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After Central Bank Financial Bubbles, Comes Liquidation And Industrial Deflation
Submitted by David Stockman via Contra Corner blog,
Nearly two decades of central bank financial repression have created huge distortions and imbalances in the world economy. Now they are coming home to roost as the impossibility of ZIRP forever dawns on even our mad money printers. Having created yet another round of ebullient financial bubbles, they are now getting palpably nervous.
Even the lady with the perpetual tan and unfailing call for “moar” monetary and fiscal stimulus, IMF head Christine Lagarde, said something sensible over the weekend:
“There is too little economic risk-taking, and too much financial risk-taking.”
She got the “too much financial risk-taking” part right, but here’s the thing. The apparatus of state policy—-fiscal borrowing and central bank money printing—-can not cause enterprise to flourish. Free market capitalism is the milieu in which business enterprise, invention, risk-taking and labor productivity thrive best. So, yes, reducing market impairments—such as tax rates on production and capital which are too high or regulations, protectionist laws and subsidies which are too onerous—-is always helpful.
These latter steps are now coming into fashion under the heading “structural reform” and they make sense as far as they go. But central bankers like Draghi and international monetary bureaucrats like Lagarde pushing this agenda fail to recognize that their own policies on the fiscal and monetary side currently dwarf the ill-effects of, for instance, over-zealous EPA regulation in the US or protectionist labor laws in Europe.
In fact, long-standing financial repression and absurdly low interest rates have generated malinvestments and debt burdens that are crushing enterprise and true economic risk-taking throughout the world economy. In the DM (developed market economies), the resulting malady is consumer balance sheets that are bloated with debt; and in the EM (emerging markets) the ill takes the form of vastly bloated industrial capacity and public infrastructure. So if there were ever a case of “physician, heal thyself”, this is it.
Indeed, the current spectacle of Europe’s monetary arsonist, Mario Draghi, telling Italy’s most recently installed double-talking politician, Prime Minister Renzi, to change the nation’s labor laws so that employers can more easily fire redundant workers says it all. Of course this should be done—Italy can’t thrive in a global economy based on 1960s communist union theories that were invalidated the moment that the comrades in Beijing swapped Mao’s little red book for the printing presses of red capitalism. Still, the redundant labor and resulting economic inefficiency in Italy’s few remaining large-scale industrial plants is trivial compared to the burden of nearly $3 trillion of public debt—a figure that amounts to 130% of GDP and continues to mount.

By his ill-considered and undeliverable pledge to do “whatever it takes”, and the phony peripheral bond rally it elicited, Draghi has destroyed any semblance of political will in Italy to tackle its 130% of GDP public debt. Instead, based on the blatant scheming now underway in Italy’s parliament, it is already evident that the “labor reform” that Renzi is talking up amounts to statutory legerdemain that will make almost no difference in the domestic jobs market for years to come. Yet, it will provide the pretext for a return to out-and-out fiscal profligacy in Italy next year—-as Italy’s politicians are already making evident in an openly public manner.
So what’s going on is Keynesian central bankers are looking for a scapegoat, and have found exactly the right word cloud to define it—-that is, “structural reform”. And the politicians are grabbing the bait, knowing that infinitely malleable enabling acts can be made to sound constructive upon parliamentary approval, even as they permit real policy change to be buried in regulatory wrangling and judicial review for years to come.
At the same time, the politicians’ pound of flesh in this emerging scam is more pork barrel spending and fiscal stimulus in the guise of “public investment”. But the litmus test on that proposition is quite simple: Are the proposed public “investment” projects being funded with higher user fees and taxes or general government borrowing?
It goes without saying that it is the latter. Yet with DM governments at peak public debt ratios nearly everywhere (i.e. 100% of GDP and higher), borrowing even more money to fund public projects which for the most part are not needed, and will not contribute to improved economic efficiency, is a little more than a recipe for higher taxes and more economic stagnation down the road.
So the new consensus coming out of this weekend’s IMF meeting is just a smokescreen. What ails the global economy can not be remedied by toothless “structural reforms” or wasteful “public investments”. What is urgently needed, instead, is an end to central bank financial repression and rapid return to normalized interest rates and budget surpluses that can pay down unsustainable public debt burdens that have built up over the past few decades.
Yes, that would cause the boys & girls and robo-traders on Wall Street to throw one hellacious hissy fit. But there’s no getting around it. Current money pumping policies by the major central banks are just inflating financial bubbles to ever more treacherous heights, guaranteeing that the eventual day of reckoning will be all the more traumatic.
