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The Warren Buffet Economy, Part 1: Why Its Days Are Numbered
Submitted by David Stockman via Contra Corner blog,
During the 27 years after Alan Greenspan became Fed chairman in August 1987, the balance sheet of the Fed exploded from $200 billion to $4.5 trillion. Call it 23X.
Let’s see what else happened over that 27 year span. Well, according to Forbes, Warren Buffet’s net worth was $2.1 billion back in 1987 and it is now $73 billion. Call that 35X.
During those same years, the value of non-financial corporate equities rose from $2.6 trillion to $36.6 trillion. That’s on the hefty side, too—- about 14X.
Corporate Equities and GDP – Click to enlarge
When we move to the underlying economy that purportedly gave rise to these fabulous gains, the X-factor is not so generous. As shown above, nominal GDP rose from $5.0 trillion to $17.7 trillion during the same 27-year period. But that was only 3.5X
Next we have wage and salary compensation, which rose from $2.5 trillion to $7.5 trillion over the period. Make that 3.0X.
Then comes the median nominal income of US households. That measurement increased from $26K to $54K over the period. Call it 2.0X.
Digging deeper, we have the sum of aggregate labor hours supplied to the nonfarm economy. That metric of real work by real people rose from 185 billion to 235 billion during those same 27 years. Call it 1.27X.
Further down the Greenspan era rabbit hole, we have the average weekly wage of full-time workers in inflation adjusted dollars. That was $330 per week in 1987 and is currently $340 (1982=100). Call that 1.03X
Finally, we have real median family income. Call it a round trip to nowhere over nearly three decades!
OK, its not entirely fair to compare Warren Buffet’s 35.0X to the median household’s 0.0X. There is some “inflation” in the Oracle’s wealth tabulation, as reflected in the GDP deflator’s rise from 60 to 108 (2009 =100) during the period. So in today’s dollars, Buffet started with $3.8 billion in 1987. Call his inflation-adjusted gain 19X then, and be done with it.
And you can make the same adjustment to the market value of total non-financial equity. In 2014 dollars, today’s aggregate value of $36.7 trillion compares to $4.5 trillion back in 1987. Call it 8.0X.
Here’s the thing. Warren Buffet ain’t no 19X genius nor are investors as a whole 8X versions of the same. The real truth is that Alan Greenspan and his successors turned a whole generation of gamblers into the greatest lottery winners in recorded history.
That happened because the Fed grotesquely distorted and financialized the US economy in the name of Keynesian management of the purported “business cycle”. The most visible instrument of that misguided campaign, of course, was the Federal funds or money market rate, which has been pinned at the zero bound for the last 78 months.
Not only did the Fed spend 27 years marching toward the zero bound, but in the process it has gotten addicted to it. During the last 300 months, it has either cut or kept flat the money market rate 80% of the time. And it has now been 108 months since it last raised interest rates by even 25 bps!
The Fed’s Addiction To The ‘Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 – Click to enlarge
The simple truth is, the Fed has caused systematic, persistent and massive falsification of prices all along the yield curve and throughout all sectors of the financial market. The single most important price in all of capitalism is the money market rate of interest. It sets the cost of carry in all asset markets, and therefore indirectly fuels the bid for all debt, equity and derivative securities in the global financial system.
Needless to say, when the cost of money is set at— and held at— zero in nominal terms, and driven deeply negative in after-inflation and after-tax terms, it becomes the mothers milk of speculation. Accordingly, it is neither a slightly lower trend rate of CPI inflation over the past 27 years nor an improvement in the art of central banking which has driven the core reference rate in the world financial markets—the 10-year US Treasury Note—–down by 80%.
Instead, the true agent of that decline is massive central bank intrusion into financial markets, wholesale manipulation of prices and fraudulent monetization of public debt and other securities. Just since 2006, the combined balance sheets of the world’s central banks have expanded from $6 trillion to $22 trillion, meaning that the scale of the implicit monetary fraud has been monumental.
Needless to say, the plunge of the world market’s core “cap rate” to what are false and unsustainably low levels caused two powerful distortions. In the DM economies like the US, it generated an enormous expansion of unproductive debt that funded fiscal expansion, household consumption and business financial engineering.
The result was a massive financialization of the economy that took the sum of business debt and market equity from about $12 trillion at the time of Greenspan’s arrival at the Eccles Building to $93 trillion today. Stated differently, the value of debt and equity securities mushroomed from about 2.4X GDP to 5.4X.
