This page has been archived and commenting is disabled.

"Massive Mis-Governance" - Q4 Obliterates The Case For QE And ZIRP

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

The most important number in today’s Q4 GDP update was 2.3%. That’s the year/year change in real final sales from Q4 2013. As an analytical matter it means that the Great Slog continues with no sign of acceleration whatsoever.

Indeed, the statistical truth of the matter is that this year’s result amounted to a slight deceleration—–since the Y/Y gain in real final sales for Q4 2013 was 2.6%.  But beyond the decimal point variation the larger point is this: Take out the somewhat jerky quarterly impacts of inventory stocking and destocking, and view things on a year/year basis to eliminate seasonal maladjustments and data collection and timing quirks, such as the double digit gain in defense spending during Q3 and the negative rate for Q4, and what you get is a straight line slog since the recession ended in 2009.

Thus, the year/year gain in real final sales for Q4 2012 was 2.1%; and was 1.5% and 2.0% for the years ended in Q4 2011 and 2010, respectively. Its a 2% world. Period.

The questions thus recurs as to what in the world the Fed’s massive money printing spree had to do with this tepid performance.  The answer is nothing at all, and that “tepid” and “slog” are exactly the right words to characterize these numbers. After all, the plunge in GDP during 2008 and the first half of 2009 was the deepest since WW II. By all prior norms, therefore, the bounce back should have been exceptionally strong.

For instance, real final sales dropped by 3% during the Great Recession—–far more than the 1.1% decline during the deepest prior post-war downturn of 1981-1982.  However, during the next five years of rebound, real final sales grew by 26% or nearly 4.7% per year.  That’s more than triple the 8% cumulative rebound from a far deeper hole in June 2009.

So the case for the Fed’s massive money printing campaign has now been flat-out obliterated. As I documented in the Great Deformation, the short but deep recession of 2008-2009 represented a sharp liquidation of excess inventories and labor that had built up in the main street economy during the Greenspan-Bernanke housing and subprime credit bubble. But that one-time liquidation was over by June 2009; the economy was not sinking into a black hole.

Moreover, by the time the US economy began to rebound in mid 2009, the real cause was the natural regenerative power of the capitalist market—not the massive money printing campaign that Bernanke had launched at the time of the Lehman failure in September 2008.  All of the massive liquidity—-which took the Fed’s balance sheet from $900 billion to $2.5 trillion in less than a year—–worked it magic in the canyons of Wall Street, not in the household and business sectors of the main street economy.

The fact is, the only channel through which the Fed can impact the main street economy is through credit expansion. Yet business and household credit outstanding was still shrinking long after the recession ended. The 2% slog that began thereafter had nothing to do with the machinations of the Fed; its represented the return of a steady, modest increment of labor hours and productivity growth to the market economy.

But here’s the thing. The 5X gain in the Fed’s balance sheet since 2009 has not been harmless——even though it has not stimulated the main street economy.  What is has done, obviously, is reflate a massive financial bubble. The latter will splatter eventually, sending the main street economy into a new tailspin of short-term labor and inventory liquidation and another financial crisis for no reason whatsoever.

Indeed, the monetary politburo is stuck in a dangerous time warp. Not recognizing that the credit channel of monetary transmission is broken and done, they keep money market rates pinned to the zero bound because they claim to detect no acceleration of consumer price inflation on the immediate horizon.

So what!  Do not these clueless Keynesian apparatchiks recognize that the  money market rate and the yield curve are the most important prices in all of capitalism, and that their policy of massive and continuous financial repression generates blatantly false prices in the financial markets and therefore rampant speculation and asset price inflation?

Needless to say, another quarter of no “escape velocity” on main street and a further round of Kool Aid drinker speculation on Wall Street takes us just that much closer to the brink. Yet the Fed remains oblivious and continues to manufacture excuses and equivocations as to why ZIRP should extend into its 80th month and beyond.

This is mis-governance on a colossal scale. So when the next thundering crash occurs—-it is devoutly to be hoped that “audit the Fed” turns out to be the least of the threats descending on the Eccles Building.

*  *  *

Wall Street vs Main Street

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 02/28/2015 - 20:41 | 5841043 wendigo
wendigo's picture

I was a heroin and cocaine junkie once, concurrently. I wanted nothing more than to continue using, because every time I tried to stop I would feel the sickest a man can feel. 

