Debt and central banking have distorted the American economy beyond all resemblance to the world-beater it once was. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:
June retail sales allegedly rose at a booming +15.6% YoY rate, thereby reminding us once again that just because you can look it up on Bloomberg doesn’t make it true. Actually, inflation-adjusted retail sales have fallen at a –13.5% annual rate since the March peak.
Then again, the March peak was an out-of-this-world aberration that underscores just how bollixed economic life has become as a result of Dr. Fauci and the Virus Patrol shutting down the great engine of the US economy last March-April, followed by a mindless compensatory bacchanalia of spending, borrowing and printing by Washington’s Infernal Inflation Machine.
One result of that madness was a cumulative 60 million layoffs and food lines for miles in many parts of the country, accompanied by the most explosive consumer spending surge ever recorded. In the equivalent of a children’s “which things don’t go together” quiz, that combo ranks in the no-brainer category.
Yet, it did happen. The March 2021 retail spending level was 42.6% above the April 2020 bottom in real terms. More importantly, it also stood 19.1% above the February 2020 level, which, of course, was recorded before the boot heels of Dr. Fauci’s minions came crashing down on the US economy.
Here’s the thing. It happens that this 19.1% pickup in monthly retail sales (excluding restaurants and bars) amounted to nearly $340 billion in constant dollar terms. In the scheme of things that’s one hell of a big number because it represents the entire increase in inflation-adjusted retail sales between February 2003 and February 2020.
That’s right. The tsunami of Washington stimmies and free stuff plus the lockdown of services venues caused a gain in retail sales for goods over the course of just 13 months that was equal to the prior 17 years of real growth.
Posted in Banking, Business, Debt, Economics, Economy, Financial markets, Government
Tagged Federal Reserve policies, Incomes, Monetary inflation, Retail Sales, Stimulus payments
Banks have tons of deposits, but they’re not lending them out. From Tyler Durden at zerohedge.com:
There was a remarkable disclosure in the latest JPMorgan earnings report: the largest US bank – an entity historically best been known for making loans to the broader population at least until the Fed nationalized the bond market – reported that in Q2 its total deposits rose by a whopping 23% Y/Y and up 4% from Q1, to $2.3 trillion, while the total amount of loans issued by the bank was flat both sequentially and Y/Y at $1.04 trillion.
In other words, only for the second time in its history – Q1 2021 being the first one – JPM had 100% more deposits than loans, or inversely, the ratio of loans to deposits is now 50% (it did post a modest rebound from an all time low in Q1).
An even more epic divergence between total deposits and loans, emerges at Bank of America where deposits similarly hit a new all time high of $1.91 trillion, even as the bank’s loans have continued to shrink at an alarming, deleveraging (and deflationary) pace and are now at $927 billion, nearly $100 billion below their level as of Sept 30 2008: in other words, there has been 12 years with zero loan growth at Bank of America, while the bank’s deposits have doubled!
Financial bubbles, particularly central-bank, fiat-money fueled bubbles, always pop. From Charles Hugh Smith at oftwominds.com:
Risk has not been extinguished, it is expanding geometrically beneath the false stability of a monstrously manipulated market.
One of the most under-appreciated investment insights is courtesy of Mike Tyson: “Everybody has a plan until they get punched in the mouth.” At this moment in history, the plan of most market participants is to place their full faith and trust in the status quo’s ability to keep asset prices lofting ever higher, essentially forever.
In other words, the vast majority of punters are convinced they will never suffer the indignity of getting punched in the mouth by a market crash. What makes this confidence so interesting is massively distorted markets always end the same way: crisis, crash and collapse.
The core dynamic here is distorted markets provide false feedback and misleading information which then lead to participants making catastrophically misguided decisions. Investment decisions made on poor information will also be poor, leading participants to end up poor, to their very great surprise.
The surprise comes from the falsity of the feedback, as those who are distorting markets want punters to believe “the market” is functioning transparently. If you’re manipulating the market, the last thing you want is for the unwary marks to discover that the market is generating false signals and misleading information on risk, as knowing the market is being distorted would alert them to the extraordinary risks intrinsic to heavily distorted markets.
There’s an old saying that it’s better for central bankers to remain silent and have people suspect that they’re brain-dead clueless than open their mouths and removed all doubt. From David Stockman at davidstockmanscontracorner via lewrockwell.com:
We start with this gem from NY Fed president John Williams. He claims the Fed must keep injecting $120 billion per month of fraudulent credit into Wall Street because, apparently, this quarter’s likely 7% real GDP growth and 5% inflation are not sufficient to meet the Fed’s goals:
“… the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery.”…
You can’t say enough bad things about this knucklehead. He’s the very poster boy for the camarilla of academics and Fed lifers who have hijacked the nation’s central bank.
