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David Stockman On The Real Evil Of Monetary Central Planning

Tyler Durden's picture




 

Submitted by David Stockman of Contra Corner blog,

The 2008 Wall Street meltdown is long forgotten, having been washed away by a tsunami of central bank liquidity. Indeed, the S&P closed yesterday at 1,983—or up by nearly 200% from its March 2009 low. Yet four cardinal measures of Main Street economic health convey nothing like a 2X pick-up from the post-crisis bottom.

To wit, in June the count of breadwinner jobs was 68.5 million or 5% below where it stood as the crisis got underway. Likewise, business investment in real plant and equipment is still 5% below its late 2007 peak. So too with the real median family income at about $53k—its still down by 6%. And unlike past cycles where safety net programs like food stamps shed recipients as the recovery gained momentum, there are still nearly 47 million Americans in the program compared to 30 million in March 2009.

Untitled

This juxtaposition has been explained away by Wall Street stock touts under the heading that “this time is different”. Markets have allegedly sprung loose from their moorings in the real economy owing to record corporate profits and an upward re-rating of PE multiples reflecting lower than historical interest rates. And, indeed, the raw facts can be marshaled to this end.

As shown in the stunning chart below, profits have doubled as a share of corporate net value added since the turn of the century. Likewise, when measured against GDP, profits are at 60-year highs.

This is just the trouble, however. The robust rate of profit growth during recent years reflects a one-time gain in the profit share of factor income. This gain in all probability cannot be replicated again during the next decade, and, in fact, is extremely vulnerable to the mean reversion so evident in the historical data above. Indeed, that may have already begun during the first quarter of 2014 when the profit share dropped sharply as shown in both charts above.

The same can be said of low interest rates. After an unprecedented 33-year descent, the yield on the 10-year treasury benchmark has nowhere to go but higher; and after hitting a QE induced rock bottom of 1.5% in mid-2012, the benchmark yield has, in fact, bottomed and begun a climb toward normalization. No amount of money printing and financial repression by the central banks can keep yields on the current massive trove of $12 trillion of publicly held treasury debt at a negative after-tax and after-inflation rate indefinitely.

This is just the trouble, however. The robust rate of profit growth during recent years reflects a one-time gain in the profit share of factor income. This gain in all probability cannot be replicated again during the next decade, and, in fact, is extremely vulnerable to the mean reversion so evident in the historical data above. Indeed, that may have already begun during the first quarter of 2014 when the profit share dropped sharply as shown in both charts above.

The same can be said of low interest rates. After an unprecedented 33-year descent, the yield on the 10-year treasury benchmark has nowhere to go but higher; and after hitting a QE induced rock bottom of 1.5% in mid-2012, the benchmark yield has, in fact, bottomed and begun a climb toward normalization. No amount of money printing and financial repression by the central banks can keep yields on the current massive trove of $12 trillion of publicly held treasury debt at a negative after-tax and after-inflation rate indefinitely.

This all adds up to a case for capitalizing corporate earnings at a rate well below the historical norms, not at the tippy-top of prior experience. But the Wall Street casino is so juiced-up on the Fed’s promise of endless liquidity and puts under the stock averages that it is uninterested in the fundamentals, and will keep buying the dips until some confidence shattering black swan comes flying in from out of the blue.

And that points to the real evil of monetary central planning and the serial financial bubbles that it inexorably produces. Bubbles are now only recognized after they burst into a flaming crash. The chart below regarding the $2.3 trillion private label market in securitized sub-prime mortgages created by Wall Street in the run up to the last bubble top says it all.

Click to View

 

What were heralded to be money-good par securities because “that time was different” have ended up in a smoldering pile of toxic waste.

 

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Wed, 07/23/2014 - 21:25 | 4996136 TeamDepends
TeamDepends's picture

Church Lady: Satan?

Wed, 07/23/2014 - 21:25 | 4996137 Seize Mars
Seize Mars's picture

Bifurcated currency.

They are going to split the USD into a domestic unit and a foreign unit.

The domestic one will be devalued.

