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Guest Post: The Downward Spiral

Tyler Durden's picture





 

Submitted by John Aziz of Azizonomics blog,

There was once a rough and logical correlation between the level of government borrowing, and the rate of interest on government debt. If the government borrowed more money, the cost of borrowing rose and the private market’s appetite for government debt fell. But that correlation totally broke down around the year 2000:

brokencorrelation

During the George W. Bush Presidency we saw interest rates remain low, even while borrowing spiked. And during the post-Bush recession we saw borrowing spike to a 30-year high while interest rates crawled lower. During the Obama Presidency, borrowing has inched downward but only to Bush-era levels, and rates have slunk ever lower.

This is weird, counter-intuitive stuff. My logical intuition is that all things being equal, a higher government demand for credit would tend to result in higher borrowing costs. Certainly, there are all manner of other factors like growth, stock prices, growth expectations and the private appetite for debt that might influence interest rates. But given that the intuitive relationship held roughly up ’til the year 2000, it is rather peculiar that it would suddenly break down.

We can explain the lowness of Treasury rates during the Bush years. Treasury rates are strongly correlated with the Federal funds rate:

GreenspanBubble

Greenspan kept the Federal Funds rate low even while large debt-fuelled asset price gains were being recorded in stocks and housing:

houses,stocks,fedfunds

Greenspan hiked rates, eventually, but it was too little too late. And a huge debt bubble (defined here in terms of total debt as a percentage of GDP) had formed by the time Bernanke became the Fed Chairman:

fredgraph (18)

Of course, in addition to keeping interest rates at zero, the Fed has expanded its balance sheet by over two trillion, removing Treasuries and various securitised debt from the market, with the intention of further depressing aggregate interest rates. (Although some say that quantitative easing raises interest rates through the expectations channel, the empirical record is clear that every single nation that has engaged in quantitative easing has ended up with lower interest rates following the implementation of that policy).

So the story that prevails is that total debt climbed to an unsustainable level supported by the Federal Reserve’s low-interest policy regime. The divergence of government borrowing levels from government borrowing costs around 2000 was an early warning sign that the markets were filled with distortions. And the 30-year trend of falling interest rates and rising debt was another early warning sign.

In 2008 we hit the Minsky moment, and today we are in the deleveraging phase. The market distortions remain huge — interest rates remain at zero, even while housing and stock prices begin to reflate. The spread between government borrowing costs and government borrowing levels remains huge. And the long, slow grind back to a sustainable debt-to-GDP ratio is slow and depressionary. Japan hit their Minsky moment in the 1990s, and today still remain trapped in the deleveraging phase. While private debt levels have fallen, government debt levels have grown to be the highest in the developed world, and the private sector — encumbered by demographic problems such as a shrinking, ageing population — seems to have little appetite to take on new debt. The Japanese economy remains weak and growthless.

The question that remains unknown is how the distortions will resolve. Will they resolve gradually over a matter of years or decades, or will they resolve quickly and brutally? Well, the speed of private deleveraging tends to suggest that we will not meet another Minsky moment in the immediate future:

While America is nowhere near a sustainable level at well over 240%, at least the trend is downward toward the more-sustainable 1990s, 1980s and 1970s levels. So while the Fed is resorting to more extreme forms of the same policies that fuelled the 00s debt bubble, it is seeming less and less likely that the result - a blowout top in private debt levels, followed by a crushing deflation - will be the same.

Instead, we should probably look to Japan where the economy has remained depressed and weak for the past twenty years, and where government debt has through cycles of stimulus and austerity replaced the private deleveraging. Perhaps Japan is an extreme example, and perhaps its demographic woes have prolonged its malaise. Perhaps that means that once the United States private debt level shrinks to a more sustainable level, the United States will enjoy solid new growth, rather than continued depression. Perhaps a new technological or energy revolution will result in falling energy and transport costs, providing America with a new growth engine for the next twenty years. Perhaps we can look at the low interest rate environment as an opportunity to invest in transport infrastructure, energy infrastructure and basic research and create a backbone for the post-depressionary economy. On the other hand, perhaps a new crisis — and one that won’t go away just by throwing money at it, like a natural disaster, or a war — will suck America into an even deeper depression.

