• Pivotfarm
    07/27/2014 - 17:57
    There never seems to be a day that goes by without someone predicting that China is going to go down the Yangtze and end up some creek without a paddle.

Time For Regime Change At The Eccles Building: Interest Rate Pegging Is Destroying Capitalism

Tyler Durden's picture




 

Submitted by David Stockman of Contra Corner blog,

The S&P500 jerked higher yesterday afternoon when the Fed minutes revealed no new information on the dreaded day when interest rates begin to rise. In other words, the stock market is one sick puppy—utterly addicted to the Fed’s baleful regime of ZIRP.

And it is a regime. We are now in month 68 of essentially zero interest rates in the money markets. There is nothing like it in post-war history.

The argument for the dangerous absurdity of providing zero cost funding to carry-traders and speculators is that the US economy was smacked by a 100-year flood type event during the 2008 financial crisis and, therefore,”extraordinary monetary accommodation” is required to heal the damage.  But that is a bogus rationalization.

The financial crisis was caused by the Fed, and then became an excuse for extending and intensifying an interest rate pegging regime that has been in place for 27 years—essentially since the Greenspan Fed panicked after the Black Monday stock market meltdown in October 1987. Indeed, Bernanke didn’t gum about the “zero-bound” inadvertently; it was, in fact, the end game of the Greenspan Fed’s core premise: Namely, that the business cycle can be flattened (if not eliminated) and macro-economic performance improved by pegging prices in the money markets; and that there will be no untoward effects from supplanting market price signals and allocations with a regime of administered money.

In truth, the Fed’s quarter century march to yesterday’s pathetic rerun of yet another episode of “lower for longer” has produced virtually the opposite of the Greenspan Fed’s premise. That is, macro-economic performance has worsened, while the negative side-effects—serial financial bubbles and massive extension of debt and leverage in all sectors of the US economy—have been monumental.

As to the macro-economic effects, you can’t find any discussion of them in the Fed’s minutes because they are essentially a short-term economic weather report. But the ticks in the U-3 unemployment rate or blips in the monthly rate of gross capital spending tell almost nothing about the trend performance and health of the national economy. Janet Yellen was perhaps unintentionally correct in her “noise” comment, but simply neglected to note that this characterization applies not just to last month’s CPI, but to the entirely of the “incoming data” which the Fed obsesses about.

At the end of the day, there are two core indicators of the trend in macroeconomic performance and health that are never noted by the monetary central planners in the Eccles Building: Namely, the rate of net capital investment growth— because that establishes the foundation for future productivity and real wealth gains; and full-time bread-winner jobs— because that measures the gains in main street living standards. In particular, part-time jobs in bars and restaurants generating annualized pay rates of less than $20k are cyclical noise, not indications of sustainable economic growth.

After a temporary but unsustainable spurt in CapEx during the  Greenspan tech bubble, net investment after allowance for capital consumption in the current reporting period has been dismal for 17-years. And the relevant figure is net investment, not the Keynesian measure of gross capital spending embodied in the GDP equation and endlessly jabbered about on bubblevision. The truth is, during the last 15 years, the highs in real domestic net investment have been getting lower and the lows have also been posting lower. Indeed, after 68 months of ZIRP real net business investment is 20% lower than it was at the turn of the century.

Real Business Investment - Click to enlarge

Real Business Investment – Click to enlarge

Likewise, not withstanding last Friday’s swell jobs report headlines, the level of full-time, family supporting “breadwinner” jobs in the US economy is still 4.4 % below the 2007 peak; and the  ballyhooed June number was actually 4 million below the level attained way back in early 2001.  The irony of this dismal condition of jobs in construction, manufacturing, the white collar professions, distribution and transportation, FIRE, business management and core government employment is that more “jobs” has been the ultimate and incessant justification for interest rate pegging and ZIRP.

Breadwinner Economy Jobs - Click to enlarge

Breadwinner Economy Jobs – Click to enlarge

So there is just no way to argue that the Fed’s long march to ZIRP has enhanced the foundational performance of the macro-economy. And that means, in turn, that the Fed is up to something altogether different. In effect, it is involved in a giant and futile game of tilting at short-run cyclical windmills on the implicit theory that the American economy is a fragile flower that will tumble into recession the minute the Fed loosens its grip on the money market dials.

