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The Wreck Of The Monetary Hesperus
Submitted by David Stockman via Contra Corner blog,
For 73 months running the Fed has lashed the money markets to the gross financial anomaly of ZIRP. Never before in the history of the world has any central bank or other monetary authority decreed that overnight money shall be indefinitely free to gamblers or that liquid savers should have their hard earned wealth chronically confiscated by negative returns after inflation and taxes. And, needless to say, never have savers and borrowers in a free market struck a bargain night after night after night at 0% for six years running, either.
Yet now comes another Fed meeting and announcement that our monetary overlords will be “patient” with zero cost money for several more meetings. Indeed, there are even hints that the era of ZIRP could extend beyond mid-summer—that is, for more than 80 months.
So an urgent question screams out. Don’t these obstinate zealots realize that zero cost overnight money has only one use, and that is to fund the carry trades of Wall Street gamblers?
Accordingly, are they not even more culpable than Longfellow’s skipper, who perished along with the fair daughter he lashed to his ship’s mast because he insouciantly belittled a ferocious storm made by nature? By contrast, these benighted folks at the Fed are actually fueling their own hellish financial storm, thereby leaving in mortal danger the main street economy which they, too, have foolishly nailed to the mast of ZIRP.
The reason that ZIRP is of exclusive benefit to financial gamblers is straight forward. No businessman in his right mind would fund equipment, inventories or even receivables with borrowings under a one-day or even one-week tenor. The risk of fatal business disruption resulting from the need to precipitously liquidate working assets if funding can not be rolled-over at or near the existing interest rates is self-evident.
Likewise, no sane householder would buy a home, automobile or even toaster on overnight borrowings, either. And, yes, financial institutions experiencing the daily ebb and flow of cash excesses and deficiencies do use the money market. But managing fluctuating cash balances does not require ZIRP—-especially when most banks alternate between being suppliers and users of funds on practically an odd/even day basis. Cash balances in the financial system can be cleared at 0.2%, 2% or 5% with equal aplomb.
So ZIRP is nothing more than free COGS (cost of good sold) for Wall Street gamblers. It is they who harvest the “arb”. That is, the spread between the free funding dispensed by the Fed and any financial asset with a yield or prospect of short-term gain. And, yes, if push comes to shove, these same fast money gamblers can ordinarily liquidate their assets, repay their borrowings and start with a clean book the next morning—unlike business and household borrowers in the main street economy.
Stated differently, the Fed’s ZIRP policy is a giant subsidy to speculators. Owing to the utter foolishness of its “transparent” communications policy, embodied in such gems as the fact the term “patient” is now the well understood code word for no rate increases for the next two meetings, traders don’t even have to worry about one single dime of unexpected change in their carry cost, or the losses that can result from needing to suddenly dump less than fully liquid assets in order to repay their overnight borrowings (or liquidate options and other similar “structured finance” positions).
The truth is, in an honest free market traders can not earn windfall returns arbing the yield curve. The vigorish gets competed away. And the independent movement of asset prices and funding costs compress returns toward the time value of money and the risk differentials embedded in each trader’s specific book of assets and liabilities.
By contrast, the ZIRP market is completely dishonest and therefore deeply subsidized. And every Econ 101 student knows that when you deeply subsidize something, you get more and more of it. In essence, by clinging obstinately and mindlessly to ZIRP the Fed is just systematically juicing the gamblers, and thereby inflating ever greater mispricing of financial assets and ever more dangerous and explosive financial bubbles.
In fact, after 73 months of ZIRP how can rational adults obsess over whether the first smidgeon of a rate increase should occur in June or September and whether the economy can tolerate a rise in the funds rate from 12 bps today to 25 bps sometime down the road?
The difference is utterly irrelevant noise to the main street economy; it can’t possibly impact the economic calculus of a single household or business.
Having pinned the money market rate at the zero bound for so long and with such an unending stream of ever-changing and fatuous excuses, the occupants of the Eccles Building do not even know that they are engaging in a word splitting exercise that is no more meaningful than counting angels on the head of a pin. Indeed, if they weren’t mesmerized by their own ritual incantation they would not presume for a moment that a fractional variance of the money market rate away from ZIRP would have any impact on main street borrowing, spending, investing and growth.
So why does the Fed persist in this farcical minuet around ZIRP? For two reasons that are not at all hard to discern.
In the first instance, the Fed is caught in a time warp and fails to comprehend that the game of bicycling interest rates to heat and cool the macro-economy is over and done. The credit channel of monetary transmission has fallen victim to “peak debt”. The main street economy no longer gets a temporary pick-me-up from cheap interest rates because balance sheets have been tapped out.
