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David Stockman's Non-Recovery Part 4: The Bernanke Bubble
From Part 1's post-2009 faux prosperity to Part 2's detailed analysis of the "wholy unnatural" recovery to the discussion of the "recovery living on borrowed time" in Part 3 (of this 5-part series), David Stockman's new book 'The Great Deformation" then takes on the holiest of holies - The Fed's Potemkin village. The long-standing Wall Street mantra held that the American consumer is endlessly resilient and always able to bounce back into the malls. In truth, however, that was just another way of saying that consumers were willing to spend all they could borrow. That was the essence of Keynesian policy, and to accept the current situation as benign is also to deny that interest rates will ever normalize. The implication is that Bernanke has invented the free lunch after all - zero rates forever. Implicitly, then, Wall Street economists are financial repression deniers.
Via David Stockman's book 'The Great Deformation',
Five years into the Bernanke bubble the Main Street economy was still languishing. In all of the previous postwar cycles the prior top had been substantially exceeded sixty months later, but this time there had been no gains in breadwinner jobs, business investment, or the core components of national income. Even the consumption accounts were stagnant. They appeared to have gained new ground only because they had been puffed up with borrowings from future taxpayers that had been intermediated through transfer payments and expansion of the HES complex.
To be sure, the latter had been enough to trigger a spurt of inventory replenishment, especially in sectors like autos where a drastic liquidation had occurred in late 2008 and early 2009. In turn, that fueled an associated boost to rehiring and capital stock replacement. Yet the vicar himself was at a loss to explain the tepid multiplier effects from the initial rounds of restocking goods and variable labor, lamenting that a newly invented condition called “escape velocity” seemingly remained just out of grasp.
The reason the Main Street economy refused to follow the Keynesian script, however, could not be found in the texts of the master or any of the vicar’s uncles. The Keynesian catechism has no conception that balance sheets matter, yet Main Street America is flat broke, and that is the primary thing which matters. In fact, half of the nation’s households have virtually no cash savings and live paycheck to paycheck (or government check), and most of the remainder are still too indebted to revert to borrowing and spending beyond their current stagnant and often precarious paychecks.
The simple reality is that the household balance sheet is still way overleveraged, and for the first time in the postwar Keynesian era this leverage ratio is being forced down on a secular basis, thereby permanently restricting the rate of consumer spending. It goes without saying that this dynamic is the inverse of all previous postwar cycles.
The long-standing Wall Street mantra held that the American consumer is endlessly resilient and always able to bounce back into the malls. In truth, however, that was just another way of saying that consumers were willing to spend all they could borrow. That was the essence of Keynesian policy, including the Reagan tax cuts.
At the 1981 peak, for example, the household leverage ratio (household credit market debt divided by wage and salary income) was 105 percent, but this had risen to 117 percent five years later as the economy rebounded and interest rates fell. Likewise, households cranked up their leverage still further during the 1990–1995 cycle, causing the ratio to rise from 130 percent to 147 percent. Then during the five years after the 2000 peak, households took on mortgage and credit card debt with reckless abandon, pushing the leverage ratio from 165 percent to 190 percent, and finally topping
out at 205 percent in 2007.
So the fundamental history of post-1970 business cycles is that household leverage was being stair-stepped radically upward. Indeed, that was the true foundation of the endlessly resilient American consumer. Yet according to Stein’s law, any trend which is unsustainable tends to stop, and that is exactly what has finally happened.
When the second Greenspan bubble burst, household mortgages, credit cards, car loans, and the like amounted to more than two years’ worth of wages. That lamentable condition would have shocked any prudent banker in 1970, and it finally shocked most American debtors when both Wall Street and Main Street buckled violently in the final months of 2008. This trauma brought the reversal of a thirty-five-year trend of steadily increasing household leverage—a turnabout which fundamentally slackened the expansion capacity of the nation’s consumption-driven economy.
In an exercise that is just plain perverse, however, the Fed’s zero interest rate policies have given households exactly the wrong signal. The effect of radical interest rate repression has been to eliminate the sting of excessive debt by reducing the interest carry on current obligations. The natural impulse of households to sharply curtail consumption and materially reduce debt under current circumstances has thus been vitiated.
By contrast, had the free market been allowed to work its will, interest rates would have likely soared, causing a dramatic escalation of defaults as well as prudentially driven voluntary pay downs of debt. In that manner excess debt would have been dramatically liquidated, and the economy would have been given a chance to “reset” on a healthy basis.