I am more optimistic than I was five years ago, or even one year ago. I can see a light at the end of the tunnel, but is still possible that this crisis may end in war or total systemic failure.

In the long run, the data is clear. The Greenspan-Bernanke era Federal Reserve wilfully built up bubbles and distortions, which grew out of control, and sucked the economy into a black hole. At the very best, this has led to a Japanese-style depression.

 


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Fri, 03/01/2013 - 19:07 | Link to Comment A Lunatic
A Lunatic's picture

So do you think it's too late to fix this with a Willy Nelson/Bono Economic Aid Concert??

Fri, 03/01/2013 - 19:26 | Link to Comment I think I need ...
I think I need to buy a gun's picture

buffett will be on cnbc monday morning maybe he'll offer to cancel his social security and if we are lucky his secretary's too......

we all know he doesn't like touching gold and him and charlie will offer none to the country

Fri, 03/01/2013 - 19:28 | Link to Comment CPL
CPL's picture

Buffet has all the gold would ever need from the 60's and 70's.  Of course he wouldn't buy it if he's got a proper hoard of it, he's had a bio written about him every two years as part of his marketing push.  Check it out, he's played with shiny objects.  He's just really old and memories are short.

Fri, 03/01/2013 - 19:37 | Link to Comment Fredo Corleone
Fredo Corleone's picture

"My logical intuition is that all things being equal, a higher government demand for credit would tend to result in higher borrowing costs."

Not to put too fine a point on it, John, but what Institution of Higher Printing has been the predominant Buyer of Record of said newly-issued government debt securities, thus artificially suppressing interest rates across the duration spectrum ? I shall give you a hint: its balance sheet is at all-time, trillion-dollar highs, and its Chairman sports a beard.

Fri, 03/01/2013 - 19:43 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Can you give me another hint? I almost have it figured out. :)

Fri, 03/01/2013 - 20:15 | Link to Comment ceilidh_trail
ceilidh_trail's picture

Do ya wanna be spoon FED?

Sat, 03/02/2013 - 00:33 | Link to Comment Spirit Of Truth
Spirit Of Truth's picture

Monetarism is the false religion of Mammon.  Our currency states "IN GOD WE TRUST", but the god should be small cap.  The beauty of Capitalism and what really makes it work for society is that profits accrue to those who discover and implement more efficient ways for waring for one another.  However, the pursuit of profit in and of itself can undermine the whole "value maximization" driven by "care", and this is where the system stands today.  Ben and his ilk are leading the charge in the inevitable undoing of free markets out of their love for money instead of God.

JMHO

http://thespiritoftruth.blogspot.com/2013/02/dow-14000-world-war-three.html

Sat, 03/02/2013 - 05:06 | Link to Comment MisterMousePotato
MisterMousePotato's picture

Again, the ZH arrow thingie lets us down by just allowing one clap.

Sat, 03/02/2013 - 03:44 | Link to Comment Bill Shockley
Bill Shockley's picture

Anybody know which way coupon rates are going on asset backed commercial paper?

 

Up or down...as we deleverage?

   bill

Fri, 03/01/2013 - 19:15 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

It´s too late to fix, PERIOD.  Save what you can, especially hard assets, because the end will be very ugly.  I do not share John´s view as things being slightly more positive-looking than a year ago.

NOTHING has been solved.

Sat, 03/02/2013 - 09:45 | Link to Comment StychoKiller
StychoKiller's picture

Oh, but sequestration is gonna cut Govt spending soooo hard...

Gad, that Koolaid tastes nasty!

Sat, 03/02/2013 - 10:17 | Link to Comment economics9698
economics9698's picture

It is already deleveraging, just waiting for the Muppets to realize it.

Fri, 03/01/2013 - 22:00 | Link to Comment clara-to-market
clara-to-market's picture

Deflation. Deflation. Deflation.

Learn it. Live it. Love it.

http://www.angrysinner.blogspot.kr/2013/03/yesterday-dragon-lady-served-...

