Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  Brexit proves that both assumptions are wrong. Now every nook and cranny of the world’s bloated and radically mispriced financial casinos will face the same shock to confidence.

  Central bankers everywhere will be on the run. And just in the nick of time.

  CHAPTER 16

  The War on Savers and the 200 Rulers of Global Finance

  THERE HAS BEEN AN ECONOMIC COUP D’ÉTAT IN AMERICA AND MOST OF the world. We are now ruled by about 200 unelected central bankers, monetary apparatchiks and their minions and megaphones on Wall Street and other financial centers.

  Unlike Senator Joseph McCarthy, however, we actually do have a list of their names. They need to be exposed, denounced, ridiculed, rebuked and removed.

  The first 30 include Janet Yellen, William Dudley, the other governors of the Fed and its senior staff. The next 10 include Jan Hatzius, chief economist of Goldman Sachs, and his counterparts at the other major Wall Street banking houses.

  Then there is the demented Mario Draghi and the 25-member governing council of the European Central Bank and still-more senior staff. Ditto for the madman Kuroda-san and his minions at the Bank of Japan, as well as Goldman’s plenipotentiary and governor of the Bank of England, Mark Carney; and also the Bank of Canada, the Reserve Bank of Australia and, not least, the People’s Printing Press of China.

  Also, throw in Christine Lagarde and the principals of the IMF and some scribblers at think tanks like Brookings and its latest monetary “scholar,” Ben Bernanke. The names are all on Google!

  That gets us to Lael Brainard. She’s a Fed governor, one of the 200 and very typical. That is, she’s never held an honest capitalist job in her life. She’s been a policy apparatchik at the Treasury, Brookings and the Fed ever since moving out of her college dorm room.

  Now Brainard is doing her bit to prosecute the war on savers. She wants to keep them lashed to the zero bound—that is, in penury and humiliation—because of the madness happening far away in the Red Ponzi of China. Its potential negative repercussions, apparently, don’t sit so well with her—so she wants the Fed to continue sitting on interest rates at the zero bound, perhaps indefinitely:

  Brainard expressed concern that stresses in emerging markets including China and slow growth in developed economies could spill over to the U.S.

  “This translates into weaker exports, business investment, and manufacturing in the United States, slower progress on hitting the inflation target, and financial tightening through the exchange rate and rising risk spreads on financial assets.”

  THE CENTRAL BANKERS’ CHEAP-DEBT MODEL—ONE CAPPUCCINO A DAY FOR A LIFETIME OF SAVINGS

  In the name of a crude Keynesian economic model that is an insult to even the slow-witted, Brainard and her ilk are conducting a rogue regime of financial repression, manipulation and unspeakable injustice that will destroy both political democracy and capitalist prosperity as we have known it. They are driving the economic lot of the planet into a dark region of deflation, maldistribution and financial entropy.

  The evil of it is vivified by a hypothetical old man standing at any one of Starbucks’ 24,000 barista counters on any given morning. He can afford one cappuccino. He pays for it with the entire daily return from his bank account, where he prudently stores the savings of his lifetime.

  But here’s the thing. We refer not to just an ordinary working lifetime, but to one of extreme thrift and frugality. The result of an average wage and a far-above-average lifetime savings rate (<20%) would be certificates of deposit now totaling $250,000.

  Yes, the interest earned at 30 basis points on a quarter-million-dollar nest egg buys a daily double shot of espresso in a cup of foamed milk!

  What kind of crank economics contends that brutally punishing two of the great, historically proven economic virtues—thrift and prudence—is the key to economic growth and true wealth creation?

  Nor is our one-cappuccino-per-day retiree an aberrant example. The household sector currently holds just under $11 trillion of bank deposits and money market funds. Yet the Fed’s interest rate–repression policy easily lowers the money market interest rate by 275 basis points—say, from 3.25% to 0.5% or under.

  Indeed, 3.25% is a modest estimate because with core inflation running at 2% it implies a normalized real yield of barely 1%. It also implies that Fed policies currently result in a giant fiscal transfer of upward of $300 billion annually from household depositors and savers to the financial system and ultimately to Wall Street speculators.