The only actual increases in household debt since the financial crisis has been for student loans, which are guaranteed by Uncle Sam’s balance sheet, and auto loans which are collateralized by over-valued vehicles. Stated differently, home equity was tapped out last time; wage and salary incomes have been fully leveraged for years and households have nothing else left to hock.
So households now only spend what they earn, meaning that the Fed’s interest rate manipulations—-which had potency 40 years ago—-have no impact at all today. Keynesian monetary policy through the crude tool of money market rate pegging was always a one-time parlor trick.
Likewise, the Fed’s interest rate machinations have not induced business to acquire incremental productive assets financed with borrowed capital. Instead, virtually the entire increase in business debt outstanding—- and it is considerable, having rising from $11 trillion on the eve of the financial crisis to nearly $14 trillion today—-has gone into financial engineering. But stock buybacks, LBOs and cash M&A deals do not cause output to expand or productivity to increase whatsoever. They just bid up the price of existing financial assets, thereby further rewarding the ZIRP-enabled gamblers who inhabit the casino.
Given the utter blockage of the credit channel of monetary transmission to households and businesses, then, why on earth do our monetary central planners cling so desperately to ZIRP? The apparent answer is that it even if the credit channel of transmission is badly diluted, cheap money might still do a smidgeon of good. Besides, it hasn’t caused any consumer price inflation so, they contend, what’s the harm?
Yes, and doing a rain dance neither causes harm nor rain, either. But there is a huge difference. Zero interest rates are not even remotely harmless. They amount to a colossal economic battering ram because they transform capital markets into gambling casinos.
So doing, they cause risk and long-term capital to be mispriced, meaning an accumulating level of malinvestment and excess production capacity; and this is a worldwide condition because all central banks are engaging in the same game of financial repression.
As is now evident in the case of oil, iron ore, copper, consumer electronics and much more, massive excess capacity ultimately results in the collapse of boom time prices. Soon there is in motion a withering cycle of deflationary adjustment, profit collapse and a plunge in new capital spending.
So our monetary central planners are trapped in a dangerous feedback loop. Having fueled the boom with cheap money, they now justify the prolongation of ZIRP on the grounds that they must use the same tool to ward off the deflation they caused in the first place.
At the end of the day, there is nothing behind the curtain at the Eccles Building except for the specious doctrine of wealth effects. Fractional changes in the money market rate are of relevance only to the day traders and robo machines which occupy the casino. Today’s words clouds in the Fed’s 529 word statement, and tomorrow’s potential hairline changes in the money market interest rate, are all about speculator confidence.
Fed policy is designed to keep them dancing. It rests on the delusional hope that the drug of ZIRP or near-ZIRP can keep the stock market averages rising and a trickle down of extra spending by the wealthy flowing into the reported GDP and job numbers.
History proves beyond a shadow of doubt that bubbles fueled by bad money ultimately splatter into a world of harm. So now comes the Wreck of the Monetary Hesperus. And unlike Longfellow’s foolish captain, the Fed is not only ignoring the coming storm, but is actually fueling its intensity with malice of forethought.
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How appropriate that you use a figure from Greek mythology to make your point about QE Forever.
More important for Master Stockman, I always thought the phrase was "malice aforethought" not "malice of forethought". See http://en.wikipedia.org/wiki/Malice_aforethought
But what the hell do I know I was only an attorney a long time ago. Nitpicking I know. Its that whole attorney thing. Fuckers.
May be one day we could have a trickle up stimulus. .....oh wait
You can only piss so high.
So an urgent question screams out. Don’t these obstinate zealots realize that zero cost overnight money has only one use, and that is to fund the carry trades of Wall Street gamblers?
Mr. Stockman gets paid by the word but I do not. So I can afford to be succinct where he cannot.
The short answer is a single word – yes.
The motivation - corruption. The various forms of which include the current kleptocracy and the so called “revolving door” from government to the riches of private “consulting” and huge “speaking fees”.
Perhaps a better question to ask is this …….
Who really pays the huge speaking fees Benny B gets? Or Hillary or Bill?
And the books they write …… what better way to launder money than through a phony book deal?
Don't worry, don't worry. Look at the Astors and the Vanderbilts, all those big society people. They were the worst thieves - and now look at them. It's just a matter of time.
Meyer Lansky
All propaganda has to be popular and has to accommodate itself to the comprehension of the least intelligent of those whom it seeks to reach.
Adolf Hitler
the Fed will always plea : absence of mailice.
http://www.allocine.fr/film/fichefilm_gen_cfilm=30.html
attorneys are largely responsible for all the legislation in this country, whether as "politicians" or as the douches that re-write the laws (to further their company's agenda and bottom lines).
Attorneys deserve their reputation. They have spent their days subverting law and justice, not upholding it. May there be a God that holds them accountable.