Wed, 07/23/2014 - 21:29 | 4996152 TeamDepends
TeamDepends's picture

Foreign unit = Hot Potato

Thu, 07/24/2014 - 00:22 | 4996748 lasvegaspersona
lasvegaspersona's picture

The problem is that there are trillions of dollars outside the  country. If the reserve currency starts acting wierd it would be the end of the reserve status. I'm afraid the dollar will have o pretend everythin is fine right up to the end.

ditto for bail-ins...in other countries maybe ...the US cannot afford to be seen as weak.

Thu, 07/24/2014 - 00:57 | 4996822 CrazyCooter
CrazyCooter's picture

If we walk this path the Treasury will have to "call in" all the outstanding currency. I think it might work like this ...

If a treasury is held, domestic or foreign, the CUSIP would have to be registered through a US approved entity in a defined period of time or the bond would be invalidated.

Cash held abroad would have to be exchanged for "new" currency at a US approved institution. US dollars would be rolled over to a new paper format during this time, possibly introducing new note amounts. Everything not converted would be "worthless".

Deposits would have to be shifted to and confirmed with a US approved institution.

What this would do is write off all the "black market" money sloshing around as criminals would have a hard time laundering all their cash in a short period of time, greatly reducing USD float and creating an artificial shortage when a surplus is expected.

If the shrink is significant enough, it might shore up confidence for longer than most expect.

It would also create the ideal US Dollar "bail in" conditions which would probably follow.

System is still broke, but they have mastered the art of kicking this fucking can, so I try to keep up anymore.

Regards,

Cooter

Thu, 07/24/2014 - 09:24 | 4997513 Bemused Observer
Bemused Observer's picture

And they have been getting us accustomed to frequent currency changes for several years already, so that we won't panic when they get ready to institute the REAL changes...We'll just wake up one day and find we have new 'dollars' again...maybe some strange new coinage. No biggie...we've seen it before.

Only THIS time it will really BE different.

Thu, 07/24/2014 - 03:29 | 4996994 All Risk No Reward
All Risk No Reward's picture

The bigger problem is that net external money is essentially inextinguishable inextinguisable net debt.

Put that stark reality in yer pipe and smoke it.

Thu, 07/24/2014 - 05:44 | 4997086 IPURDOM75
IPURDOM75's picture

Hope at least it'll get you high!

Thu, 07/24/2014 - 00:49 | 4996806 CrazyCooter
CrazyCooter's picture

No such thing.

They could float two currencies, one internal and one external, with either a fixed or floating exchange.

Pick one idea, the one you think you are representing, and demonstrate to me how the mechanics are going to work.

Regards,

Cooter

Thu, 07/24/2014 - 21:39 | 5001863 Seize Mars
Seize Mars's picture

CrazyCooter

Think of it like China's A-shaes and B-shares. A Chinese company offers shares of stock; those allowed for trade by domestic people are "A shares" and those offered for trade with foreigners are "B shares."

Kind of like that.

Get ready, it's going to happen.

Wed, 07/23/2014 - 21:35 | 4996170 NoDebt
NoDebt's picture

"After an unprecedented 33-year descent, the yield on the 10-year treasury benchmark has nowhere to go but higher"

As Yoda would say:  "THAT is why you fail." Or... "Japan, Mr. Stockman.  Remember your failure in Japan."

Nothing more will I teach you today.  Clear your mind of questions.

Wed, 07/23/2014 - 22:44 | 4996432 Double.Eagle.Gold
Double.Eagle.Gold's picture

Yoda: "Why you fail that is.  Yeesssssss.".

and: "Japan, mr.  Stockman.  Your failure in japan remember.  Yes, hmmm."

Fixed, source reference

Yoda translator

Wed, 07/23/2014 - 21:39 | 4996187 starman
starman's picture

Bingo the more people on snap the more food we produce! 

Thus more workers needed that  will result in jobs recovery!

Fuck I should run for president! 

Wed, 07/23/2014 - 21:43 | 4996209 NoDebt
NoDebt's picture

No damned way I'm voting for you unless you wear that ICP mask during your entire campaign.  Do that, you got my vote.

Wed, 07/23/2014 - 21:58 | 4996274 Chief Wonder Bread
Chief Wonder Bread's picture

You'd be wasting your vote. The Party games the system with the Presidential Debate Commission. Juggalos would never get their voice heard.