  Apparently, this is Main Street’s condign punishment for not spending that $11 trillion on trinkets at the mall and junkets to Disney World, and thereby validating that our monetary politburo calls the tune and can make the economy go boom by banging the interest rate lever until it hits the zero bound or lower.

  Yet in this age of relentless consumption and 140-character tweets, what kind of insult to common sense argues that human nature is prone to save too much, defer gratification too long, shop too sparingly and consume too little?

  This purported lack of profligacy, in fact, is the fundamental predicate of today’s Keynesian central bankers. Forget all of their mathematical economics, dynamic-stochastic-general-equilibrium (DSGE) model regressions and rhetorical mumbo-jumbo about the zero bound, r-star, labor slack, inflation targets and the rest.

  Our 200 unelected rulers are enthralled to a dogma of debt that is so primitive that it’s just plain dumb. It boils down to the proposition that more debt always and everywhere is the magic elixir of economic growth and prosperity.

  Nor does it matter a wit that savings rates are now in the sub-basement of historical trends, not too high, and that leverage ratios are at all-time highs, not too low.

  Accordingly, by purchasing existing debt with digital credit conjured from the send key on their computers, our 200 central bank rulers make room for more and more of it. And they do so without the inconvenience of deferred consumption or an upward climb of interest rates owing to an imbalance of borrowings versus savings.

  Likewise, by pegging the money market rate at zero or subzero, they enable even more debt creation via daisy chains of rehypothecation. That’s the hocking by speculators of any and all tradable financial assets at virtually zero cost of carry in order to buy more of the same and then to hock more of them, still.

  A WORLD UP TO ITS EYEBALLS IN DEBT

  Contrary to this central banker dogma, therefore, the world has long since been up to its eyeballs in debt.

  After the mid-1990s, the 200 rulers ignited a veritable tsunami of credit expansion. As I indicated earlier, worldwide public and private debt combined is up from $40 trillion to $225 trillion, or 5.5X during that two-decade span; it has grown four times more than global GDP.

  So whatever has caused the growth curve of the global economy to bend toward the flat line in recent years, it surely is not the want of cheap debt. Likewise, the recurring financial crises of this century didn’t betray an outbreak of unprecedented human greed or even deregulation; they were rooted in heretofore-unimagined excesses of leveraged speculation.

  That’s where massive financial bubbles come from. For example, that’s how margined credit-default-swap wraps on the supersenior tranches of portfolios of CDOs (collateralized debt obligations) squared came into being before the last crisis, and how they eventually splattered in a manner that rattled the very financial foundations of the world.

  That’s also how it happened that upward of 10% of disposable personal income in 2007 consisted of mortgage equity withdrawal—that is, the cash obtained by Main Street Americans by hocking their homes.

  It’s also how the U.S. shale patch flushed $200 billion of junk debt down drill boreholes that required $75 per barrel of oil to break even on the return trip.

  Likewise, you don’t need any fancy econometrics to read the next chart, either. Since 1994, U.S. debt outstanding is up by $45 trillion compared to an $11 trillion gain in GDP. That’s nearly $4.25 of debt for each dollar of incrementa
l GDP.

  If debt were the elixir, why has real final sales growth averaged just 1.2% per annum since Q4 2007? That’s barely one-third of the 3.1% peak-to-peak rates of growth historically.

  If the $12 trillion of U.S. debt growth since the eve of the Great Recession was not enough to trigger “escape velocity,” just exactly how much more would have done the job?

  Our 200 financial rulers have no answer to these questions for an absolutely obvious reason. To wit, they are monetary carpenters armed with only a hammer.

  Their continued rule depends upon pounding more and more debt into the economy because that’s all a central bank can do; it can only monetize existing financial claims and falsify the price of financial assets by driving interest rates to the zero bound or now, outrageously, through it.

  But debt is done. We are long past the peak of it. After 93 months of ZIRP, Ms. Brainard’s recent call for “watchful waiting” at 38 bps is downright sadistic.

