The Public Sector Is A Milk Cow For Private Enterprise

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

Social Security and Medicare are under attack from Wall Street, conservatives, and free market economists. The claims are that these programs are unaffordable and that the programs can be run more efficiently and at less cost if privatized.

The programs are disparaged as “entitlements.” The word has come to imply that entitled people are getting something at great cost to everyone else. Indeed, entitlements have become conflated with welfare.

In fact, Social Security and Medicare are financed by an earmarked payroll tax paid by employees. (Economists regard the part of the payroll tax that is paid by employers as part of the employee’s wage.)

According to the Social Security and Medicare trustees, Social Security as presently configured can pay full promised benefits for the next two decades and with current payroll tax and demographic trends can pay 75% of benefits thereafter. Medicare can pay full benefits for 12 more years and 90% of promised benefits thereafter.

It makes sense to look ahead–something that democracies seldom do–but there is no current crisis.

The Carter administration did look ahead and put in place a series of future increases in the payroll tax sufficient to keep the programs in the black for several decades into the future. Shortly thereafter in 1981 there was a claim that there was a short-term financing problem. The National Commission on Social Security Reform was created. Alan Greenspan was appointed chairman, and the commission is known as the Greenspan Commission.

What the commission did was to accelerate in time the payroll tax increases that were already in place. In my opinion, this was done in order to reduce projected federal budget deficits that concerned Wall Street and Republicans. The consequence of the accelerated payroll tax increases is that over the next decades the programs accrued large surpluses in the trillions of dollars that the federal government spent on other programs, substituting for the surplus payroll revenues non-marketable Treasury IOUs to Social Security and Medicare. Far from entitlements worsening the federal deficit, entitlement surpluses have reduced it.

‘Dollar’ Coming Back Into Focus

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The FOMC statement changes seem to have initiated knee-jerk reactions undoing the interpretations of the March statement. In other words, the first blush of FOMC obfuscation appears to be trending back toward “hawkishness” in clear defiance of last month’s clear “dovishness.” The basis for that seems to be the references to what the Fed is still proclaiming “transitory” factors, to the now-preclusion of any references to actual economic figures.

The line seems to be one of that the FOMC is not yet convinced the gathering “slump” is a slump. From that there are indications that take perceptions back to a 2015 end to ZIRP. That seems, again at least initially, how the eurodollar market has reacted, with determined selling out past the policy window. The back end of the curve steepened almost as far back as to what it was on that last March FOMC meeting.

With the front end still much lower, it seems that the curve is suggesting that, in contrast to March, the Fed will be raising rates just not necessarily in the next few meetings. The danger in that shift is obvious, with the March 18 FOMC meeting clearly offering a release of “dollar” pressure. Almost every major funding indication shows a pause originating around that date. It is far too early to tell at this point, but if these “markets” are back into a pre-March 18 frame then the risks of the “dollar” may turn yet again.

Why deflation is unlikely

Submitted by Alasdair Macleod – FinanceAndEconomics.org

Financial markets are becoming aware that the US economy is stalling, so  investors increasingly take the view that with demand likely to stagnate or even fall, prices for goods and services will soften. This is already threatening to be the situation in a number of other advanced nations, with negative interest rates to combat it becoming commonplace. For this reason, gold and silver priced in dollars are expected by many traders to drift lower.

Putting the prices of precious metals to one side for a moment, there are some serious issues with this analysis. Let us assume for a moment that the US economy does stall; the text-books tell us supply and demand for goods and services will rebalance at lower prices. This was what effectively happened in the wake of the Lehman Crisis, when energy, metals and precious metal prices all fell sharply and large discounts for manufactured capital goods became available. This does not mean that second time round (and a sliding US economy could create the sort of financial strains that make Lehman look like a walk in the park), the same thing will happen again. Indeed, for next time the central banks already have a plan to contain the situation based on their experience in the Lehman Crisis. It involves the rapid expansion of money, which to the Federal Reserve System (“Fed”) at least has been proven on recent experience to have little or no inflationary consequences whatever.