Eventually, I had to stop for other reasons. The withdrawl won't kill you. You just wish you would. 

What's going on with the financial markets is similar. 

Sat, 02/28/2015 - 21:54 | 5841245 negative rates
negative rates's picture

I used to be a drug dealer, nothin hard just weed, my home grown stuff was the best around, just limited sometimes. well this one guy would come around every 6 months for a twenty bag, I think he was a coke head. Well he came around this one time and all i had was my high test, he says no problem just give it to me, so i did. Six months later he comes back but all i have this time is my regular weed, He's says GOOD, that last stuff fuck me up. 

Sat, 02/28/2015 - 23:32 | 5841491 one_hundred
one_hundred's picture

my co-worker's mom makes $87 an hour on the laptop . She has been without work for 8 months but last month her pay check was $15653 just working on the laptop for a few hours. try this website... www.globe-report.com

Sat, 02/28/2015 - 20:48 | 5841060 world_debt_slave
world_debt_slave's picture

Hayek and the Austrians were demonized in their day, how much more now?

Sat, 02/28/2015 - 20:54 | 5841077 lesterbegood
lesterbegood's picture

" So when the next thundering crash occurs—-it is devoutly to be hoped that “audit the Fed” turns out to be the least of the threats descending on the Eccles Building."

http://www.zerohedge.com/news/2015-02-28/more-giant-craters-appear-siber...

Long sinkholes.

Sat, 02/28/2015 - 21:01 | 5841094 disabledvet
disabledvet's picture

"Line of Death" here we come....

Sat, 02/28/2015 - 21:12 | 5841128 Amish Hacker
Amish Hacker's picture

That last sentence, about threats to the Eccles Building, means that Stockman will be joining the rest of us at camp, probably on the first train.

Sat, 02/28/2015 - 21:17 | 5841146 A Lunatic
A Lunatic's picture

Maybe we can upload our brains to the Net and get jobs as trading algos......

Sat, 02/28/2015 - 21:23 | 5841160 NoDebt
NoDebt's picture

Ever so slowly I watch as Stockman comes around to the realization that a giant (engineered, on purpose) regression to the mean is the goal:  Small number of rich, large number of poor and just enough middle class to service the rich.  As it has been in most societies throughout most of human history.  

If you're an elite, it cures so many ills in one giant stroke:  overpopulation, resource depletion, global warming (if you're into that sort of thing), and most importantly puts control squarely back in the hands of the elites who control the governance process.  

It's the swiss army knife of solutions for the power-crazed.  The growth of a vast middle class in the 20th century was the anomaly, not the norm.  The elites almost lost control.  A mistake they will never make again.

 

Sat, 02/28/2015 - 21:29 | 5841175 will ling
will ling's picture

yawn.

Sat, 02/28/2015 - 21:55 | 5841248 Pickle Jar Bob
Pickle Jar Bob's picture

The Fed will stop this policy when a Republican takes office so they can hang the implosion around his neck.

Sat, 02/28/2015 - 23:03 | 5841421 Ballin D
Ballin D's picture

Would make more sense to pull it at the end of Obama's term.  Obama will blame the next guy and the next guy will blame Obama. Fed doesnt get a re org.

Sat, 02/28/2015 - 22:01 | 5841267 RobD
RobD's picture

"deepest prior post-war downturn of 1981-1982"

I graduated high school in 1981. I had no clue we were in the shit at that time. Joined the Navy right after graduation and was "Haze Gray and Underway" oblivious to what was going on. Now I know whats up and damn it sucks.

Sun, 03/01/2015 - 00:18 | 5841619 Make_Mine_A_Double
Make_Mine_A_Double's picture

The Fed is check mated. And the Frankenstein on ZIRP and all it's distort ions have taken on their own organic dynamic.

You can only juice it so much longer as we're at peak equities and there's nothing left to canabalize short of overt Fed buying. Raise interest rates in any meaningful way and it implodes.

5 minutes to midnight - it will be external shock that triggers it.

Sun, 03/01/2015 - 03:13 | 5841797 JoWazzoo
JoWazzoo's picture

There will be no Federal Funds increase.  We will see more QE after the market implodes or GDP drops.  And that will also begat the Plunge Protection Group buying as they have done before.  They may already be at work keeping Volatilitity down in Feb.