Fri, 03/01/2013 - 19:08 | Link to Comment McMolotov
McMolotov's picture

"I am more optimistic than I was five years ago, or even one year ago. I can see a light at the end of the tunnel..."

That's probably the flash from the mushroom cloud that you're seeing. The shockwave will arrive eventually.

Fri, 03/01/2013 - 19:17 | Link to Comment Osmium
Osmium's picture

Evidently he does not live on the same planet that we do.

Fri, 03/01/2013 - 19:30 | Link to Comment bank guy in Brussels
bank guy in Brussels's picture

Had a good laugh over this

The young Mr Aziz is amazingly optimistic there will be no crash

Despite 600 trillion of notional derivatives going bust, and the Western banking system going down with it

Yes it would be great if the Western future were *only* as bad as Japan's last 23 years

However ...

Ha!

Sat, 03/02/2013 - 19:04 | Link to Comment Nu Yawks hottes...
Nu Yawks hottest club is's picture

Agreed. I saw this article as a 'cover your ass' play as every talking head likes to be able to claim they were at least partially right in an uncertain future, and given that he's trodden the 'the sky is falling' route pretty heavily ..

Fri, 03/01/2013 - 19:53 | Link to Comment NotApplicable
NotApplicable's picture

Give the kid another twenty years of experience, and I bet he won't fall for this Hopium again. I see it as the classic "we must be okay after all, as we should've been dead long ago" mindset.

In other words, it's a restatement of the idea that "the market can remain irrational longer than you can remain solvent." When the reset doesn't come right away, people start thinking perhaps it has been averted. Well, at least until they read Mises.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Fri, 03/01/2013 - 20:32 | Link to Comment Pareto
Pareto's picture

Exactly right.  The real economy has to produce enough "stuff" and fetch a high enough price to pay back the debt that is fueling the speculation in the non-wealth generating part of the eocnomy.  But, since you have too much money chasing too few goods (including assets) price rises and the real economy is unable (willing) to pay for "stuff" such that the net revenues from selling the "stuff" are large enough to pay for their cost of production, government taxes, yet still leave enough to service principal and interest.  There is no free lunch.  A debt fueled economy (whether it be for infrasture or whatever) and its first derivative is always negative.  The only time a debt fueled economy is a good idea, is when you don't have to pay it back....EVER.  But that's monetizing the debt.  That's inflation.  And that always ends bad, and certainly worse than any deflationary correction.

There is no light at the end of the tunnel.  Just NDAA officer flashlights coming down on his head for slowing down the food line.

Fri, 03/01/2013 - 20:48 | Link to Comment mendigo
mendigo's picture

While it would be nice to believe that people get what they deserve, I think that that is really just a fairytale used to keep the common folk in check - sort of like the meek shall inherit jack shit.

While it is possible or even likely that the whole thing will blow-up one day I think it is also possible that they will manage a contrlled decline marked by a waisting in the middle. I think there is evidence to say this is already well under way and we are truly enetering a dark age. Already it seems the desired outcome is for older people to giveup on trying to find real employment and we string them along on meager healthcare feed them dog food and cigaretts and big macks and let them die off prematurely or maybe mess with thier heads to get them to commit suicide. If they are so stupid as to keep reelecting the same jerks from the same two parties then they are only getting what they deserve

What I don't see is perspective. When did this manipulation begin in earnest?

Fri, 03/01/2013 - 19:09 | Link to Comment fonzannoon
fonzannoon's picture

John I usually like your stuff but you are off the charts here. How many on food stamps? How many out of the labor force? What's the student loan situation? People are going broke. Flat ass broke, and when they get there, there is no job for them to start over.

This is not people deleveraging. This is people being extinguished.

What happens the minute the fed takes their foot off the gas John? What happens to rates then? Please tell us about this light at the end of the tunnel.

Fri, 03/01/2013 - 19:34 | Link to Comment McMolotov
McMolotov's picture

Unfortunately, the Nine Inch Nails song by the same name applies only too well to our situation:

"A lifetime of fucking things up fixed in one determined flash." —from The Downward Spiral

Fri, 03/01/2013 - 19:56 | Link to Comment Nigh Eve
Nigh Eve's picture

I am about to go on food stamps, myself.
I used to make $84,000/ year.
Employers often tell me I'm overqualified for their openings.