Wed, 07/23/2014 - 21:52 | 4996249 WhackoWarner
WhackoWarner's picture

INCORRECT.  More people starving the more demand for GMO and Roundup.

Wed, 07/23/2014 - 21:46 | 4996222 Eireann go Brach
Eireann go Brach's picture

Question for you ZH folks? When the stock market finally does crater and collapses, which way will the 10 year Treasury go? Will it go below 1% or will it skyrocket? 

What say you?

Wed, 07/23/2014 - 22:32 | 4996396 Uber Vandal
Uber Vandal's picture

My question has been if the stock market finally craters and collapses, WHO is going to be able to collect if one is short, the derivatives daisy chain finally goes all explodey, the banks declared a (permanent?) bank holiday, etc?

 

Wed, 07/23/2014 - 23:52 | 4996668 disabledvet
disabledvet's picture

My answer is that and has been "in lieu of a stock market crash on buys treasuries." I would also add "how about those growth numbers Stockman!" Eeeee haw!

"And let's throw in the bankruptcy of Detroit just to show we care!"

Ridiculous article...spreads are still absolutely huge in the fixed income space (and that's not counting the 22 percent interest rates you're paying on your credit card debt while getting zero percent on your savings account.) no way I'm long recovery...and now with two truly massive war efforts underway (Ukraine and pretty much the entirety of the Missile East) I'm really not seeing too much in the way of a "private sector problem" given the huge energy boom inside the USA.

I do think "professional politicians" are an endangered species...but we'll see.

"All Politics is Loco" is the title of my new book.

Check it out at "disabledvet on zero hedge."

Wed, 07/23/2014 - 22:36 | 4996412 NoDebt
NoDebt's picture

Since the Fed has taken over and there really are no markets any more, the next crash will be the widowmaker.  It will take down EVERYHING.  Not that it will matter much, since you won't be able to access your investment accounts, your bank accounts or anything else.  They'll all be closed for a "holiday".  When they re-open, IF they re-open, you will be poor, no matter what you thought you had before.  

Thu, 07/24/2014 - 01:11 | 4996832 honestann
honestann's picture

Which is why everyone should convert all paper assets into gold, silver, productive machinery and supplies.  Now.  If not sooner.  Then shrug.

Thu, 07/24/2014 - 01:01 | 4996826 CrazyCooter
CrazyCooter's picture

I have reached the conclusion that official rates will never officially go up, but the value of the dollar is heading into the shitter for good.

Don't believe me, then go try to get a ZIRP loan. Right, you can get 12% on that card, but no ZIRP for you.

GTFO out of debt and try to keep a job.

Best of luck.

Regards,

Cooter

Thu, 07/24/2014 - 01:27 | 4996840 honestann
honestann's picture

The stock market may suffer a temporary dislocation, but will never fall in nominal dollars for an extended period.  However, the stock market will soon fall in real dollars.  Since 99% of humans are too dumb to understand this situation, what we will likely see is the following totally sicko phenomenon.

People will be partying at their 10x nominal gains in stocks.  They will not understand the real value of their stocks lost 50% of their value.  So they will celebrate their 50% loss as if it was a 1000% gain!

But the real situation is much worse than that.  They'll pay huge honking taxes on that nominal 1000% gain, not deduct the real 50% loss they actually suffered (because the law says so).

So they'll be raped by the federal reserve.

Then they'll be raped by the infernal revenue scurvus.

And yet... they'll be dancing in the streets, celebrating their poverty.

Humans are fools.

Thu, 07/24/2014 - 07:09 | 4997165 A82EBA
A82EBA's picture

 "the stock market will soon fall in real dollars"

is this because commodities will be higher in nominal dollars?

Thu, 07/24/2014 - 18:52 | 5001178 honestann
honestann's picture

Yes, because pretty much everything will increase in nominal dollars... faster than stocks.  Not just commodities, but homes, cars, rent, services, etc.

Wed, 07/23/2014 - 21:46 | 4996223 Eireann go Brach
Eireann go Brach's picture

Double post! So might as well say something useful. FUCK YOU OBAMA!