We therefore know something we did not know in the wake of August 2008, when the imminent collapse of the global banking system drove everyone to increase their cash balances. This time we know that last time’s guarantees of $13 trillion, or whatever sum you care to think of, will yet again be provided by the Fed, backed by hard cash on demand. Forget bail-ins; they are for dealing with one-off bank insolvencies, not a wider systemic crisis.

Of course it’s tempting to think that a new financial and economic crisis will drive us towards selling anything we can for cash. However, this has not necessarily been the experience of previous monetary inflations: after printing money fails to raise the animal spirits, the consensus often expects a fall in prices, only for the opposite to happen. This was certainly the case in Germany and Austria after the First World War, when economic burdens from the combined destruction of infrastructure and wealth, the loss of productive lives, the end of military spending and the burden of reparations were all expected to overwhelm their respective economies. The result was people briefly preferred to hold onto their savings rather than spend. How wrong they were.

U.S. and UK GDP Fall Heralds Recession – ZIRP to Continue

Submitted by Mark O’Byrne  –  GoldCore

– U.S. first quarter GDP grew 0.2%, down from 2.2% last quarter
– U.K. GDP for first quarter was 0.3%, last than half the previous quarter’s figure
– Large inventory build up in the U.S. may mask deep recession
– Zero percent interest policies (ZIRP) to continue despite suggestions to contrary
– Global economy vulnerable to recession and depression

U.S. and U.K. GDP slowed very sharply in first quarter of 2015. Latest data confirms the rapid slowdown despite stock markets booming in the UK, U.S. and globally.

This highlights the major disconnect between the real economy and a financial sector intoxified by easy money.

U.S. GDP figures fell sharply from last quarter when the economy grew at 2.2%. GDP for the first three months of this year fell to 0.2% with some analysts suggesting the real figure should be in negative territory.

The news of a slowing U.S. economy had a negative impact on sentiment in the export dependent Asian economies and indeed on vulnerable EU economies.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1 percent with South Korean, Australian, Chinese and Hong Kong shares suffering losses as did European indices.

The abysmal U.S. GDP figure was buoyed by the biggest inventory build in history. GDP grew by $6.3 billion in Q1 2015 whereas unsold inventories increased by a phenomenal $121.9 billion.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Negative Interest Rates Set Up World For Biggest Mass Default Ever (Warner)

• German Bunds Are Tanking After Big Investors Say to Get Out (Bloomberg)

• The Real Financial Crisis That Is Looming: Consumer Spending (STA)

• US Economy Grinds To A Halt In First Quarter 2015 (Bloomberg)

• Fed Stays Vague on Rate-Hike Timing, but Sees Slower Growth as Blip (Hilsenrath)

• Ignore The ‘Whiff Of Panic’ As US Economy Stalls (AEP)

• Fed, White House Fail To Mention The D-Word (MarketWatch)

• Firebrand Greek Minister Risks Fresh Schism With Europe (Telegraph)

• Greece Close To Minimum Agreement Deal With Creditors: Deputy PM (Guardian)

• Reinforced Greek Finance Team Heads To Brussels For Talks (Kathimerini)

• Transactions Over €70 On Larger Greek Islands To Be Plastic Only (Kathimerini)

• Majority of Financial Pros Now Say Greece Is Headed for Euro Exit (Bloomberg)

• Bank Of Japan Keeps Policy Steady In 8-1 Vote (CNBC)

• New Zealand Rockstar Economy All Smoke And Noise (NZ Herald)

• It’s Now Impossible For Most Poor Australian Families To Find A Home (Guardian)

• Who is to Blame for the Tragedy in Yemen? (Viktor Mikhin)

• Going Rogue: 15 Ways to Detach From the System (Tess Pennington)

• The Last 3 Bornean Rhinos Are in Race against Extinction (Scientific American)

• Heaviest Element Yet Known To Science is Discovered: Governmentium (Not PC)

The Knockout In Final Sales

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

These are strange economic times, with an undeclared (and unrequited) recovery existing apparently alongside an undeclared (and strengthening) recession. The economy is superficially partly one thing and partly the other, producing innumerable inconsistencies that should be more troubling than they are taken. Maybe that relates to the fact that almost six full years after the Great Recession was declared ended and the trillions in “stimulus” spent and conjured toward ending it, there isn’t much other than that amplified gyration to show for it.

