davidstockmanscontracorner.com:
With every passing week that money markets rates remain pinned to the zero bound by the Fed, the magnitude of the financial catastrophe hurtling toward main street America intensifies. That’s because 80 months—– and counting—–of zero interest rates are fueling the most stupendous gambling frenzy that Wall Street has ever witnessed or even imagined. Sooner or later, therefore, this mother of all financial bubbles will splatter, bringing untold harm to millions of households which have been lured back into the casino.
The truth is, zero cost in the money market is irrelevant to main street. As we have repeatedly demonstrated the household sector is stranded at “peak debt” and, consequently, there is no interest rate low enough to elicit a spree of pre-crisis style consumer borrowing and spending. Based on the clueless jawing that occurred this weekend at Jackson Hole, the following simple chart that I laid out last week bears repeating:
On the eve of the financial crisis in Q1 2008, total household debt outstanding—including mortgages, credit cards, auto loans, student loans and the rest——– was $13.957 trillion. That compare to $13.568 trillion outstanding at the end of Q1 2015.
That’s right. After 80 months of ZIRP and an unprecedented incentive to borrow and spend, households have actually liquidated nearly $400 billion or 3% of their pre-crisis debt.
Likewise, zero money market rates are irrelevant to legitimate business finance. That’s because no sane executive would finance the life blood of his enterprise—–the working stock of raw, intermediate and finished goods——in the overnight money market; and, self-evidently, free overnight money is beside the point when it comes to funding long-term, illiquid but productive assets such as plant, equipment and software.
In fact, the only impact that free money market funding has on corporate America is round-about and perverse. To wit, it flushes money managers into a desperate quest for yield and provides stock speculators with endless opportunities to load up their trucks with zero cost carry trades, thereby driving the stock averages to lunatic heights.
As a result of this double-whammy, the C-suites of corporate America have been turned into glorified gambling parlors. The stock option obsessed executives domiciled there are endlessly and overpoweringly presented with the opportunity to sell cheap corporate credit to yield-hungry fund mangers and use the proceeds to buyback their own over-priced stock or to acquire at a hefty premium the equally over-priced stock of their competitors, suppliers and customers, or any other company that Wall Street bankers happen to be peddling.
To continue reading: More Drivel From A Dangerous Academic Fool