For want of doubt, here is William’s career since age 18:
- 1980-1984: A.B. in economics at University of California at Berkeley;
- 1985-1989: MA in economics at London School of Economics;
- 1990-1994: PhD in economics at Stanford University;
- 1995-2002: Federal Reserve Board staff economist;
- 2003-2010: Director of Research at the San Francisco Fed;
- 2011-2018: President, San Francisco Fed;
- 2018-2021: President, New York Fed.
Does this man remind you of a medieval theologian who never escaped the bosom of the Roman Catholic Church, and who did truly believe you can count the number of angels on the head of a pin?
Stated differently, Williams has been so mentally flayed by 40 years of captivity in macroeconomic models and the Fed’s theological groupthink that he can no longer think at all. And the evidence is overwhelming.
Even as the Fed is injecting $120 billion of fresh cash into the dealer markets each and every month, Wall Street has become so waterlogged with cash that upwards of $800 billion is being loaned right back to the Fed via its so-called o/n RRP facility.
An introduction to Twilight Zone central banking. From Wolf Richter at wolfstreet.com:
Yesterday, the Fed raised its interest rate on overnight reverse repos, and this morning, a giant sucking sound of cash.
The Fed sold a record $756 billion in Treasury securities this morning in exchange for cash via overnight “reverse repos.” This was up by a stunning 45% from yesterday’s operations of $521 billion. There were 68 counterparties involved. Yesterday’s overnight reverse repos had matured and unwound this morning, to be more than replaced by today’s tsunami.
During the period starting in 2014 and then abating with the Fed’s quantitative tightening in 2018, the US financial system was also creaking under a massive amount of cash following years of QE, and the Fed drained some of that cash out via reverse repos. There too were spikes, but they came at the last day of the quarter, and particularly at the end of the year.
This time, overnight reverse repos (RRPs) spiked during the quarter, and today they spiked into the stratosphere. Yesterday, the Fed had hiked the RRP offering rate to 0.05% (from 0.0%), and this morning, a giant sucking sound of cash (please forgive me, Ross). The RRP balance of $756 billion drains over six months of QE from the market:
When the only thing that matters is that the stock market is going up, it’s time to ask yourself what could go wrong. From Charles Hugh Smith at oftwominds.com:
Nobody seems to notice the ‘diminishing returns’ on Fed manipulation, oops, I mean ‘intervention’.
Perhaps it shouldn’t surprise us that everything that will eventually matter is ignored until it does matter–but by then it’s too late. Here’s a short list to start the discussion:
1. The Federal Reserve has transformed the American populace into a nation of dismayingly over-confident gamblers. I’ve been writing about moral hazard–the separation of risk from consequence–since 2011. Punters who are insulated from risk will have an insatiable appetite for risky bets, which is precisely what we see on a mass scale, as the confidence that the Fed will never let markets drop is 99.99% because the Fed has indeed reversed every decline, no matter how modest, month after month, year after year.
The Fed has perfected moral hazard: everyone from the money manager betting billions to the punters gambling their stimmy money is absolutely confident I can’t lose because the Fed will always push the market higher. Hence the advice to never sell and keep increasing the size of one’s bets because losing is transitory (heh).
2. The Fed’s perfection of moral hazard radically incentivizes increasing debt and leverage to maximize one’s bets because the bigger the bet, the bigger the payoff–the Fed guarantees it! Margin debt is at extremes, and many wildly successful stock and options punters have reaped fantastic gains by maxing out their Robinhood margin as their winnings increase.
Since the Fed guarantees that anyone holding until the Fed gooses markets higher will be a winner, maximizing leverage is completely rational: hedging is a foolish waste of money that could have been placed on a sure winner–any long bet.
Margin and shadow-banking leverage is through the roof, but nobody sees any risk from this extreme expansion of debt and leverage. Never mind that leverage unwinds faster than it builds…
The Fed is quietly taking control of more and more of the financial system and the economy. From Charles Hugh Smith at dailyreckoning.com:
For the past 22 years, every time the stock market whimpered, wheezed or whined, the Federal Reserve rushed to soothe the spoiled crybaby. There are two consequential results of the Fed as savior:
1. The Fed has perfected moral hazard: everyone from the money manager betting billions to the punters gambling their stimmy money is absolutely confident I can’t lose because the Fed will always push the market higher.
What happens when participants are confident they can’t possibly lose? They make ever-riskier and ever-larger bets. The entire nation is in the grip of a moral hazard mania, all based on the confidence that the Fed will always push every market higher—always, without fail.
2. Organic (i.e. non-manipulated) market forces have been extinguished. There is now only one consequential force, the Fed. All markets are now 100% dependent on the Fed responding to every bleat from every punter who’s recklessly risky bet is about to go bad.
The Fed is now the perfect union of quasi-religious savior and Helicopter Parent: oh dear, our little darling got high and crashed the Porsche? Quick, let’s save our precious market from any consequences!