Wed, 07/23/2014 - 21:48 | 4996233 datapanik
datapanik's picture

How many shattering black swans do you need? Yellen and her junkies are impervious. Criminal behavour rewarded.

Wed, 07/23/2014 - 21:50 | 4996238 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

what news came out at 945 pm EST?

Wed, 07/23/2014 - 22:10 | 4996329 ebworthen
ebworthen's picture

Fudged China Manufacturing PMI?

Wed, 07/23/2014 - 22:07 | 4996315 ebworthen
ebworthen's picture

"And that points to the real evil of monetary central planning and the serial financial bubbles that it inexorably produces. Bubbles are now only recognized after they burst into a flaming crash."

Stockman on point yet again.  The Hindenburg economy of the U.S. sure has a lot of hydrogen in it.

Wed, 07/23/2014 - 22:11 | 4996325 Yes_Questions
Yes_Questions's picture

 

 

wait, 68.5mm people win bread at their job?

 

I've got to read more in to this

Wed, 07/23/2014 - 22:10 | 4996326 scrappy
scrappy's picture

Didn't this guy help INVENT this current Neo-con system or am I missing something?

CYA

Wed, 07/23/2014 - 22:22 | 4996365 Yes_Questions
Yes_Questions's picture

 

 

Can't the FED issue variable rates to various "borrowers"?

 

and anyway, is the FED really necessary for credit formation?

 

 

Wed, 07/23/2014 - 22:39 | 4996429 kchrisc
kchrisc's picture

It is not "central planning." It is central theft.

 

"My guillotine is a form of central riddance."

Thu, 07/24/2014 - 00:26 | 4996753 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

Anyone who has not taken the time to read, "The Creature from Jekyll Island", should make the time ASAP.

The book lays how and why the FED was created and how over the last 100 years every economic tragedy has been knowningly been the handy work of the banking cartel which owns the Federal Reserve.

Wed, 07/23/2014 - 22:49 | 4996475 Freewheelin Franklin
Freewheelin Franklin's picture

Sure. Next, you'll be trying to tell me that housing prices can never go down. 

Wed, 07/23/2014 - 22:57 | 4996499 Freewheelin Franklin
Freewheelin Franklin's picture

Someone might want to edit out the two repeated paragraphs. 

Wed, 07/23/2014 - 23:24 | 4996593 q99x2
q99x2's picture

Boy, the author sure seems cranky.

Wed, 07/23/2014 - 23:56 | 4996678 Temerity Trader
Temerity Trader's picture

For a really bright guy, he still doesn’t see the forest for the trees.  He belongs right here with all you ZH  perma-bears.

 David, wake up Buddy! Did you fall asleep in 2008 and are just now coming around? The economy collapsed in 2008 and there was no choice but massive and permanent intervention. Permanent is the key word here, the New Normal. Without central bank money printing and massive government and private debt expansion, it is riots in the streets. The Great Depression, Nazi Germany and Soviet Russia are what happen when they just let the ‘system’ work its own problems out. This one would have taken the U.S. down for good and spread around the globe.

Zero rates encourage borrowing and spending by consumers and this IS consumption nation.  Massive government debt is for a 2 million person jobs program (read government employees). They don’t want a few hundred thousand unemployed vets returning from Iraq and Afghanistan and marching on D.C. EBT cards, Medicare, Social Security, welfare also mean tranquility and stability; no one is rioting in the streets.  Same goes for student loans, keeps them passive and mostly stupid.  When they owe tens of thousands of $$ they are more docile and controllable.  Highway and infrastructure programs, paid for with debt, etc, keeps many lemmings in beer, potato chips and with an I-phone and HDTV each…peace and quiet at home.  No qual auto loans, the sheeple can drive around in SUVs and remain fat, dumb, and happy. Repo’s no problem, just go buy another one…dealers happy to sell to fools then sell the paper off to a bank.  Bank gets in trouble, bailout, rinse, repeat.  Only low paying jobs?  So what?  That’s what EBT cards are for.