I guess I should have started a business of some kind - but in what?

Fri, 03/01/2013 - 20:03 | Link to Comment nightshiftsucks
nightshiftsucks's picture

Thats going to be all of our stories soon.

Fri, 03/01/2013 - 20:18 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Me fucking too. Over qualified for a $30,000 a year job a moron could do, much less someone with a brain.

Fri, 03/01/2013 - 20:48 | Link to Comment Tango in the Blight
Tango in the Blight's picture

Gravedigging. There's going to be much demand for that soon.

Sat, 03/02/2013 - 13:50 | Link to Comment e-recep
e-recep's picture

Good restaurants and coffee shops seem to be doing fine. But you have to be really good and I tell ya, it's not easy. And no, I don't mean franchise or chain type of thing. You gotta be unique. Well-to-do elderly people still pay quite a sum for good food.

Sun, 03/03/2013 - 10:30 | Link to Comment moonstears
moonstears's picture

Seeing how the dollar menu is keeping McDs afloat (actually it keeps them coming in and then buying the 400% marked up fountain sodas to wash it down), cheap but good home style fare is what I'd sell if I had restaurants.

Fri, 03/01/2013 - 19:14 | Link to Comment nightshiftsucks
nightshiftsucks's picture

Japan had trade supluses and a growing world economy,we have neither. Bye bye USA,you were once great.

Fri, 03/01/2013 - 22:12 | Link to Comment Calmyourself
Calmyourself's picture

Japan has not had 10,000 nukes, Aircraft carriers task groups, etc..  They will stay strong long after they "should" have gone down..

Fri, 03/01/2013 - 19:15 | Link to Comment venturen
venturen's picture

The bubble is happening right now....check corn, gas, housing prices in certain markets.... Bernanke is going to make Greenspan look like a panty waste

Fri, 03/01/2013 - 19:17 | Link to Comment I think I need ...
I think I need to buy a gun's picture

thats called "growth" on cnbc

Fri, 03/01/2013 - 19:27 | Link to Comment Bunga Bunga
Bunga Bunga's picture

And when you take a look at Bitcoin prices, Bernanke is going to make Weimar look like a fart.

http://www.youtube.com/watch?v=au634gy6F3c

Fri, 03/01/2013 - 19:29 | Link to Comment otto skorzeny
otto skorzeny's picture

I wish bitcoins were a tangible coin-because I would take a monster box of them and shove them up yours and CH1's ass sideways

Fri, 03/01/2013 - 19:38 | Link to Comment Bunga Bunga
Bunga Bunga's picture

Hey, your trollin' is fun, especially when it's based on really underinformed crap like yours.

Fri, 03/01/2013 - 19:30 | Link to Comment otto skorzeny
otto skorzeny's picture

"waste"-great play on words

Fri, 03/01/2013 - 19:20 | Link to Comment Charles Nelson ...
Charles Nelson Reilly's picture

"I am more optimistic than I was five years ago, or even one year ago. I can see a light at the end of the tunnel, but is still possible that this crisis may end in war or total systemic failure"

....... I'm not following your story arc here, John?

Sat, 03/02/2013 - 09:54 | Link to Comment StychoKiller
StychoKiller's picture

"What to do if you're trapped under a huge boulder with no hope of rescue:

First, consider how lucky you are that life has been good to you so far.  If, on the other hand, life hasn't been good to you so far, (which given your present circumstances, seems more likely) consider how lucky you are that it won't be troubling you much longer!"  -- Hitchiker's Guide to the Galaxy.

 

Fri, 03/01/2013 - 19:21 | Link to Comment Rustysilver
Rustysilver's picture

Meanwhile in US:

..." a new report shows a huge drop in what it average Americans are earning. According to Commerce Department personal income fell by three point 6% in January that's the biggest month to month -- like twenty years."

Fri, 03/01/2013 - 19:21 | Link to Comment q99x2
q99x2's picture

Thank God. There will be a world by the time I receive my PhD.