Every day, Fed speakers take to the pulpit to spew another sermon about the Fed’s god-like power and wisdom. The true believers soak up every word: golly-gee, the Fed is better than any god — it’s guaranteeing I can get rich if I just leverage up any bet in any market!
With a savior like the Fed, you don’t need a real economy or a real market — all you need is the assurance that the Fed will save every market from every consequence.
Inflating the money supply benefits those who are at the head of the line, and who do you think is at the front of the Fed’s line, the wealthy and powerful or the poor and voiceless? From Tyler Durden at zerohedge.com:
After his status-quo-shattering appearance on CNBC this week, during which he warned that “Fed policy is endangering the dollar’s reserve status,” billionaire fund manager Stan Druckenmiller spoke to The USC Marshall Center for Investment Studies’ Student Investment Fund Annual Meeting via Zoom, and shocked the on-lookers with his frank assessment of our current perceptions and realities.
After The Bank of Canada sheepishly admitted this week that “some of the monetary policy tools it is using to address the COVID-19 pandemic, such as quantitative easing (QE), could widen wealth inequality,” Druckenmiller drops the proverbial hammer on all the hedged-speak (“could”), and blasts that
“I don’t think there has been a greater engine of inequality than the Federal Reserve Bank of the United States… so hearing the Chairman [Powell] talking about visiting homeless shelters is very rich indeed…”
The outspoken fund manager went on to note that “everyone wealthy that I know is making fortunes” because “this guy [Powell] is printing money like there’s no tomorrow” adding that the kids is Harlem are not benefitting from money-printing but wealthy people are, exclaiming that
“…for the life of me I can’t understand why the left is so excited about money-printing when all the data shows that the people who benefit from money-printing are rich people.”
“The odds-on bet is that we’re going to have inflation,” he continues:
“and inflation is going to hurt poor people, again, a lot more than rich people.”
How does this all end?
“The asset bubble which [Powell] is blowing up into unbelievable proportions busts before the inflation ever really manifests itself, that’s what happened in the housing bubble in 08/09. We never really got to the inflation because the asset bubble burst… not dis-similar to what happened in 1929.”
And Druck reminds us all, “there is no one, no group, that will be hurt more by a bust than the poor… they will be first in line to get screwed.”
Given the copious amounts of debt the Federal Reserve has monetized, rising prices are inevitable. From Bruce Wilds at brucewilds.blogspot.com:
The monster known as inflation has been unleashed upon the world and will not easily retreat into the night. This is reflected in soaring commodity and housing prices. Due to the stupid and self-serving policies of the Fed, we are about to experience a massive shift in the way we live. Bubbling up to the surface is also the recognition the Fed has played a major role in pushing inequality higher. This means that inflation is about to devour the purchasing power of our income and the savings of those that have worked hard and saved over the years.
Over the months we have watched Fed Chairman Jerome Powell time and time again cut rates and increase the Fed’s balance sheet. This has hurt savers, forced investors into risky investments in search of yield, damaged the dollar, encouraged politicians to spend like drunken sailors, and increased inequality. The greatest wealth transfer in history has already begun and the next crisis will only accelerate the process. Sadly, the same policies that dump huge money into larger businesses because it is an easier and faster way to bolster the economy give these concerns a huge advantage over their smaller competitors.
For decades the American people have watched their incomes lag behind the cost of living. To make matters worse, the official numbers of the so-called Consumer Price Index (CPI) have been rigged to understate inflation and not to reflect the true impact it was having on our lives. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. Currently, the government understates inflation by using a formula based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia. This has skewed expectations and led many people to think inflation is not something they need to worry about.
The Fed’s real job is to monetize the government’s debt at an acceptably low rate of interest. All this other economic and financial stuff is just window dressing. From Charles Hugh Smith at oftwominds.com:
Despite their hollow bleatings about ‘doing all we can to achieve full employment’, the Fed’s policies has been Kryptonite to employment, labor and the bottom 90%–and most especially to the bottom 50%, the working poor that one might imagine most deserve a leg up.
As wealth and income inequality soar to new heights thanks to the Federal Reserve’s policies of zero interest rates, money-printing and financial stimulus, the Fed says its goal is to create more jobs. Really? OK, let’s look at how the Fed’s doing with that.
I’ve assembled a chart deck to display the consequences of Fed policies on debt, wealth inequality and employment. Recall what Fed policies actually do:
1. Zero interest rate policy (ZIRP) destroyed the low-risk return on savings and money market funds, stripping everyone not in the Fed-privileged rentier-speculator-financier class of safe, real returns on capital.
2. Zero interest rate policy (ZIRP) lowered the cost of speculation by financiers and corporations but left the interest rates paid by the working poor for credit cards, auto loans and student loans at extortionate rates.