This is patent nonsense. The mild recession cycle of 2001-2002 and the deep but brief plunge of 2008-2009 represented the liquidation of bloated inventories, jobs and marginal output that had built-up during the Fed enabled dotcom and housing/credit bubbles, respectively. During the so-called “recovery” period of 4-5 years after each of these cycles, it was not interest rate pegging and its ultimate manifestation in ZIRP that did the trick.

In fact, the above graphs make absolutely clear that low interest rates did not stimulate capital spending or real job creation. What pick-up in activity that did occur under these foundational headings represented the ordinary workings of the capitalist economy. Not withstanding the cyclical windmill tilting in the Eccles Building, and the massive diversion of capital resources and financial activity to the Wall Street casino that is the inexorable result of free money to the carry-trade gamblers, the natural forces of capitalist regeneration did propel the US economy sluggishly forward during the so-called recoveries.

In short, the 27 year regime of interest rate pegging has done nothing to flatten the business cycle, but, instead, has actually intensified it by fueling malinvestment-riven financial bubbles that inevitably need to be liquidated.  On an all-in basis, therefore, administered prices in the money markets have increased cyclical instability and detracted from trend performance of the fundamentals.

As defective as it is, even the real GDP measure doesn’t lie. During the last 14 years, real GDP growth has averaged only 1.8 percent annually or barely half of the trend during the prior 50-years.

At the same time, interest rate-pegging and ZIRP have destroyed the most important price in all of capitalism—namely, the cost of short-term money used to fund speculation in the financial markets—whether through old-fashioned margin credit or other leverage or through more sophisticated forms of options and structured finance trades.

In any event, honest price discovery throughout the whole range of financial assets has been destroyed because Fed enabled and subsidized speculation has caused cap rates to be artificially repressed and asset prices to be vastly inflated by one-way trading in the Wall Street casino.

So maybe its time for a new version of the old regime at the Fed. That is, for the Eccles Building to eschew interest rate-pegging and ZIRP entirely, and thereby allow financial markets to once again engage in honest price discovery and two-way trading; and to allow the natural business cycle to meander along its own capitalist path as determined not by the 12 members of the monetary politburo, but the 317 million consumers, producers, investors, entrepreneurs and even speculators who comprise the real main street economy.

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Thu, 07/10/2014 - 18:55 | 4945343 fonzannoon
fonzannoon's picture

More importantly than interest rates it's currency pegging. Or as someone a lot smarter than I am wrote to me today..

"i love the now bread and butter ZH theme of the USDs reserve status ending because everyone is calling for settlement in other currencies. i mean LOL!!! look at this fucker:

http://finance.yahoo.com/q/bc?s=EURUSD=X&t=1y&l=on&z=l&q=l&c=

as long as everything is pegged and we aren't free floating currencies anymore, you can settle in whatever you want, its all the dollar anyway..."

Thu, 07/10/2014 - 19:15 | 4945432 slaughterer
slaughterer's picture

PM raid tonight.  Even Blythe's flying monkeys were called in for tonight.  

Thu, 07/10/2014 - 19:17 | 4945441 fonzannoon
fonzannoon's picture

yeah silver can't hold 21.50. Look at this dumper. I was watching this all day.

http://finance.yahoo.com/q/bc?s=EXK+Basic+Chart&t=1d

Thu, 07/10/2014 - 19:28 | 4945470 max2205
max2205's picture

I can't believe I may have to retire while CDs are Zuuuuuurrrrrpppp

Fuck the Fed....giving it all to The Too Big To Fail.....that'll bite them in the ass one day soon I pray

Thu, 07/10/2014 - 19:31 | 4945491 Dollarmedes
Dollarmedes's picture

The Fed only has two mandates, and they aren't accomplishing either one.

Thu, 07/10/2014 - 19:34 | 4945507 Kaiser Sousa
Kaiser Sousa's picture

same fraud channel...
same fraud pattern..
you gotta know by now that as soon as it enters the"nobody is selling any real fucking Silver" Globex that they will drag it down below the new high...

nothing but paper games.