It was this massive financial bubble that begat paper wealth gains of 8X and 19X and even more.
Total Marketable Securities and GDP – Click to enlarge
Secondly, the worldwide central bank financial repression led by the Fed resulted in massive over-investment in fixed productive assets on a global basis, but especially in China and the EM. The impact was a one-time acceleration of global economic activity that temporarily inflated current income and further goosed the value of financial assets.
This central bank fueled boom will ultimately be paid for in the form of a prolonged deflationary contraction. Then, trillions of uneconomic assets will be written off, industrial sector profits will collapse and the great inflation of financial assets over the last 27 years will meet its day of reckoning.
On the morning after, of course, it will be asked why the central banks were permitted to engineer this fantastic financial and economic bubble. The short answer is that it was done so that monetary central planners could smooth and optimize the business cycle and save world capitalism from its purported tendency toward instability, underperformance and depressionary collapse.
As will be shown in Part 2, the whole case for this sweeping and unprecedented Keynesian demand management by the monetary authorities was a crock. Accordingly, the days of the Warren Buffet economy are indeed numbered.
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Please!! Get it over with. I'm more ready than most. BRING IT ON FUCKERS!!!
Does anyone want to create a pingpong league while we wait?
Do you even know what they are bringing on?
Do you have food, water, and guns & ammo stored up?
Can you survive the rioting & looting?
Are you sure you know what you are asking for?
On the morning after, of course, it will be asked why the central banks were permitted to engineer this fantastic financial and economic bubble.
Because, how can you usher in the new system unless you have burned the old one to the ground? This HAS to be coordinated by the CBs to make sure every entity crashes when the SHTF moment comes.
This central bank fueled boom will ultimately be paid for in the form of a prolonged deflationary contraction.
It will only be 'prolonged' if the FED allows it. They(banksters) print the money and command their servants in Congress to issue the debt for them to purchase(inflate). Otherwise, the ever growing debt bubble says an eventual crack-up boom followed a deflationary collapse. It's a hostile takeover of the private economy.
It took the FED 30 years to get to this point. I suspect it'll take about 10 years to unwind it when things start changing direction.
Not sure about this one, but it took 70 years for the last "great society" to cannibalize itself, that being the USSR.
"The short answer is that it was done so that monetary central planners could smooth and optimize the business cycle and save world capitalism from its purported tendency toward instability, underperformance and depressionary collapse"
IMHO to fund war all over the planet to keep the illusion of a superpower.
After this behemoth collapses, I believe we'll be less concerned with question and answer panels, and more concerned with finding food and some 12 gauge shot shells. Just sayin.
This is what happens when you let the satanic money changers rule.
Typical Stockman.
Despite the massive increase in Fed liabilities, the "fraudulent monetization of public debt and other securities" & so on & so forth, he still just assumes that the credit of the Fed itself will never fail, that there will be a "prolonged deflationary contraction", where all & sundry scramble for the fraudulent obligations of the Fed.
What does he think the $ is? Gold?
Yeah, there's a gap between what *should* happen and what *will* happen.
Stockman argues for what *should* happen and he's right, of course.
But what *will* happen is another matter. Anybody who thinks that the Fed will fold its hand and watch a deflationary depression ravage the political and financial careers of its revolving-door frien- pool is mistaken, I believe.
You haven't quite got my point. What should happen is the opposite to what Stockman argues. What will happen is his, & my, best guess.
"What does he think the $ is? Gold?" it is the global reserve currency, hence it's King Dollar. destined to reign. until the ROW decides it's too much
so no, it is, in many aspects, "better" then gold. more... flexible then gold. and, as you noted, it's about... credit. where does this credit really come from?
"The real truth is that Alan Greenspan and his successors turned a whole generation of gamblers into the greatest lottery winners in recorded history."
and don't we love, love, love those gamblers, eh? particularly those who talk about taking mega-bets with 100-times leverage
but note that Warren Buffet bought railroads. and this, imho, tells everything about Warren Buffet
Why deflation? I would have thought the reverse.
Stockman believes the credit of the US government & its bank is untouchable, exceptional, unassailable.......
You're missing the point friend.
The 'money' generated by the Fed and the banksters over the past 40 or so years is imaginary, it doesn't exist in the real world.