First Quarter GDP is likely to tank ( 1 % at best - Atlanta Fed forecasting 1.7 % but no one tells us that - I just did) and earnings are gonna be the shits, so maybe April the biggee hits.

Whether the start of something big or maybe just a minor correction (nah - they don't happen anymore) there was a bit of down draft at the close on Friday. Massive sale of SPY at the close on the low of the day.  Volume sucked all week with new highs falling like dominoes - weak hands.

Sun, 03/01/2015 - 08:51 | 5842085 grekko
grekko's picture

For some reason, I don't think that audit the fed is going to be the worst. More like pitchforks, rope and torches.

Sun, 03/01/2015 - 11:46 | 5842480 To Infinity And...
To Infinity And Beyond's picture

From the charts above it looks like total mortgage debt in 08 was about 9 trillion. The government gave Wall Street much more than that because banks convinced them they were TBTF.

If the government had said at the time all mortgages had to be forgiven to get this money it would have benefitted both main street and wall street. Banks would have relieved of their toxic mortgage paper. Mortgage backed derivitives would not have defaulted because the loans would not have technically gone bad (they would have been all marked paid off). 

The taxpayer was on the hook for the government debt anyways so it would not have been a mortgage bailout per sey. 

The economy would have exploded with new demand.

At that time tighter lending regulations should have been put in place to prevent a complete reinflation of the mortgage bubble.

Where am I wrong here?

Sun, 03/01/2015 - 12:03 | 5842543 Watchful_iii
Watchful_iii's picture

Moral Hazzard for those who haven't paid their mortgages, you'd piss off a bunch of people who had paid on their mortgages and then all of those who did not have a house would be priced out of the market from all of that new "demand".  In short your plan would lead to riots by the people who's riots turn to R3volutions, not media circuses

Sun, 03/01/2015 - 13:39 | 5842813 Dre4dwolf
Dre4dwolf's picture

You are wrong.

Sure you would of had a few haters that didn't get in.

But now you have a bunch of haters that didn't get in on the stock market bubble.... same thing just a different bubble.

De-leveraging all the households and getting rid of trillions in mortgage debt would of sent domestic demand for home repairs/renovations/house-hold appliance SKY ROCKETING the economy would of instantly recovered front he "great recession" and we would not be stuck in a food stamp depression like we are today.

 

In a proper scenario a bank that makes a bad loan ... FAILS and pays the price for ITS MISTAKES the borrower is not at fault for the banks poor judgement.

To bailout the person responsible for the mistake and then to increase the tax burden of the borrower . . . is quite literally the stupidest thing you could do.

Moral hazard has already formed. .  . WHY SHOULD ANYONE PAY THEIR MORTGAGE WHEN THEIR TAX DOLLARS BAILOUT THEIR LENDER?

There is your moral hazard.

One way or another the banks will take a LARGE hair-cut on the outstanding "loans" all the bailouts did was delay it and pump the banks with counterfeit reserves to weather the storm.

They are just delaying the inevitable . . . whatever bailouts they got will slowly get eaten up in legal fees from pissed off borrowers suing banks for predatory lending.

Best thing banks can do is sweep everything under the rug and cancel out all the loans and start from scratch...

 

Its not like anyone who couldn't afford a house in 2007~2009 ... can afford one now, so your argument is a moot point.

 

Every borrower out there has a moral obligation/duty to sue their lender the way I see it.... lawsuits cost the borrower practically nothing. . . and it costs the bank around 50,000$ for every 3~6 months the case is active. . .  factor in the average judge delays the case for years because of the back-log of mortgage cases . . . you are talking the average lawsuit against a bank by a small nobody can cost the bank upwards of 150,000 to 300,000$ JUST IN LEGAL FEES for what a borrower spent about 5000$ to start the case with a neighborhood lawyer.

At that point its in the banks interest to just surrender.... you are in checkmate.

 

The way I see it... the real moral hazard is letting banks get away with the crime of the century . . . not letting a few borrowers off the hook who would turn around and return the favor and spend money into the economy and boost domestic demand . . . creating jobs.

People who believe the borrowers obligation to pay trumps the lenders obligation to obey the law and conduct his business in a sound manner are brainwashed.

Thats like arresting and hanging Robin Hood for feeding the homeless and rewarding the tax collector with a mansion while all the peasants are starving to death on their own farms... at that point if that is what the "law" calls for . . . then the "law" is Wrong and should not be obeyed.

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