David Stockman on What Could Happen If the Fed Loses Control

  • 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. Instead, what meager savings they have accumulated languish in bank deposits, CDs or money market funds earning exactly what the Fed has decreed—nothing! So, when Powell says he’s only trying to help the average American, you have to wonder whether he is just stupid or the greatest lying fraud yet to occupy the big chair at the Fed.
  • The Fed is now a completely rogue institution that is a clear and present danger to the future of prosperity and liberty in America.
  • Needless to say, when incomes drastically shrink due to the folly of Lockdown Nation, debt should be liquidated, not massively increased. So, the Fed and its fellow-traveling global central banks are setting up our Humpty-Dumpty economy for a very great fall.
  • 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; way too much debt was widely identified as the fall guy. 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. That’s because when the central banks drastically falsify interest rates to sub-economic levels, everyone is incentivized to borrow hand-over-fist. And, most often, it’s for unproductive purposes, such as more transfer payments in the government sector and more financial engineering among the C-suites.
  • Indeed, the Fed’s cheap credit never really leaves the canyons of Wall Street, where it fulsomely rewards carry-traders and risk asset speculators because zero cost money is always and everywhere the mother’s milk of leveraged speculation. It also causes corporate C-suites to become maniacally obsessed with goosing their stock options via financial engineering gambits like stock buybacks, leveraged recaps and wildly over-priced M&A deals as a substitute for organic growth. Yet these maneuvers merely supplant equity and financial resilience with debt and financial fragility. So when business bankruptcies soar to unprecedented levels in the month ahead as the economy reels from the folly of Lockdown Nation, the financial fragility part will become crystal clear.
  • 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 fact, real business CapEx minus current capital consumption (depreciation and amortization charged to current period production) is today barely a tad higher than it was 20 years ago on the eve of the dotcom bust. In short, the Fed has fostered a zombie economy, and it is the collapse of the zombies that will eventually take it down.
  • Needless to say, there is nothing remotely rational, plausible or sustainable about an FY 2020 budget that’s going to end up with revenue south of $3 trillion and spending north of $7 trillion. That’s not even banana republic league profligacy; it’s just sheer stupidity and madness, bespeaking a bipartisan duopoly in Washington that has had its collective brains turned into sawdust by the relentless, egregious money pumping of the central banks.
  • After all, if the Treasury Secretary and Fed Chairman are utterly clueless about the grave dangers of the fiscal and monetary bacchanalia now rampant in the imperial city, how in the world will it stop except in some fiery collapse?