Not surprisingly, since Fed policy has had the opposite aim only modest deleveraging has occurred, and even that has been concentrated in foreclosures on the worst of the subprime home and auto loans. Thus, by mid-2012 the household sector still had just under $13 trillion of credit market debt outstanding, amounting to nearly 190 percent of wage and salary income.
It is perhaps a tribute to our debt-besotted age that most Keynesian economists, whether in the hire of Wall Street or simply enthralled by doctrine, have interpreted this modest rollback as evidence that the household sector has substantially repaired its balance sheet. Under this happy scenario households were said to be on the verge of a new spree of borrowing and spending, meaning that the deleveraging crisis was over and that the American economy would soon regain its former gait.
But why is that plausible when the household leverage ratio is still nearly double its pre-1980 norm? Surely that earlier marker has some validity, given the overwhelming evidence that the US economy performed far better during the golden era after 1954 than it has during the last two decades of explosive debt growth. In fact, Keynesians are drastically misinterpreting the situation with respect to household leverage because they have been lulled into the financial repression trap.
As a result of the Fed’s yield pegging, the interest carry on household debt is artificially low, thereby generating far less liquidation and financial distress than would an equivalent burden of debt financed at much higher free market interest rates. Yet to accept the current situation as benign is also to deny that interest rates will ever normalize. The implication is that Bernanke has invented the free lunch after all—zero rates forever.
Implicitly, then, Wall Street economists are financial repression deniers.
Their favorite statistical chestnut, in fact, dramatically underscores this delusion. The so-called debt service to DPI (disposable personal income) ratio has fallen sharply, from a peak of 14 percent to about 11 percent by September 2012. This is held to be a signal that “escape velocity” will be achieved any day now because the American consumer will soon become his or her former free-spending self.
The two things profoundly wrong with that ratio, however, are the numerator and the denominator! In a normalized financial environment, the interest carry cost of current household debt would be 50 percent to 100 percent higher than at present. At the same time, the disposable income denominator is not nearly what it’s cracked up to be. It doesn’t measure ability to pay, as implied, because nearly 50 percent of the $1.34 trillion gain in DPI over the last five years is due to transfer payments, and much of the remainder stems from the fiscally swollen HES complex.
So in yet another twist in the endless Keynesian circle of debt and more debt, the household sector is now purportedly ready to borrow again because its debt service-to-DPI ratio has been artificially deflated by deficit financed transfer payments and central bank interest rate repression. In truth, the household sector’s trivial amount of deleveraging to date is just the beginning of its corrosive impact on PCE growth and GDP expansion. The nation’s households are not even close to having repaired their balance sheets, meaning that the next phase of deleveraging will actually result in a body slam to the Keynesian aggregates.
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my great fear is they have created a simulation so powerful, a veritable holographic economic derivatives deathstar so large that "the endless Keynesian circle" jerk can be perpetauted right up to the point where we are literally being inserted into a borg beehive
oh wait...
The "Corporates Fuck The Workers Chart" I'll keep posting until we have a REAL debate tinyurl.com/m9ztm3p
I love capitalism. What we have is bankerism. Washington is funded by corrupt bankers to make rules to enrich corrupt bankers. The tax structure in the USA...is one large loophole for those with more than $2 Million in assets and income. We need to tax capital gain like income at a flat yearly rate. No deductions, except for children. Unfortunately the damage is done we are going need the actual tsunami to wipe are the rot! Long real gold and bullets and guns.
How's about no taxes and a few duties.
The "Corporations Fuck The Workers " chart I'll keep posting until we have a REAL debate tinyurl.com/m9ztm3p
Down goes Modern Money Mechanics!
The problem is that since 2001 this country has been on a death spiral.
We are just printing money to paper over the red numbers.
Perception is reality, until reality brings your toes back down to earth.
The Fact of the matter is, Central Banks like the Federal Reserve and Large Lending Institutions distort market conditions causing bubbles.
Bubbles in the economy give out false signals to investors, entrepreneurs and good old fashioned people looking to buy a house or a car... or whatever.
Because of Greenspan and Burnbanke, everyone thought it was a great time to buy a home, even though homes were hitting record prices, the FIAT money speculation drove the market up, and the FIAT drove up construction jobs and the like (people were dumping money into homes, so there were jobs).
When the housing bubble finally popped, all those jobs disapeared and most of the population suddenly found themselves in debt to their eye balls, with no real job prospects (everyone stopped building new homes/renovating/buying appliances/charging their credit cards cause they could no longer afford it).