  Where do she, Janet Yellen and the rest of their posse get the right to confiscate the wealth of savers in there tens of millions? From the Humphrey-Hawkins Act and its dual mandate?

  No, they don’t. As we showed in Chapter 4, it is a content-free enabling act etched on rubber bands; it memorializes Congress’ fond hope that the people enjoy an environment of price stability, full employment and kindness to pets.

  This elastic language hasn’t changed since 1978, meaning that it mandates nothing specific on interest rates or any other economic targets. In fact, it enabled both Paul Volcker’s 21% prime rate and the Bernanke/Yellen campaign of 93 months of free money to the Wall Street casino—with nary a legal quibble either way.

  So what is at loose in the land is not public servants carrying out the law; it’s a posse of Keynesian ideologues carrying out a vendetta against savers. And they are doing so on the preposterous paint-by-the-numbers theory that people are saving too much, borrowing too little and therefore not doing their central bank–ordained job of shopping until they drop, thereby putting points on the scoreboard of GDP and jobs.

  That’s complete rubbish, of course. In the first place, jobs are a supply-side thing. They are a function of the price and supply of labor and the real level of business investment, productivity and output—not the amount of nominal expenditure or GDP.

  And most certainly they are not mechanically derived from the level of GDP clustered inside the United States’ economically open borders. As we explained in Chapter 5, in the context of an economy inflated with debt and high costs and that is crisscrossed by monumental flows of global trade, capital and finance, more domestic borrowing, on the margin, leads to more jobs in China, not Youngtown, Ohio.

  Likewise, “savings” are not an economic evil. To the contrary, on a healthy free market they finance the investment component of GDP today and tomorrow’s capacity for growth and productivity, not a hoarder’s knapsack of bullion.

  Besides, the claim that a nation experiencing 10,000 baby boom retirements per day has too little savings is not only ludicrous; it’s empirically wrong.

  Household savings at the recession bottom in Q2 2009 amounted to $780 billion at an annualized rate, according to the GDP accounts. In Q2 2016, it was $763 billion, or 2% lower.

  During that same 28-quarter “recovery” period, by contrast, personal consumption expenditures rose from $9.8 trillion to $12.7 trillion, meaning they were 30% higher.

  So “savers” were actually saving less during the last seven years. They didn’t get in the way of “spenders” spending nearly $3 trillion more.

  PEAK DEBT AND THE SAVINGS DROUGHT

  The truth is, central bank financial repression is at a dead end. Since balance sheets are saturated at Peak Debt and savings rates have been driven to all-time lows, the only thing that ZIRP and NIRP can accomplish is to brutalize savers and reward Wall Street speculators.

  Indeed, banging the interest rate lever hard on the zero bound for so long has now taken our 200 financial rulers into truly Orwellian precincts. Governor Brainard’s quote reproduced above, which echoes the fatuous propaganda of B-Dud (William Dudley), Goldman’s viceroy at the New York Fed, claims that widening “credit spreads” are a reason to keep the policy rate pegged near the zero bound.

  That is, widening credit spreads allegedly mean the market is doing the Fed’s job voluntarily and preemptively!

  No, it isn’t. Credit spreads have been wantonly, dangerously and artificially compressed by massive central bank intrusion in the financial markets. Yet every time that markets begin to twitch with the ethers of normalization, the likes of B-Dud and Brainard take that as a sign to keep their boot on the savers’ neck.

  But by now the lunatic extent of their misfeasance should be evident to all. As we have indicated, from a cold start in 2015 the assembled central banks of the world have driven nearly $13 trillion of sovereign debt into the netherworld of negative yields, and with each passing day it gets more absurd.

  Now, even well-rated corporate debt like that of Nestle is passing through the zero bound. Yet these dangerous fools have the nerve to claim that this mutant collapse of interest rates is caused by the state of the global economy, not their own massive financial repression, and that central banks that have not yet joined the Looney Tunes brigade of the European Central Bank, Sweden, Denmark, Switzerland and Japan in the outright subzero realm should consider doing so.