As for Mr. Stockman's possibly rhetorical question "don't the obstinate zealots realize".....zealotry can be very profitable these days. Just like certain non-profits can provide a really good living for some.
Up is down, war is peace, and ZIRP is the new usurp...of middle class wealth, that is.
I thought it was greek too, but it turns out to be a poem by longfellow, about a boat named the hesperus that got sunk in a new england blizzard back in 1830-something.
read ZH, learn something new.
That good ship & true was a bone to be chewed...
Fellas, it's bin good t'know ya!
https://www.youtube.com/watch?v=hgI8bta-7aw
couldn't have said it better
Sure you could have. Because this quote: "the Fed is ... ignoring the coming storm" is utter bullshit. Of course the Fed knows what is coming, and it's all according to plan.
Quit thinking the Fed is clueless. It is acting with intent.
Absolutely agree, Alea. Bernanke always said there was a fiscal component to getting the economy moving, but Congress stuck full resonsibility for it on the Fed. Other than a temporary 2% reducion in FICA, haven't seen any stimulus $$$. Vinz
a title that could only come from one david stockman
When did he become a voice of reason? Did I miss the announcement that he switched sides? And why is he now a ZH "regular"?
He's full of shit, spouting the company line. Simple as that.
Remember, if you can't figure out who the sucker is...
Fellas it's been good to know ya!
Does anyone know where the love of God goes when the waves turn the minutes to hours?
"Don’t these obstinate zealots realize that zero cost overnight money has only one use, and that is to fund the carry trades of Wall Street gamblers?"
Yes. David, I know this is hard for you, but you need to understand that they understand. This is not a mystery to them. They know. What you can't believe is that somebody could know this and keep doing it. Put on your big boy pants and get this through your skull: They know and they do it anyway.
Then there was this line.
Not so much rational adults, as much as rational sophists. Then again, he's actually trying to reach out to the herd, so I'll cut him some slack.
All in all, an excellent article.
The cognitive dissonance required to accept that the FED is knowingly evil is too great for many.
It would make Steve Liesman's head explode.
His head exploded quite some time ago; in case you haven't noticed they just replaced it with a bowling ball.
Look in your heart; you know I'm right.
^ This. NoDebt you nailed it.
Go ahead and ask "why" if it will help you sleep better, or you can accept it as fact. Either way, the Fed will stay on course and you (we) will keep taking it up the ass.
That was cruel, NoDebt. I wasn't ready for that.
There is no way to be ready for it. No way to soften the blow. It has to hit you like a lightning bolt, like a 2x4 to the back of the head. Like when you were a kid, the first time you realized somebody bald-faced lied to you about something very important.
What comes after is you decide whether you have a spine or not.
No mystery to any of us here. Of course if your securitizing a house at least you're getting an asset.
cars and education? Good luck using that as your equity.
If Tesla drops the price of their Model S to 50 grand you'll see total chaos.
Chill out peeps so one anti-establishment writer is moderate. If you want someone shouting conspiracies and NWOs ineffectively you should stick to Alex Jones, and don't forget to pick up some great infowars merch! Shirts almost sold out and iodine is 20% off... bargain!!
The moderate Stockman has his place, he writes well for one. So he does not want to be pigeonholed as another paranoid conspiracy nut foretelling the endtimes at the hands of a devious few (for those who think so highly of the human species that it would take a conspiratorial effort to get us into this current quagmire/shitfight).
We talk here of US foreign policy being a game of checkers when others are playing chess. To think the solution to this monetary/economic machine of theft, is to simply quash it and start anew, is myopic checkers. Worse still, you are not playing against a few greedy elites, you are battling the human condition, and the human condition wins everytime BECAUSE IT NEVER MOVES ITS BACK ROW.To completely remove this monetary system would be like removing a middle-eastern dictator, power abhors a vacuum, the human condition will quickly reassert itself. It's all very zen, ying & yang, even economical. If the supply of benevolence rises then so does the value of malevolence. The free market of human cuntery has, after 5000 years, found its correct price. Anybody wishing to change it has a mountain to climb as high as the Keynesian wishing to achieve perfect aggregate demand.
We are our own worst enemy, 5000 or so years of 'civilisation', the more it changes the more it stays the same. To concede utterly that we as a species are unable to escape the human condition, that the next 5000 years of civilisation will remain relatively unch, is to truly be free. We are at our natural equilibrium; morally, behaviourally, intellectually whatever.
It's not sooo bad...
Well, I can be patient too, and much longer than the Fed, because I have much less to lose, and certainly no fiat. So let's wait. As the old adage goes: They also serve those who stand and wait.
The FED is fueling the storm because they serve the banks - and the banks make money as the bubble is blown then get bailed out when the bubble pops.