So everything collapsed.
If we had no money printing and loans, the economy would not of entered the bubble, and we would have had slow steady growth that was predictable.
The problem is , people seem to prefer this Boom and Bust style economy, where we go through an inflationary cycle that drives growth and a deflationary cycle that destroys everything that was created or earned.
In the end, the only ones that profit from such a system are the banks, because they endup with all the collateral for free... (they loaned money into existance, money they never had, received payments and then a free house to foreclose on) for banks if the economy goes up its a WIN, if it goes down its a WIN for the banks and a lose for everyone else.
Its happening today, right before your eyes.
If this continues, everyone will endup renting their own lives from JP Morgan and that my friend is not only a shame, in any other universe it would be a crime/act of war/treason.
What drives me crazy is , as a society, when we encounter these downturns in our cyclical FIAT economy, we try to solve it by doing the exact same thing that got us into the mess.
"The economy imploded because we printed too much money and inflated a bubble that popped, the solution is to inflate another bubble", its almost the text-book definition of insanity...
No one ever thinks, hey? maybe banks should fail for making bad decisions?
hey? maybe businesses and banks failing is important to a free-market economy because it provides new opportuniy for someone else to doit better?
Instead, we take the broken parts of our system and just buffer them with unlimited cash in hopes the problem doesn't repeat itself over- and over...yet it does...
Panic of 1819
Panic of 1837
Panic of 1857
Black Friday 1869
Panic of 1873....93~96~1901~07~29 ~37~1987~1989~92 black Wednesday~97~2000 ~2001~07~08~2010... today?
Bubble after Bubble popping.... and no one seems to ask the question... what causes these horrific bubbles?
Its simply a mathematical phenomena that the FIAT system causes.... the cycle of growth and destruction will exist so long as we operate under this FIAT system.... it will continue until the banks have seized all the collateral and all the property.... until no one owns anything to borrow against and they have to literally put up their body as collateral... with the promise of working in a slave labor camp to pay off an impossible to pay-off loan.... thats where this system inevitably ends, I just hope we have some-kind-of revolution by then to stop it.
When will we learn, that the central banks ARE the problem, that they ARE the cause of this mess that keeps REPEATING OVER AND OVER AND OVER.
Central Banks allow the following:
Deficit Spending on needless wars, central banks are actually the CAUSE of every major war.... because they force economies to waste resources.... driving shortages of resources thus causing pain, thus causing the need of war to steal other peoples resources, thus allowing the govt to waste resources on wars that would be otherwise WAY too expensive to have.
If none of the govts of the world could afford to go to war, we would have world peace, CENTRAL BANKS are the primary barrier between humanity and world peace, so long as there are central banks, we will have wars, world wars and terrorists, central banks empower the terrorists, the biggest money laundering institution is THE FEDERAL RESERVE, 100's of billions of dollars earned from the drug-trade are laundered by the federal reserve in conjunction with the middle american-south american central banks, despite that in many of these countries its illegal for people to have U.S. Dollar denominated accounts (the Fed knows this, so where do they think all those USD's are coming from?)
The FED IS BY FACT, the larges money laundering institution on the planet for Drug Cartels and Terrorists, but no one goes to jail, no investigation is ever done... why?
They are playing everyone off against themselves, the bigger the war on drugs....the more profit for the Feds investors.
FIAT SUCKS, its a place-holder system.... it will be replaced... its only a matter of time.
yeah well where he'll is the boom everyone keeps talking about? seems to me we've gone thirty years of going bust and that's about it. "someone always has a plan to spend your money." this time around I was the Government "with the Bankers and Wall Street driving the getaway car." it ain't like their bonuses are suffering! "now unphuck this media! circuses...but no bread this time!"
It has been like this for Centuries, people will never learn only a few of us that read, learn and prepare for these kind of disasters will escape. It's a infinite cycle I'm afraid.
Wonderful post my friend. Thank you for that.
The only reason "they" do this act of violence against humanity is because of the profit motive period.
Stupid question: What is the "HES Complex"?
HES Complex [health, education and social services] jobs
Read: Goobermint makework
http://peakwatch.typepad.com/.a/6a00d83452403c69e20147e27abdc1970b-pi
from
http://www.declineoftheempire.com/2011/02/no-new-jobs-is-the-new-normal....