I knew everything was going to be ok. I just knew it.

Fri, 03/01/2013 - 19:48 | Link to Comment TrustWho
TrustWho's picture

Please tell me you are getting a PhD in a real field.

Fri, 03/01/2013 - 20:43 | Link to Comment WTFUD
WTFUD's picture

Yes! PHELATIO ( Gag Nam Style ) Honours Stylie

Tue, 03/05/2013 - 11:45 | Link to Comment TrustWho
TrustWho's picture

Chimps can do it without any classes. If you borrow the funds and pay, they will teach. What a fucking bubble! (pun for emphasis)

Fri, 03/01/2013 - 19:21 | Link to Comment WhiteNight123129
WhiteNight123129's picture

WHat matters is not whether or not Japan did ~quantitative easing~. What matters is the magnitude of debt monetization. The monetary base of Japan grew by 5% between and prior to Fukushima in nominal terms. If the debt grew as fast, the ratio of debt to base money is unchanged = deflation.

To get out of deflation you need to shrink debt to base money. The Austrian school does that by wacking credit and massive bankruptcies, so did Iceland and Latvia and they are back on track quickly.

The Keynesian say it is too painful and we should play with the denominator (what the US is doing). The base money rises way faster than debt in the US as opposed to Japan.

Japan did not want to wack bad credit in teh bank neither explode the monetary base by 4 times in 5 years. So they are stuck with a large quantity of (bad) debt to base money. Germany is trying to do the same, which will make Europe stuck in permanent depression.

Choose your camp, either accept bankruptcies, or explode the monetary base, but the result should be the same, that is lower percentage of debt to base money, whether you are an Austrian or a Keynesian.

So the comparison with Japan is not appropriate because the bulk of the debt sold by the Japanese Gov was funded by existing deposit. In the US, since it is bought by the Fed instead of being debt it vanishing and so the US Gov instead has pure base money to spend in the economy. (The DEbt on the balance sheet being permanently rolled-over, it is not debt anymore. If you get base money in exchange for a promise to never repay, you have no debt but free money to spend).

So that is the key difference between Japan and US. That is also why you see now Japanese Yen weakening and Stock market rallying. You need to have a velocity of the base money expanding faster than debt to get out of deflation.

 

Fri, 03/01/2013 - 19:22 | Link to Comment celtic_mist
celtic_mist's picture

You epitomise the problem with economists, everything is relative, there is no fundamental base with which to measure. Basically, all economic commentators talk bullshit! That said, there are, as always, real worries about the economic future..

Fri, 03/01/2013 - 19:23 | Link to Comment hardcleareye
hardcleareye's picture

Excellent article!

Fri, 03/01/2013 - 19:26 | Link to Comment AllWorkedUp
AllWorkedUp's picture

and yet gold and silver and mining stocks go down every single fucking day. Why? Because everything we put our fucking hands on in every market is rigged.

These pieces of shit can keep this rigged, bullshit game going for fucking ever. No fear of reprisal, no fear of jail, no fear of any consequences at all.

I hear this "sky is falling crap" every day and guess what? The sky ain't falling yet! The recession/depression might or might not be here now, but they can paper it over to infinity with freebies for Joe six pack. Until the fucking sheep can't eat, the DOW will go up forever AND THERE WILL BE NO CONSEQUENCES FOR THE FINANCIAL CRIMINALS THAT WALK AMONGST THEM!

Thanks. I feel much better now.

Fri, 03/01/2013 - 19:27 | Link to Comment fonzannoon
fonzannoon's picture

calm down you are going to get your self all wor.....nevermind...

Fri, 03/01/2013 - 19:33 | Link to Comment AUD
AUD's picture

No, it's because most gold and silver mining stocks don't mine any gold & silver, & even fewer pay a dividend if they do. They are up to their eyeballs in debt.

Most gold and silver mining stocks are Ponzi schemes, currently out of favour with the 'investment community'.

Fri, 03/01/2013 - 19:42 | Link to Comment NotApplicable
NotApplicable's picture

Not to mention that their debt is all collateralized with their properties (thanks to GS advisors, I believe).