We lose / they win and thus the reason for the existence of the FED.
George Harrison - "Wreck of the Hesperus" from his album "Cloud Nine".
Great song about getting older: https://www.youtube.com/watch?v=9PtXeQOyZeM
Increasingly I am thinking this is completely intentional. I suspect once they realized there was no way out, they've decided to blow the system up in such a way as to take out as many parties as possible, to pave the way for their attempt at a single replacement.
I speculate that the original plan was to have demand for a global currency develop organically, much like how the USD was taking over, and then once it became clear the wheels would come off, they switched to plan B. Plan B is what we should worry about now, because whoever shows up the day after a financial collapse with a completely worked out solution definitely had a hand in the collapse itself and doesn't have our best interests at heart.
Of course it's intentional. The bankers created the Fed to have a ready, willing and able source of unlimited funding when they screwed the pooch and needed to reliquify the system. And that is what the Fed, with the aiding and abetting of the US Treasury, and the bought and paid for corrupt stooges of the US Government have been doing since 2007/2008.
I suspect anyone who had some crap piece of paper that wanted to dump it has already sold it to the Fed, and now is just sitting on the cash.
But they know that nothing has been done to stimulate demand in the economy, that there are few/no signs of any growth or activity (why would there be?), so they sure as hell aren't going to take a risk and loan it out!
I just don't get it with people like Stockman and his ilk. After benefitting from this obviously biased system optimized for a few key players for most of his life, you would think he would have figured it out by now.
Methinks he doth protest too much. Scream about what is visible, but totally ignore what he knows is going on behind the scenes.
Vinz
"I suspect anyone who had some crap piece of paper that wanted to dump it has already sold it to the Fed, and now is just sitting on the cash."
hmmm ...I'm working on that one.
> "At the end of the day, there is nothing behind the curtain at the Eccles Building except for the specious doctrine of wealth effects."
Not true, Mr. Stockton. There is the benefit of telegraphing your moves to insiders so they can front run the Eccles Building and further steal from the middle class.
See http://www.zerohedge.com/news/2015-01-29/janet-yellen-now-advises-democrats-what-feds-monetary-policy-plans-are
Yellen:...and... This one time at a Fed meeting...I shoved some QE into my...
As the established systems of enforced frauds automatically become worse, faster, and so, that becomes more blatantly obvious, presumptions based on Hanlon's Razor work less and less well, due to the overwhelming facts that indicate the Federal Reserve Board IS "actually fueling its intensity with malice of forethought."
The Fed has ALWAYS been the result of the international bankers corrupting the political processes through the use of bribery, intimidation, and assassination of those politicians who could otherwise not be bribed or intimidated. The biggest gangsters have ALWAYS been those banksters, throughout the history of America. Their degree of success from doing that has resulted in the overall social situation becoming that there is practically nothing else than ORGANIZED CRIME & CONTROLLED OPPOSITION.
Indeed, that has been the basis of the entire history of Neolithic styles of civilizations based on social pyramid systems that backed up lies with violence. The Federal Reserve Board was NEVER anything else than a King of Fraud, at the pinnacle of the overall integrated systems of legalized lies, backed by legalized violence. As those basic social facts become more blatantly obvious, guys like David Stockman are beginning to state them. (However, he is not remotely close to going through a deeper analysis of that situation, which requires much more profound paradigm shifts.)
Wreck of the Hesperus by Procul Harum, lyric by Keith Reid
We'll hoist a hand, becalmed upon a troubled sea
'Make haste to your funeral,' cries the Valkyrie
We'll hoist a hand or drown amidst this stormy sea
'Here lies a coffin,' cries the cemetery, it calls to me
And all for nothing quite in vain was hope forever tossed
No thoughts explained, no moments gained, all hope forever lost
One moment's space, one moment's final fall from grace
Burnt by fire, blind in sight, lost in ire
We'll hoist a hand, becalmed upon a troubled sea
I fear a mighty wave is threatening me
We'll hoist a hand, or drown amidst this stormy sea
'Come follow after,' cry the humble, 'You will surely see ...'
But still for nothing quite in vain was hope forever tossed
No moments gained, no thoughts explained, all hope forever lost
One moment's space, one moment's final fall from grace
Burnt by fire, blind in sight, lost in ire.
WTF??? NO one posted this? WTF!!!!! It was better back then. It SUCKS now. Wake up allyou fucking sheeple.
Ahahahahahahahahahahahaha
https://www.youtube.com/watch?v=49fSTBPrhlI
Stockman must have meant "The Raft of the Medusa"
(a picture is worth 1000 words)
https://www.artsy.net/artwork/theodore-gericault-the-raft-of-the-medusa