Thanks. It was the "S" part I couldn't figure out.
edit--
It is a recurring them here that Ben is making a great error and his plan will not work and is having negative effects.
But in fact his plan has actually worked spectacularly in respect to making all the right people so wealthy that whatever comes next doesn't really matter and in saving the bacon of the mismanaged banks. One has to wonder if this wasn't the real plan all along.
Separately it is completely overlooked that as Ben said he could not address the problem alone and yet the federal gov has done less than nothing in the way of structural reform.
perhaps this thinking derives from the "taking sides" meme - if only the "right" side was in charge, then things would change, because the "wrong" side is full of idiots. that's what keeps people voting, this sad belief that incompetency is in control, and eventually the competents can be found to fix the mess.
of course, this goes back many generations, and perpetuates the system - meanwhile, the juggernaut continues to roll over everything, collecting the monies as it destroys all.
this is by design. the system functions as intended. when the mind is allowed to make that connection, the individual unplugs from the false beliefs, from the false hope of being "rescued" by someone - it's not an easy thing to know. . .
but it IS necessary.
Excellent point.
Keep doiong the same thing and expect a better outcome.
How can people not see that they are being played by both sides.
We have it so easy - all we have to do is change our voting habits and things would begin to improve. In some countries they are dealing with dictatorships and such to effect change is difficult and dangerous.
And yet the people here remark about how bad obama is as if to suggest the problem is the democrats and how stupid the rest of the public is.
The is no hope until you give-up on the current two party system.
I would say there is no "hope" at all, merely reality - as much reality as one can admit to, and even that is incre-mental.
that you mention "other countries" means you're widening your area of attention - this is important IMO, because the nationstates are only created in minds, and enForced by those who draw the imaginary lines & name the space(s), taking ownership of everything "inside" those lines.
when one drops the implanted idea that each human "belongs" to a governed space with an assigned flag, a huge leap of Truth is realised.
I hear you and agree.
However if more than 90% of all the people around you ignore reality, and the system encourages and helps them to keep on ignoring reality, then...
if you really think about it, you may find that reality is subjective:
in that each mind filters experience through its own perspective. . . even when folks are in agreement, subtle differences do exist - it's the nature of humanity. "reality" is more fluid than we tend to acknowledge.No, it only boils down to needing to discuss the perception differences. Which doesn't mean one is wrong and all others right, but that you understand the views and can constantly evaluate which one seems more fitting (a/k/a Occam's Razor.)
Its a two headed hydra, one side is painted blue with a red neck and head, the other the opposite, the heads twist around each other to antagonise the groups of people gathered to chant for one color or the other, the red attacking the blue and vise versa.
There is a small group of people out in front of it, that watch and yell, trying to get people from the edges of the groups to just take a few steps towards them, and realize that both groups see the same opposite.
From the front you can see that the hydra has a rider, pulling the chains to direct the heads.
I like to play with the notion that when born into our individual perspectives, this is likened to dropping a pebble into a body of water. . . the concentric ripples increase as we age, taking in more and more "reality" as the mind ripples expand.
once a certain point is reached, the surface stills and perhaps we can once again center ourSelves in the pebble, our immediate daily presence, experiencing action in each moment.
I would like to believe so, watching the action though, through my own life, is more tiring and depressing however than i assume others are apt or given to experience.
Watching the motion move away and towards me itself, the oscillation of ideas as they emanate and return, much like triangulation , is enough to confirm that i well never be the pebble, that my life and actions will always be turbulent, assumed through either destiny or chaos, i have no choice in the matter.
I can only be the voice that i am given through life as it occurs.
As i fall through the water, and the ripples and edges that were engraved in me as i washed down the trough of the stream push me and flutter me as the air to a feather, eventually i will rest, but not in this lifetime.
Keynesians should have lost all credibility long ago due to their consistently wildly inaccurate predictions, but they haven't. Why? Because their garbage theory reinforces the financial sector's desired message of governments and individuals borrowing and consuming their way to prosperity.
Keynesian economics is the only way to pay for the bloated war machine. Reagan drove Russia broke doing this. Now America is driving America broke doing this.
Debt deleveraging in 2008 would have plunged the globe into a major depression. By 2013, we would be at the bottom of a ten year depressionary cycle. Millions would be starving to death, literally. Many millions more would be homeless and on the move, looking for work and/or food.
This depression, had it happened, would have destroyed Obama's re-election chances. Most probably, it would have made a Ron Paul revolution possible. The Arab Spring, Libya, and the Syrian war may have occured, but US would not be involved.