And yet the central bankers are reluctant to allow interest rates to escape from the zero bound and begin their flight upward toward “normalization” because they are wedded to the Keynesian fallacy that a weak economy is evidence of insufficient “aggregate demand”. Therefore, monetary “accommodation”—even when it reaches the lunatic extent of recent years— is purportedly needed to goose households and businesses into more spending.
In the DM world, however, the credit transmission channel of monetary policy is broken and done. Real interest rates for maturities up to five years have been negative in real terms for most of this century. Not surprisingly, main street households have smothered themselves in debt, and have thereby, ironically, reduced the efficacy of Keynesian stimulus policies practically to zero.
The reason is that during the decades after the demise of Bretton Woods in 1971, public and private balance sheets were consistently and drastically levered-up on a one-time basis. The resulting credit-fueled consumption binge in DM economies added to measured GDP, but not to true, sustainable wealth gains. It was a one-time parlor trick that has now left them with contractually fixed public and private debts ranging from 350-500% of GDP—– off-set by stagnant incomes and unsustainable mark-to-market asset values that are vastly inflated by the long years of bubble finance.
So the DM world has now reached the limits of “peak debt”, even with the ZIRP enabled ultra-low “carry” cost on these towering obligations. In this regard, the US and Spanish ratio patterns are typical. But in either case, Keynesian monetary stimulus is simply pushing on a string, as is reflected by slowly falling debt ratios since the 2007-2008 peak.
Stated differently, there has been no escape velocity owing to Keynesian stimulus. Massive central bank liquidity injections have remained in the canyons of Wall Street and other major financial markets where they have enabled endless free money funding of speculation and carry trades, but have contributed virtually nothing to spending by debt-saturated main street households.
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At the same time, central bank financial repression has made capital inordinately cheap and has thereby caused fantastic over-investment in the EM world. The current disastrous overcapacity in China’s steel industry is a case in point. Between the year 2000 and 2010 its steel industry grew from 150 million tons of annual capacity to 750 million tons—a rate of heavy industry growth never before witnessed anywhere.
Yet as shown below, the flood of cheap money from the Peoples’ Printing Press of China in response to the Great Recession only stimulated a further round of even more fantastic steel capacity growth.
The 300 million tons or 40% gain since 2010 is a striking measure of the current global derangement. China’s steel capacity expansion in just the last four years exceeds the combined capacity of the entire steel industry of Europe and North America combined. Yet China’s sustainable domestic need is arguably less than 500 million tons per year—once its spree of constructing empty apartment buildings, unpopulated cities, redundant highways, bridges, airports and high speed railroads and unneeded industrial capacity comes to an end—as it surely must and will. Even the comrades in Beijing are signaling a resignation to that unavoidable outcome.
Already, the inevitable collapse is becoming visible. Prices are plunging, inventories are soaring, and profits in the steel industry have virtually disappeared. As detailed in the attached story from Bloomberg, the inexorable consequence will be a flood of cheap exports on the world market.

Indeed, the real problem is that once this immense capacity was brought into being, it was not going to go quietly into the night. China’s true excess capacity now amounts to upwards of 50% of steel production in the rest of the world. Consequently, when China’s domestic consumption is sharply curtailed as the world’s greatest historical building boom winds down, the flow of excess plate and sheet and rebar and structural products into the world steel markets will have a relentless shocking impact. Prices and profits will be crushed everywhere; and protectionist policies not seen since the 1930s are likely to be kindled.
After all, it only need be recalled that 85% of all the growth in global steel production since the year 2000 has been attributable to China. In the rest of the world, steel production during the last 14 years has barely inched forward—growing at just 1.1% per annum owing to a tepid level of end demand. So when the flood of dumped still comes flooding in from China, it is evident that the absorption capacity is next to zero.
And steel is just the most advanced case. A huge wave of industrial deflation is virtually guaranteed in the food chain of materials extraction, production and fabrication.

Today’s Bloomberg story on China’s growing steel industry crisis notes that “China steel now as cheap as cabbage.” Perhaps that is a foretaste of things to come!
In any event, the stunning collapse of steel prices and the soaring inventories of iron ore in China are a reminder that cheap capital artificially provisioned by central banks can lead to an enormous boom of malinvestment. But ultimately the laws of economics will out and a relentless deflationary correction ensues.