Instability is troubling enough on its own but it is also suggestive of statistical problems outside the “normal” paradigm. This is observed primarily of the employment statistics but you could certainly add GDP to the discussion. It is difficult to ascertain much of a certain interpretation when the figure can swing wildly from -3% to +5% and almost back again in the space of just five quarters. What is truly amazing about that is not the presence of just low lows and high highs but rather that GDP itself was constructed in the most favorable economic terms (adding government as a plus?); in other words, GDP is meant to show the best growth possible.

That it can’t maintain itself on a steady pace is highly suggestive of both structural deficiency and statistical unsuitability. There is more to say about GDP itself, especially since GDP ex inventory was about -3% again, but there are worse and more important indications than even that. The Final Sales accounts strip out some of the artificial and beneficial (for GDP’s view on growth) aspects and focus solely on the private economy at the point of sale. That means inventory is extraneous in terms of the private economy in the moment; the purchaser view also does not infuse imports with a negative sign, as we want to know how much private “demand” actually exists before entangling geography and currency systems in analysis.

Of Final Sales to Domestic Purchasers, the statistical problems are evident straight away in Q1 2015. Real Final Sales, taking account of the official version of “inflation”, were $31 billion more than Q4 2014. However, Nominal Final Sales were $33.5 billion less quarter to quarter. Not only are the signs reversed, these are enormous discrepancies in that direction. Under ideal circumstances, such would be great fortune for the economy and a welcome respite from its monetary repression (buying more and paying less for it), but the unusual nature of this arrangement again suggests more statistical problem than actual economic benefit.

Seeing a negative nominal growth rate in final sales is highly unusual, which might as well be expected given that we have been under some form of an “inflation” appeal of monetary theory since 1965. In the twin final sales accounting, Final Sales of Domestic Product, there have only been four instances of a negative quarter since 1958. Three of those were during the Great Recession, and Q1 just produced the fourth!

The Dwindling US Economy

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

The announcement today (April 29) of a barely positive GDP first quarter 2015 growth rate of 0.2 percent (two-tenths of one percent) is an intentional exaggeration.

Today’s GDP report is the “advance estimate.” There will be two revisions, with the first occurring in one month on May 29.

Although the “consensus estimate,” which is Wall Street’s estimate, declined dramatically over the past month, the consensus estimate was for 1.0 percent.

The BEA’s advance estimate bears the burden of impact on financial markets even though it is the least reliable estimate. Subsequent revisions receive much less attention. Because of its market impact, the advance estimate is fudged by the Bureau of Economic Affairs (BEA) in order not to upset financial markets keyed to the consensus forecast.

All indications are that the first quarter experienced negative GDP growth, that is, a decline from the previous quarter. However, if BEA reported a negative GDP when the financial markets were relying on positive real growth, the government’s Plunge Protection Team might be unable to prevent a substantial market decline.

Therefore, the BEA in its advance estimate reported a barely positive result that kept GDP out of negative territory. This gives financial markets a month to undergo an orderly reduction prior to the first and then second revisions of the advance estimate, or simply to forget the poor performance altogether until the second quarter advance estimate.

Maintaining stability and not shocking financial markets is now ingrained in US economic reporting. No government statistical department wants to be blamed for crashing the financial markets. So bad news leaks in slowly if at all.

Indications are that the second quarter 2015 will also have negative GDP growth, that is, a further decline. As John Williams (shadowstats.com) is likely correct that there has been no recovery from the prior recession, just bottom bouncing with stock and bond markets driven by the Fed’s outpouring of liquidity, the first half of 2015 will signal a second downturn in the US economy which is collapsing as a result of jobs offshoring and a deregulated financial system.