Thousands of companies would have gone bankrupt, including (hopefully) most of the major investment banks. China's economy would have been utterly destroyed, leading to a collapse of Communist rule in China.
Israel, suddenly deprived of US financial and political support (in a Paul presidency) would have been forced to make major concessions to the Palestinians, leading to an independent Palestinian state.
The financial collapse would have led to a collapse in federal revenues, thus destroying thee power of DHS, the NSA, the pentagon, and other federal agency power.
The fed, and the destruction it causes, would now be left on the ash-hep of history.
If the debt-deleveraging depression of '08 been allowed to play out, the world would be a poorer, hungrier place, but it might also be more free.
Now, the inevitable-only-forestalled collapse will lead to state martial law, and complete totalitiarianism. Maybe this is the reason for the fed's policy direction?
Stockman is disingenuous and shows his true colors that he is nothing more than a stooge for Pete Peterson billion dollar founded foundation with a goal to steal social safety net funding. How can anyone mention Keynesian spending without paying any lipservice to Military Industrial Complex, National Security and White Boys Contractor Giveaways and just blame everything on Health Care, Education and Social Services.
Should I bother to mention trillions spend on housing that Pete Peterson founded Blackstone LLC is a direct beneficiary?
Stockton is a fucking tool.
You clearly haven't read the book.
I reserved a library copy, but I am 100% certain that Stockman is selling AUSTERITY, which is wealth transfer from the have-not to the haves.
I know that people like Martin Armstrong and ZH are popularizing the nonsensical theory that the government is going to steal your bank's deposits? No the government(banks and billionaire elites) are going to steal your Social Security benefits.
No they're going to steal both.
And you're lacking even the slightest hint in your post why one theory is nonsensical but the other true, in your belief.
Because that would drive all the capital out of US.
Great book. I finished reading it right before the ZH articles began to appear. Stockman is an eloquent and lucid writer, documents his points very well, and makes a case that spares NO politicians of either major party.
I learned a great deal from him! Well done!
I have no debt. Yipee Yi Yippeee Yip Yippeee yip yip yip.
sorry for you! Why not borrow a $10 Million at ZERO and buy some 5% bonds that you can hold to maturity. People holding dollars are going to get CRUSHED. Take all the debt you can...
Once again the US consumer is up the wazoo in debt! And that's what the fed calls consumer confidence lol.
People had the confidence of getting way over their head again led by the feds false media propaganda fueling the consumer to believe that the road is all clear now. Until they realize they've been standing on the railroad tracks 10 feet away from the "default express"! DEJAVUE?
Republicans cannot say tax cuts create US jobs. Politically, they've shot themselves in the foot. Mitt Romney learned that in the poll taken last 06November. He not only lost, thanks to the hidden camera, he was finished in September 2012. There was nothing Sheldon Adelson, the Koch Brothers, money, or the Republican leaders could do about it. Brazilians riot in the streets. American show up at polls and amazingly they don't vote Republican, a quiet revolution.
The entire scenario reminds me of Hitler's mindset at Stalingrad. He kept thinking he was so close, if he'd just sacrifice another 50,000 men's lives he's have the victory he wanted. The same scociopathic mindset exists among bankers and politicians as they believe they can raise this economic corpse from its grave with but one more round of QE, another stimulus program, maybe a new cash for clunkers buy back Little do they know that the battle has already been lost.
Their money will not protect them from the angry hords once they wake up from their media induced sleep of Honey-Boo-Boo and DWTS to see they are ruined and they were lied to. I'd like to see some of these sociopaths have to put a Mauser to their temples as the barbarians approach their bunkers. (One can still dream you know)
One should reflect a bit on the household leverage ratio (household credit market debt divided by wage and salary income) [...] finally topping out at 205 percent in 2007.
I mean nation-wide average topped out at only 205 percent?
Isn't the (old!) rule of thumb that you can afford a house double (200%) the price of your annual income, with a 30 year mortgage? And that was effectively being pushed towards 300% or 400% in the housing bubble mania.
So I can't believe that 205% number is showing the true picture.
I'd expect the number is heavily skewed lower by rich housholds who add a lot to the denominator, but very little to the numerator as they don't borrow much themselves, but let their owned corporations borrow instead, which doesn't count into household debt.
David is becoming an American hero on a par with Snowden.
"The Bernanke Bubble" is really http://AlansBubble.com continued.