It would appear that the global steel industry, among others, is soon to find out about the crack-up part which inexorably follows the boom.

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My Bitcoin is seeking a bargain.
I am the Central Bank of my own soul and body and I provide liqudity to myself in the form of liquid... alcohol.
Oh yeah.....
I can just see it now. Thems thats taken on oodles and oodles, gobs and gobs of debt (which in total is way way up since the 2009ish bottom, no there has not been shit for deleveraging) is gonna have a buncha pain in the deflationary slow growth coming world.
Cashing in the chips, a la jingle keys in housing 6+ years ago.
Whoopee!
nah it's way simpler than that, I just chug a few tallboys and feel better.
When this plays out, it will be interesting to see if anyone will be able to afford another shrimp to throw on the barbie, mate.
“There is too little economic risk-taking, and too much financial risk-taking."
How does Lagarde and her ilk expect any old school capitalist investor to embark on risking their hard earned money in a venture whose viability canutterly vaporise the moment any one of a dozen central banks decides to intervene, or not to intervene, or slam on the brakes, or go full throttle, or any other of the zillion tricks theyve been using to redistribute wealth to the oligarchy in the facetious claim that their fiscal health alone will magically trickle down and revive consumer based debt saturated economies?
LOL we really dont have much industrial capacity left, what is left is already deflated.
Nothing better than then a French socialist running IMF and even having a oppinion...We have been dupped! Guess the nut jobs talking about revolution knew these evil squid bankers would ruin us eventually....So sad to see...We did it to ourselves..Greed feels so go....Something for nothing...Most will learn whay real hard work is soon enough!
F
Be as self sufficient as possible.
learn how to cook real food from basic ingredients, something your mum knew how to do...hopefully
keep your debts down , preferably nothing.
keep your skills current or acquire useful new skills.
Don't buy crap, always think do I really need this or simply really want this.
Look after your health, don't eat too much and exercise three times a week, even if its just a long walk.
smile, be happy, it costs nothing.
Do all of the above and you will be well placed for whatever the world throws at you.
those owning debt will be the slaughterees. those who issued all that debt will get relief in large proportion thru default/monetary debasement. the Fed will own about a trill of US home mortgages, purchased for free with non-governmental fiat currency debt.
Look at beans, wheat & corn. They've crashed back to '06 lows threatening to break lower. THe lesson? The fed can affect price in teh short term but they cannot control price in the long term.
http://futures.tradingcharts.com/chart/CN/M?anticache=1413337394
These are amazing charts. A double bubble bust that hopefully our children will never witness again. To put it in perspective, corn sat at $2.50 since the '60s. Since the 2000s, corn went on a eild ride to nearly $9, tripling and then crashing back to near 1960s levels. WHY? Because rational people went out and bulldozed 4000 acres/hour of rainforest to take advantage of PRICE...
Simple as that. Artificailly pull up price and expect SUPPLYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...
www.job-reports.com
Even a leech knows when to stop sucking his host's blood...to keep him alive for the next meal...but the "enough" gene is missing from all bankers' DNA
yeah, i read this article this am about new "deficiency judgements" for people who forclosed... illustrates your point perfectly.. http://finance.yahoo.com/news/americans-face-post-foreclosure-hell-wages...
I work in title insurance and we come across these all the time. My only advice is to either prepare and record a deed in lieu of foreclosure instead of fighting the bank or just keep in mind judgments expire after 7 years unless they file a proceeding against you to foreclose other property for payment so if you can not work for 7 years after the judgment is filed then it will just expire and you'll be fine. Sounds terrible but there''s enough welfare out there you can make it.
BTW....
"For seven years you think you're good to go, that you've put this behind you," said Huthsing, who cleared her savings out of the bank and stowed the money in a safe to protect it from getting seized. "Then wham, you get slapped to the floor again."
I GOT NO SYMPATHY! These morons signed the fucking mortgage! You left the place because you broke up with your boyfriend? What? Did you think that exempted you from the debt?! A lot of these idiots deserve what they get... you sign the mortgage what did you think was going to happen? When you were served what did you do? Ignore it? Exactly... dont give me this shit about wah wah wah wooeee is me... you made a stupid deal with the bank and that's your own damn fault.
I was in mortgage....your right most made bad deals but in there defense...it wasn't that ethical and they took upto6% loans that shouldn't qualify when it was bulked up and sold...assumed prices would keep climbing and AIG and others insured the paper....it was a fail all around!