Fri, 03/01/2013 - 20:41 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Actually, several do pay decent dividends but the majority of them are liars standing over a hole. The real reason they suck is not debt, its's naked fucking shorting by the "investment community" that goes on unabated, and stupid fucking managements that could care less about shareholders. Oh, did I forget to mention algorithims that are set to sell every $.02 up move?

 

 

Fri, 03/01/2013 - 19:26 | Link to Comment BlueStreet
BlueStreet's picture

The light at the end of the tunnel isn't sunlight it's the 20 watt bulb illuminating the sign that says beware of the brick wall.  

Fri, 03/01/2013 - 19:39 | Link to Comment steve from virginia
steve from virginia's picture

 

 

 

Dear Aziz,

 

The Fed blew 'bubbles' and oversold credit because there is nothing else to offer. Work is dead, long live gambling!

 

"Perhaps that means that once the United States private debt level shrinks to a more sustainable level, the United States will enjoy solid new growth, rather than continued depression. Perhaps a new technological or energy revolution will result in falling energy and transport costs, providing America with a new growth engine for the next twenty years. Perhaps we can look at the low interest rate environment as an opportunity to invest in transport infrastructure, energy infrastructure and basic research and create a backbone for the post-depressionary economy."

 

"Perhaps that means that once the United States private debt level shrinks to a more sustainable level:"

 

How? Deleveraging = repudiation. at the end of the day everyone is completely penniless!

 

"the United States will enjoy solid new growth,"

 

 ... and Santa will come down the chimney and give everyone a tooth fairy. Growth is dead, so is capital, killed by capitalists!

 

"rather than continued depression ..."

 

better get ready buddy, there is no forgiveness in anyone's future.

 

"Perhaps a new technological or energy revolution will result in falling energy and transport costs ..."

 

then again ... perhaps not.

 

"providing America with a new growth engine for the next twenty years."

 

Add all these growth engines together and we're all dead.

 

"Perhaps we can look at the low interest rate environment as an opportunity to invest in transport infrastructure, energy infrastructure and basic research and create a backbone for the post-depressionary economy."

 

Just what we need, more highways, bridges, parking lots, gas stations, perpetual motions machines, implanted TVs and direct brain-links to advertisements ... more underpasses for homeless to camp under.

 

Enough with this Blade Runner nightmare! Can't we be free and done with the tyranny of MONEY, tycoons, the oppressor state and the goddamned junk? Is this what 'America' all about? Can't we just once stand proudly on our own two feet breathing free as human beings and be outside the grasp of Walmart? Damn your money, damn your future and its 'wonders' ... it's destroying us all.

 

 

Fri, 03/01/2013 - 19:48 | Link to Comment McMolotov
McMolotov's picture

"If you want a picture of the future, imagine a boot stamping on a human face — forever."

Fri, 03/01/2013 - 19:51 | Link to Comment NotApplicable
NotApplicable's picture

Oh, wow. I missed the part about "investing in infrastructure." That's like pure, uncut Hopium.

I think that paragraph can be summarized as massive malinvestment.

John, please stop writing, and start reading Mises, Rothbard and Hayek. Your solution is the very problem that got us here. Mises clearly lays out the danger of over investment in capital goods industries at a time when there is NO DEMAND. Yet you seem to think bankrupting us even further (thank ZIRP) is a framework for recovery? Seriously?

Honestly, this article is embarrasing, and belongs on the pages of HuffPo, not here. I hope you'll reconsider before you submit something like this again. As I stated above, you obviously don't have enough experience yet, as your perspective is immature. Very, very immature.

Fri, 03/01/2013 - 19:46 | Link to Comment Martial
Martial's picture

"I am more optimistic than I was five years ago, or even one year ago. I can see a light at the end of the tunnel..."

Yea this guy is a moron. Why is ZH posting his crap?

Fri, 03/01/2013 - 19:55 | Link to Comment Yen Cross
Yen Cross's picture

 I'm speed reading. When Greenspan, technology, and intrest rates are part of the same " Robert Gibbs" re-churned garb? I really like my "oversold XAG". MDB has some slightly used "carbon coinage for sale".