Thu, 07/10/2014 - 19:28 | 4945475 rbg81
rbg81's picture

Because if they did this, the US Government would no longer be able to afford the deficit.  That, an all the resultant chaos it implies, will be avoided at any cost by the Powers-that-Be.  Even if it means turning Commie.

Thu, 07/10/2014 - 19:34 | 4945513 NoDebt
NoDebt's picture

Or Japanese.

Thu, 07/10/2014 - 18:55 | 4945346 FieldingMellish
FieldingMellish's picture

Cynical. Hope that the those in government want to help you. Everyday.

Thu, 07/10/2014 - 19:06 | 4945394 Groundhog Day
Groundhog Day's picture

can we just get the supernova now so we can all move along 

Thu, 07/10/2014 - 19:24 | 4945459 NOTaREALmerican
NOTaREALmerican's picture

Somebody really big has to fail for it to burst.   No idea how that can happen, but that's it.    The stock market number is meaningless; it's just a measure of the optimism level of (mostly) males with gambling OCD.  

Thu, 07/10/2014 - 18:58 | 4945358 NOTaREALmerican
NOTaREALmerican's picture

I'm hoping that it will trickle down from the job creators to the Trash Class (who don't really deserve the jobs the job creators create, but because the Trash Class won't simply "go away", like honorable people should, the job creators - being very honorable people - will take some time from their busy schedules and try to create a few more jobs).

Thu, 07/10/2014 - 20:36 | 4945735 PeeramidIdeologies
PeeramidIdeologies's picture

You forgot the sarc

Thu, 07/10/2014 - 21:02 | 4945815 RockyRacoon
RockyRacoon's picture

We see the sarcasm, but the 1% are nodding their heads as they see it as truth.  It's all in one's perspective.

Thu, 07/10/2014 - 21:36 | 4945923 PeeramidIdeologies
PeeramidIdeologies's picture

He did get two greenies... I've always wondered how the world looks from behind the decimal. I've heard we're are quite the eyesore.

Thu, 07/10/2014 - 22:08 | 4946010 NidStyles
NidStyles's picture

I really wish people in general would quit bringing up the world when they mean HUMANS.

Thu, 07/10/2014 - 19:06 | 4945392 AdvancingTime
AdvancingTime's picture

America imports around five hundred billion dollars more from other countries every year than they export. This means we have a giant trade deficit, when we add this to our enormous government deficit it is easy to see that we are living far beyond our means. The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop.

The Fed  must at some point begin to ponder a real exit strategy and end the massive and corrosive stimulus that the economy has come to expect. To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...

Thu, 07/10/2014 - 19:08 | 4945403 fonzannoon
fonzannoon's picture

I beg to differ, we import stuff, we export dollars.

Thu, 07/10/2014 - 19:26 | 4945462 NoDebt
NoDebt's picture

Not even printed paper dollars.  Electronic 1s and 0s.  You would think they would have gotten wise after Nixon closed the gold window ("temporarily", of course, I'm sure it will reopen any day now).

But nope.  We sure fooled them, huh?  So long and thanks for all the stuff.

Thu, 07/10/2014 - 22:48 | 4946102 logicalman
logicalman's picture

What is this 'we' you refer to?

Most people make thier way through life based on what gets them through to tomorrow.

Too many things are imposed using violence or the threat thereof.

There is no 'We'

Thu, 07/10/2014 - 19:46 | 4945489 Pairadimes
Pairadimes's picture

The reason why America imports so much more than it exports is the same reason why a dog licks it's balls. Because it can. As long as there are idiots somewhere willing to trade iphones, TVs and tennis shoes for FRNs, this will go on.

The problem with your logic and expectations is it assumes the wrong motivations on the part of the Fed and their government accomplices. This isn't about improving the economy. It is about keeping the greatest fraud in the history of humanity alive as long as possible. The imposition of the current fractional reserve banking, debt-based currency model for the United States, coupled with the gargantuan conflict of interest and moral hazard inherent in the Federal Reserve, could have no other outcome than the one we are seeing right now. It's just taken 100 years to get there.