I especially like the part about Danell Huthsing. 'They' think slavery ended back in 1865!
Just as indians lack the gene to process alcohol, there is the other tribe which seems to lack the "enough" gene.
Off topic: anyone know why the vix dropped so radically on the close, or why vxx went down another 3% in afterhours? looks like fat finger or perhaps liquidation???
You've been here over 4 years and you're seriously asking this question? The PPT is losing it's fucking mind... notice how fucking crazy everything's been going since that 666 order on Thursday? You think the VIX and Gold are getting slammed after hours for a reason? There's no reason to any of this buddy! Manipulation of everything FTW!
yeah, i see your point...
More importantly, Timothy Sykes is on Below Deck this evening.
I steal dont get it? Chinese are hording every kind of metal?
/sarc
1 line for you:
King Abdullah of the Kingdom of Saudi Arabia, the real chairman of the Federal Reserve
Did the Rothschilds retire?
Saudis do not give a flying excrement for rothchilds, rockefellers, buffett, koch bros, jpmorgan, goldmans sacks all put together
0.01% yield on savings is one Big Factor that has destroyed this economy and many others in the process. Many other CBs forced savers out into risky speculative assets. This destructive policy is coming home to roose as you say.
Very Harsh Blowback ahead I'm afraid as stawk markets and housing prices correct and revert to the norm with a substantial drop across the globe.
Taper=Blowback. On deck, J. Yellen with her favorite bat, The QE4.
There is 1 and only 1 semi stable path. The CNY must gain greatly with respect to G3 currencies and the only way to do that in this circular currency war world is through gold going parabolic.
You can help end the games forever by selling all bubble stocks, raising physical cash and buying gold.
China has become Walmart, driving prices down for everyone but they have the advantage of cheap labor. Their over capacity will drive the rest of the producers into bankruptcy and China will win again. They are smart if not creative. They know what is coming as they are a culture which is several thousand years old and knows what real money is and real power is in productive activities such as manufacturing. The USA was screwed by the banksters and corporate scum.
The current market rout, likely to be arrested any day by more promises of central bank action, only proves what we already knew. We're totally fucked with debt and free money is here to stay.
UPDATE...and, right on cue: http://www.marketwatch.com/story/feds-williams-says-qe-could-be-needed-if-economy-slides-2014-10-14
Be as self sufficient as possible.
learn how to cook real food from basic ingredients, something your mum knew how to do...hopefully
keep your debts down , preferably nothing.
keep your skills current or acquire useful new skills.
Don't buy crap, always think do I really need this or simply really want this.
Look after your health, don't eat too much and exercise three times a week, even if its just a long walk.
smile, be happy, it costs nothing.
Do all of the above and you will be well placed for whatever the world throws at you.
I work in the met coal sector in Oz and its carnage and thats before the Chinese slapped on a 3% tarriff on coking coal (6% on energy coal)
Like to know more 'thestarl', more detail please.
The tarriffs were annonced last Thursday taking effect Oct 15 and as you know seabourne export coking and thermal coal contracts are priced in USD.Currently there is in excess of 35 million tonnes of seabourne coking coal floating around or stockpiled at various terminals.The current spot price for premium met coal is 110-120USD/t and based on current exchange rates 88 to the USD marginal miners are not even covering production costs.
Unlike iron ore China only imports something like 10% of its coal needs and only to the coastal fringes.BHPB only on Monday officially opened its new super open cut pit Caval Ridge producing 6 million tonnes of met coal after axing 700 jobs recently in its BMA alliance in the Bowen Basin some of these jobs will go out to contractors at obviously much lower hourly rates.
BHPB are aggressively ramping up production at the expense of smaller miners flooding the market and driving down conditions and prices.Myself Ak work in the NSW south western coalfields and so far this year over 200 jobs have been lost in the company I work for as well as job losses to service providers etc.
Personally I'm ok no debt but the young guys are so fucking leveraged to the eyeballs and as we all know the Australian property market is in bubble territory so then you have the flow on effects downstream and you know this ends badly.
have a hard look at the FRED's chart of Spanish household debt (measured versus GDP) and you'll get what is really happening in the eurozone
agree in part with the author about the labour market reforms, but disagree on how much willingness there is in Italy about going towards... balanced budgets. there is much more, if you stop listening to the loud voices only
What to do with excess steel capacity, what to do, what to...? - Aircraft carriers, tanks, bunkers!
So,does that mean that drugs and prostitution can't save Italy?