Fri, 03/01/2013 - 20:02 | Link to Comment ramacers
ramacers's picture

how many more stats are necessary? how many more political distractions? folks have just got to get their heads around the nightmarish end just around the corner and get right with providence.

Fri, 03/01/2013 - 20:05 | Link to Comment busted by the b...
busted by the bailout's picture

Al's conundrum of low long-term interest rates is simply that cash is trash, imo.  There is too much money around, and excess supply = low rates.

Fri, 03/01/2013 - 20:07 | Link to Comment TrustWho
TrustWho's picture

write the FED 

 www.federalreserve.gov/apps/contactus/feedback.aspx?refURL=https://www.google.com/

 

The stock market has a significant fuel...THE FED. You asked congress, sarcastically, "What do you want me to do, raise interest rates?" 

I will answer. "Yes, raise interest rates because you are violating the Laws of Prudence and Economy. The Fed oversteps its principles in an effort to save the world. Your effort to save the world has destroyed the markets. Your destruction of the markets saved the wealthy and harmed the common men who are led by a leaderless government you aided to stay in power with your low interest rate policy. The real damages caused by many but significantly caused and aided by the Fed wait for us.” I know your retort: “You slap the face of the only entity that can save you from your worst nightmare”. 

The road to hell is paved with good intentions. Today with a government executing a policy that reduces GNP 0.6, the stock market rises. January 1 the government increases tax rates that CBO estimates will impact the economy negatively by 0.9 percentage points, and S&P 500 rises over 6%.   A good example of the UNintended consequences is the introduction of alien species such as the Asian carp, which may become a nuisance due to unexpected proliferation and behaviour (wikipedia). The Fed has thrown the sink at this economy and your results are unbelievably below your forecast. You have two choices: 1) keep throwing the sink or 2) wean the infant from the breast milk. 

The release of the minutes tested the hypothesis and the current path will lead to doom because the legislative and executive branches have no reason to deal with the problems when they have an unelected arm of the banks to execute a fiscal policy called QE.

Fri, 03/01/2013 - 20:14 | Link to Comment hairball48
hairball48's picture

Another reason the US won't go into a long, drawn out recession/depression  like Japan is:

The Japanese "sheeple" are true sheeple....a patient people, a docile society. Japan is a totally different culture from the USA. They go along with whatever the gov't tells them...or have up to now.

The sheeple here in the US are a whole 'nother breed, and anything but patient....When the American sheeples finally figure out what's going on...They can(and will) go from ignorant/docile to pissed off and violent in a heartbeat. So when the shit hits the fan, the riots and mayhem here in the US will make what's happening in Europe look pretty tame.

You big city dwellers better standby to standby :)

Fri, 03/01/2013 - 20:31 | Link to Comment Yen Cross
Yen Cross's picture

 You make a good point #48. What happens when PBoC calls it's markers in? What happens if some unforseen "natural disaster"happens? What a "thin veneer" of trade we live in/on, when snake eyes are rolled!

Fri, 03/01/2013 - 21:14 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Seriously? The PBoC should have already called their markers in right? The Russians and Chinese are buying tons of gold (so we're told) why the fuck haven't they issued a gold or silver backed currency and destroyed the USD yet? Must be afraid of U.S. military might. What else could be stopping them?

 Until they "call in their markers" the scum parasites that have destroyed every empire since the beginning of time will destroy the U.S. empire too. The U.S. has turned into a disgrace.

Fri, 03/01/2013 - 20:49 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Problem is hairball, the U.S. shepp will NEVER figure it out until they are literally starving and even then, 70% still might not understand what's been done to them.

Fri, 03/01/2013 - 21:02 | Link to Comment socalbeach
socalbeach's picture

In your last graph you're subtracting GFDEBTN (federal debt) from TCMDO (total credit market debt owed).  But from the Z.1 it looks like TCMDO doesn't include federal intragovernmental debt holdings, whereas GFDEBTN does.

http://www.federalreserve.gov/releases/z1/ (page 64, pdf page 71 of Dec 6th "Complete file" release)

So that would mean the last graph makes non-federal debt as a % of GDP look better than it is.