Thu, 07/10/2014 - 19:08 | 4945402 Harriet Wanger
Harriet Wanger's picture

I'm dumber for having read ZH the last couple of days.

Thu, 07/10/2014 - 19:19 | 4945444 NOTaREALmerican
NOTaREALmerican's picture

Well,  see what happens in a few days.   Who knows what might happen.

Thu, 07/10/2014 - 19:23 | 4945457 Shad_ow
Shad_ow's picture

Reading comprehension might help.

Thu, 07/10/2014 - 19:33 | 4945503 Pairadimes
Pairadimes's picture

Sounds like a misdiagnosis to me.

Thu, 07/10/2014 - 21:05 | 4945832 RockyRacoon
RockyRacoon's picture

I'm dumber for having read ZH the last couple of days.

Are you sure you weren't in an intellectual decline all along? 

From what lofty cerebral heights are you falling?

Correlation does not presuppose causation...

Thu, 07/10/2014 - 21:37 | 4945924 Harriet Wanger
Harriet Wanger's picture

It's not so much the hackneyed stories promoting hate, bigotry, and ignorance, it's the greediness with which those stories were lapped up, the fervor with which frenzy whipped itself, and the speed with which readers rushed to bare their crudest impulses to the rest of the world. Reminds me of a recent Failbook experiment.

Thu, 07/10/2014 - 19:15 | 4945429 i_call_you_my_base
i_call_you_my_base's picture

It's a house of cards and no one wants to touch it. The fed will continue to manipulate rates lower by any means necessary. There is too much debt, they can't let rates go higher. That's game over. Employment and the health of the econonomy is just a distraction, they don't care.

Thu, 07/10/2014 - 19:18 | 4945443 asteroids
asteroids's picture

Why the hell don't people nail Old Yeller and the European Drag Queen during their press conferences with these simple facts?

Thu, 07/10/2014 - 19:21 | 4945454 NOTaREALmerican
NOTaREALmerican's picture

The "King has no clothes" story is all you need to know about humans and authority worship.    We couldn't have the societies we do and wouldn't have the history we do if everybody could actually ask the King why he was naked.   

Thu, 07/10/2014 - 19:30 | 4945480 Kaiser Sousa
Kaiser Sousa's picture

yawn.....
Apmex delivered today...
carry on MoneyChangers...
Absent the debt based currency paradigm since 2007.
that is all.

Thu, 07/10/2014 - 20:09 | 4945610 Burticus
Burticus's picture

No small group of men, however brilliant, educated, experienced and well-meaning, can substitute for the collective brilliance and stupidity of millions of individuals.

Needless to say, a group of corrupt bankers with profit motive and their academic apologists all appointed by the elephant-n-jackass sock puppets can't subsitute for the collective brilliance and stupidity of millions of individuals either.

Thu, 07/10/2014 - 20:42 | 4945755 PeeramidIdeologies
PeeramidIdeologies's picture

Bottom line, everyone love free shit. I don't care if your broke on welfare, or a billion dollar "capitalist" if the opportunity is there people are gonna take it. If you think this system will ever be rearranged to benefit anyone other then the current engineers then you don't understand human behaviour.

The sharks only get bigger from here, and you are surrounded by ocean.

Thu, 07/10/2014 - 20:45 | 4945766 TheBird
TheBird's picture

The central banks should not be setting any interest rates at all. Let the markets determine the cost of money.

Thu, 07/10/2014 - 21:09 | 4945847 RockyRacoon
RockyRacoon's picture

...which is exactly why they are setting the rates.   The market-set rates would be unacceptable to the power brokers.  The Fed has created its own Catch 22 scenario.  Nothing will be fixed until the whole system is shut down and reset.

Thu, 07/10/2014 - 20:48 | 4945775 SweetDoug
SweetDoug's picture

'

'

'

Since when the @#$% did low interest rates motivate the banks to make loans to schlubs like us?

That's nothing but more financial proganda newspeak.

Like now, how QE is not about keeping the interest rates low, since they're stopping QE.

Is you is or is you ain't. Ya can't be suckin' and blowin' at the same time.

 

Doug

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