It's all fake, phony, a FRAUD. There is no 'money'. Buffet ain't got shit but a bankster's promise to pay and debt.
And that reality will be made abundantly clear to everybody soon enough.
The only ones who benefit from the conflation of money and credit are the issuers of credit with no money.
Thanks for the answers. I'm not sure why I got dinged on the comment rating; it was an honest question.
I'll reread the article with keeping in mind what you said.
Not quite right. The "money" becomes real when we the plebs are forced to exchange them for goods and services. Also, it's not 40 years but 101 years, Fed was created in 1913.
I suspect the 40 year reference was to the breakup of Bretton Woods under Nixon ... and that it was rounded.
I would argue that qe is masking the contraction that is under way.
No banker left behind.
Be in no doubt: the can will be kicked.
Satan works in not so mysterious ways.
Right now as we read this..the EU is talking to Greece about giving them another 15 billion....out of nowhere..just print 15 billion......its just paper...
15 bln is just 7 working days when qe3 was there. In the new qe 4 it will be 2 days.
Let's see Greece 2 days. Ukraine 3 days all paid with funny money. Who s is up next?
When Buffett croaks I think we're all going to be reading lots of shit about him. Don't know what it will be, but I doubt it will read well. That's what we've got to look forward to.
What we haven't got to look forward to is the 100% guaranteed tear-fest on CNBS. Buckets and buckets I tell ya, and that's probably from just the men. For some reason, American men seem to cry at the slightest reason. Generals Custer, Sherman, Patton as well as John Wayne, James Coburn, Charles Bronson and the Malboro Man must be turning in their graves how the feminazis have turned the American man.
Castration Anxiety is everywhere.
You see that Bruce Jenner story?
Good for him. It'll be cold comfort to him, though, and he sitting in the dock in the Court of the Almighty.
Justice above is swift, final and eternal---and settling with the Sovereign for a sum Warren can pay out of petty cash won't be an option.
By driving rates down to zero, whether by accident or avarice, they effectively socialized our fiat currency allowing the government and the connected to borrow as much as they want for zero ... why steal when you barrow as much as you want no cost? Organized crime never had it so good.
Why? The whole point of central banks is to make it easier for the powerful to live at the expense of others, doing no meaningful work in return (creating nothing but taxes and debt for poor people to pay, and wars for poor people to die in), and avoid the consequences of their own vanity and greed.
The top dogs, or at least the smarter ones, have figured out it can't last---which is why those who can't count on being goners when it happens (like Buffett) are cashing out, and making arrangements to be long gone by the time the bubble bursts to whatever country will give them and their ill-gotten gains refuge. That's the reason for all these stock buybacks, just for example.
When the elites have thoroughly fouled their own nest, even if they're the last to notice the stench, they're always the first to fly away.
https://www.youtube.com/watch?v=VMqcLUqYqrs
Buffet reminds me of William Durant during the great depression who thought he was bigger than the market and stepped in to try and signle handidly save the market. He ended up filing for bankruptcy with $250 left in his bank account.
It would be nice to see a chart of federal spending in regard to the above article's information. Over the years all that Fed induced asset inflation probably generated a lot of cap gains and other taxes. Government temporarily turned, and continues to turn, a blind eye because of the tax revenue market churn generates.
And by the way, consider basic pay say an aggregate of $1 million. Would the government rather see it concentrated in only a few people who pay a much higher tax rate or divided among a larger group with much lower pay, many of which pay no income tax whatsoever? Wake up. The government benefits from this concentrated top end salaries.
One way to help the economy is to refuse to or reduce your sending your money out of the country when you buying foreign goods. Buy American made goods. Doing so will reduce the size of the monetary river that flows out of the USA to other countries. It will also increase the size of the monetary stream flowing into real jobs in various market sectors - particularly USA manufacturing.
So[?] Was Marx's correct about capitalism and utility, as in this cellophanized`kevlarian hybrid-democ-socialial-racy-ist' evolution. This queerish kafkaesque citcom... this palliate of endless-struggle,... [this] juxtaposed dichotomy encyclopedia of pleasantry heterodox paper'd mache cellulose`silhouette, fashioned as in, good for evil,... or vice`versa depending where your grounded on planet 'Bizarro'!
WTF, is one to do Mr. Stockton of Reganiteville?!?