Fri, 03/01/2013 - 20:56 | Link to Comment tony bonn
tony bonn's picture

the divergence in borrowing levels vs borrowing costs is explained by interest rate swaps, without which interest rates would be double digit.....this article is looking at the big lump under the rug and not knowing what the lump is.....

by thwarting the thermostat, ie removing risk and its consequences to say nothing of costs, the system is headed for total destruction - economic tsunami......

Fri, 03/01/2013 - 21:20 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Well, judging by the traffic and amout of posts here at ZH, it looks like most ZH'ers have pretty much thrown in the towel on gold and silver going up, or the stock market going down - EVER AGAIN.

Fri, 03/01/2013 - 23:15 | Link to Comment jimmyjames
jimmyjames's picture

Greenspan hiked rates, eventually, but it was too little too late. And a huge debt bubble (defined here in terms of total debt as a percentage of GDP) had formed by the time Bernanke became the Fed Chairman:Greenspan hiked rates, eventually, but it was too little too late. And a huge debt bubble (defined here in terms of total debt as a percentage of GDP) had formed by the time Bernanke became the Fed Chairman:

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Greenspan did hike rates but Geenspan had no control over rates-in fact the long end was signalling deflation before that and when he did hike rates-the long end went the opposite way-he called it a great conundrum-he then followed the long end down and here we are--Bernanke wont hike the FFR--he knows how the bond market made Greenspan look like a fool-

http://tinyurl.com/b7kvmu2

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There was once a rough and logical correlation between the level of government borrowing, and the rate of interest on government debt. If the government borrowed more money, the cost of borrowing rose and the private market’s appetite for government debt fell. But that correlation totally broke down around the year 2000:

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Lots of goldbugs here and haven't seen anyone address that mysterious quirk-unless i missed it-

Something else broke down in the same time frame and that would be gold which snapped out of a 20 year bear market and like the long bond-other than violent fluctuations--never looked back-

I suspect bonds and gold could see the credit risk building (deflation risk) and it's still there--bonds are still in a bull market and so is gold-

Sat, 03/02/2013 - 02:29 | Link to Comment Joseph Jones
Joseph Jones's picture

Wow.  Two Jew bankers (Greenspan who, with Ayn Rand and Ford looking on, laid his hand on The Talmud when sworn into office...and Bernanke) promote debt slavery.  Gee.  I'm shocked!

/sarc off

Sat, 03/02/2013 - 05:40 | Link to Comment dogfish
dogfish's picture

"And when the United States private debt level shrinks to a sustainable level". And how long will this take.

 

 

Sat, 03/02/2013 - 11:04 | Link to Comment caShOnlY
caShOnlY's picture

he is optimistic, more optimistic than a year ago.  Does the FED's FIAT creation of 85 billion a month lead to this optimism?  I believe very soon the optimism will be over 100 billion a month. When looking at the de-leveraging chart how much is the de-leverage dip worth?  Could it be equal to the FED's expanded balance sheet?  How about the 7 trillion in U.S. debt grown over 4 years? and future decits?

I think when we look at debt and de-leveraging we need to look at the whole big picture.  It is the same as removing food and energy from the CPI and heavily weighting it with housing for "positive" effect.

Sat, 03/02/2013 - 20:01 | Link to Comment Notarocketscientist
Notarocketscientist's picture

How in the fuck are you more optimistic?

How many trillions so far?  How long has the US had ZIRP?

Yet the country is heading into a recession. 

Can you explain to me how the US gets out of recession in light of the fact that the Fed has used every single tool in the box - and has thrown the kitchen sink, ironing board, every pot and every pan in the house, the TV, the blender and just about everything else Ben can get his hands on - try to STAY OUT of this recession?

We are now entering the beginning of the end - the consumer is fucked - retail is heading into a death spiral.  I don't care how much pumping the Fed does for stocks and housing - it's all phony and it will at some point not mask the reality - the real economy is contracting and will continue to contract until it implodes. 

This will really accelerate as everyone starts to see GDP go negative and the govt is powerless to do anything.  That is when the real slaugher will start.

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