We are NEVER going back to the good ‘ol days Dave…never! The Fed Bank will print trillions more, Uncle Sam will go trillions more into debt. There is NO other way now! The bears will scream it is unsustainable five years from now, and ten years from now too. 

 

Yes, the numbers say when rates rise, can’t service the debt..right!  Rates will never rise.  Loans will be forgiven, banks will be bailed out, the Fed balance will grow and maybe double…it doesn’t matter. Embrace the New Normal, or fight it with common sense and logic, and go broke.

 

Thu, 07/24/2014 - 00:39 | 4996776 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

Agree with everything you posted.

The only thing that will bring it down is the dollar losing reserve status. If enough foreign nations choose another currency the whole house of fraud and lies will come tumbling down, ebt cards wont save anyone. It will actually be what the Bernake told legislatures could happen in 2008. Dogs and cats sleeping together, Old Testament kind of times, biblical, and the real end of the USA as a Nation of Lies.

Which just might cause a turn to that treasure of promise, the currently disregarded Constitution.

Another chance to build once again the dream the Founding Fathers envisioned.

Thu, 07/24/2014 - 01:04 | 4996829 CrazyCooter
CrazyCooter's picture

Hey asshole, if everyone in my generation starts to figure out this gig, gets the fuck out of debt, and never borrows again, how does your thesis pan out?

Don't tell us about your conviction, go bet your ass and leverage it and make a killing being a fucking genius.

Regards,

Cooter

Thu, 07/24/2014 - 01:35 | 4996859 RaceToTheBottom
RaceToTheBottom's picture

So we should believe in the never ending Free Lunch?  And the perpetual motion machine as well?

 

Thu, 07/24/2014 - 01:48 | 4996869 LostandFound
LostandFound's picture

I was offered $15,000 by HSBC in cash availability the other week transferred from the balance of my credit card availability straight into my checking account. HSBC said i can start paying this back to them in 6 months time at the current interest rate.

I told them to go fuck themselves, why? because i was parented by the working class who believed in saving and not getting into debt, believed in living within their means.

How can the FED just alter Human behaviour like that, that is imprinted into my upbringing? I suspect the majoirty of people have a conscience about getting into debt. 

This is why when the slow burn continues on the Consumer, they will reduce consumption rather than get into more debt.

This aint going to work, plain and simple and it will be interesting to see the consumption in Q2 GDP estimates.    

Thu, 07/24/2014 - 03:25 | 4996988 kurt
kurt's picture

Money should be issued by the treasury not created as debt. Dump the fed

Thu, 07/24/2014 - 06:49 | 4997106 IPURDOM75
IPURDOM75's picture

I think you're right in the short/ middle term. However in the long run that can't work indefinitly. It's a ponzi scheme, all the FED is doing is buying time, but the more time is passing, bigger the problem will be at the end. Understand this: money is debt, when debt is not repaid it creates deflation. That's what happen in the great depression, and Dave explains it very well in his book " the great deformation", you can't force people to borrow if they don't have any perpective for business. During great depression, it's wrong to think the FED was tightening the credit, rates were low, and money was available. Only problem nobody was eager to go into debt with businesses crashing. Therefore US had this killing deflation.

The FED is, and will continue, litterally drawning the economy of liquidity to avoid this deflation until the dollar is so debased to real value that it doesn't worth anything and people will start looking to real money: GOLD and Silver. Then deflation will smash, and it'll hurt, the economy will be flushed out from all the unnecessary goods and services which are currently overwhelming our economy. Will go back to the basics.

If we check history, that's how all fiat currencies end up.

Thu, 07/24/2014 - 03:19 | 4996979 shouldvekilledthem
shouldvekilledthem's picture

Message from the genesis block:

"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"

 

Thu, 07/24/2014 - 07:30 | 4997197 AdvancingTime
AdvancingTime's picture

Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. Have these actions really worked or merely masked over major flaws and problems?  And just for fun, consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future.

  Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps are suppose to allow us to print and  manipulate away problems. What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...

Thu, 07/24/2014 - 09:11 | 4997466 RougeUnderwriter
RougeUnderwriter's picture

We have a leadership shortage. Those who do not learm from the mistakes of the past are destined to repeat them.

Do NOT follow this link or you will be banned from the site!