  As we have demonstrated, the truth is the opposite. The amount of debt pouring into the negative-yield arena is not owing to weak growth; it’s the handiwork of speculators buying bonds on NIRP-enabled repo. Their cost of carry is nothing, and the prices of NIRP bonds keep on rising.

  So yields are plunging into the financial netherworld because speculators are front-running the financial death wish of the central banks.

  Until they stop. At that point, look out below. The mother of all bubbles—that of the $100 billion global bond market—will blow sky-high.

  At length, savers will get their relief and our 200 financial rulers will perhaps be lucky to merely end up in the stockades at a monetary version of The Hague.

  Meanwhile, the war on savers continues to transfer hundreds of billions from savers to the casino in the United States alone—even as the global economy careens toward a deflationary collapse.

  ZIRP AND NIRP ARE FUTILE AT PEAK DEBT

  Needless to say, B-Dud is a moniker implying extreme disrespect, and Bill Dudley deserves every bit of it. He is a crony-capitalist tool and one of the Fed ringleaders prosecuting the current relentless, savage war on savers. Its only purpose is to keep carry-trade speculators gorged with free funding in the money markets and to bloat the profits of Wall Street strip-mining operations, like that of his former employer, Goldman Sachs.

  The fact is, anyone who doesn’t imbibe the Keynesian Kool-Aid dispensed by the central banking cartel can see in an instant that 93 months of ZIRP has done exactly nothing for the Main Street economy. Notwithstanding the Fed’s gussied-up theories about monetary “accommodation” and closing the “output gap,” the litmus test is really simple.

  To wit, artificial suppression of free market interest rates by the central bank is designed to cause households to borrow more money than they otherwise would in order to spend more than they earn, pure and simple.

  It’s nothing more than a modernized version of the original, crude Keynesian pump-priming theory—except it dispenses with the inconvenience of getting politicians to approve spending increases and tax cuts in favor of the writ of a small posse of unelected monetary mandarins who run the Federal Open Market Committee and peg money-market interest rates at will.

  But the whole enterprise is a crock. The consumer-spending pump can’t be primed anymore because, as we demonstrated in earlier chapters, households reached a condition of Peak Debt at the time of the financial crisis.

  On the eve of the financial crisis in Q1 2008, total household debt outstanding—including mortgages, credit cards, auto loans, student loans and the r
est—was $14.313 trillion. That compare to $14.316 trillion outstanding at the end of Q1 2016.

  That’s right. After 93 months of ZIRP and an unprecedented incentive to borrow and spend, households have increased their total borrowings over the last seven years by the tiny sum of $3 billion, or by 0.02%!

  That’s Peak Debt in operation. To be sure, there has been a change in the mix—with mortgages and credit card balances down and auto- and student-loan balances significantly higher. But debt is fungible—so the truth about the aggregate of all household debt is stunning. Namely, not a single dime of the Fed’s $3.5 trillion QE bond-buying spree left the canyons of Wall Street.

  Stated differently, the entirety of private nonfinancial debt growth since the financial crisis and the inception of “extraordinary” monetary measures in the fall of 2008 has occurred in the business sector. Moreover, on a net basis even the modest growth of business debt during the last seven years has been recycled back into the speculative pools of Wall Street via stock buybacks, mergers and acquisitions, and leveraged buyouts.

  So here in summary detail is what B-Dud and the small claque of Wall Street shills surrounding the Fed are actually hiding.

  First, it is blindingly obvious that the household-credit channel of Keynesian monetary stimulus is over and done. During the 20 years after Greenspan took the helm at the Fed, household debt rose like a rocket.

  From a level of $2.7 trillion in Q3 1987 it exploded to $14.3 trillion by Q1 2008. That represented an 8.5% rate of growth for two decades running, thereby dramatically outpacing the 5.5% rate of nominal GDP growth during the same period. Accordingly, household debt was ratcheted up on a one-time basis from 55% of GDP to 95% by the eve of the crisis.

  So, yes, Greenspan’s activation of the Fed’s printing press during that period did goose the GDP by mortgaging household balance sheets. But that was a one-time parlor trick that is over and done, and will now tax household incomes for the indefinite future.