The real economic outlook, which will emerge from BEA in a month or two, should be obvious to anyone who had the introductory course to macroeconomics. The economy depends on consumer spending. Consumers have two ways of spending more. One way is from rising incomes. The other way is from rising consumer debt.

With the advent of jobs offshoring, real median family incomes ceased to rise. The ability of consumers to substitute larger debt burdens for the missing growth in their real incomes was used up by Federal Reserve chairman Alan Greenspan’s policy of expanding consumer debt in order to fill in for the missing growth in consumer income. Today consumer debt levels are too high for consumers to incur more debt. The only element of consumer debt showing an increase is student loans.

Dead Money US$; The OIS Transformation

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

In looking last week at some stress mechanics of the interbank markets I intentionally left out one piece, the Overnight Index Swap. OIS is often viewed as another measure of liquidity risk, keyed off matched maturity LIBOR, to give us a sense of order and good function. There is an OIS rate for every major currency regime, predicated and cued to the relevant central bank rate. That is because OIS is the price at which a counterparty will pay for the fixed leg in a funding swap.

In an example, a money center bank could pay 1% on a 12-month deposit CD, but only wishes to take the funding dependability of that while reducing the overall funding cost. In other words, the bank wants to keep the 1-year term but swap down to the ultra-short overnight rate. The OIS allows the bank to do that as it will receive, say, up to 50 bps on the fixed leg in the swap. If the overnight rate, tied to the federal funds target rate in the US$, is expected at less than 20 bps then the bank will be accruing liabilities at 70 bps, saving 30 bps on funding.

Since the swap is only an exchange of cash flows on the difference between expected payments, with, as other derivatives, no actual notional value exchanged or at risk, the OIS hedges are almost pure expressions of interbank liquidity and its relation to the monetary policy rate.

The FOMC in 2008 favored the LIBOR-OIS spread as a measure of interbank effectiveness of its own policies, which I think was a huge mistake. I think overdependence on OIS has been the cause of a lot of monetary policy problems, which has further implications in interbank settings (even recently). In other words, I don’t believe OIS tells central banks what they think they want to know, and instead may end up being at least partially deceiving.

To get a sense of that, we can go back to the summer of 2007 and see the various pieces in action. Clearly, LIBOR-OIS (usually 3-month maturity) holds some value in displaying serious distress.

Zooming in toward August 9, 2007, the OIS rate began to drop while LIBOR expanded. From the OIS perspective, that meant interbank counterparties were willing to accept lower fixed payments because there was a growing expectation for central bank rate cuts (which would reduce the OIS reference). That is, at least, the predominant interpretation as OIS is assumed to be a function strictly of hedging term funding costs related to central bank policy.

Like all the other interbank rates, there is a smooth and deliberate hierarchy prior to August 9 (or 8th in the case of LIBOR), 2007 – thereafter noticeable discord and an elevation of chaos-like functionality. For this mainstream interpretation, what matters is the green line on the chart immediately above sinking after the first rumble of crisis. That meant OIS hedgers were expecting a sharp, especially around December, decrease in the federal funds target which the FOMC believed(es) amounted to an increase in liquidity provisions.

However, the dark red line, 3-month LIBOR, did not initially follow OIS, thus coming out as a widening spread. Again, that is interpreted as the inability of the interbank market to translate expected policy “easing” into term function. In fact, if you follow interbank function further into 2008 there are all sorts of anomalies persisting throughout.

Punk Q1 GDP Wasn’t Surprising—It Extends A 60-Year Trend Of Exploding Money And Imploding Growth

Submitted by David Stockman – The Contra Corner Blog

During the heyday of post-war prosperity between 1953 and 1971, real final sales—–a better measure of economic growth than GDP because it filters out inventory fluctuations—-grew at a 3.6%  annual rate. That is exactly double the 1.8% CAGR recorded for 2000-2014.

And after this morning’s punk GDP report in which growth stayed above the flat-line by a hair only due to a massive inventory build, the contrast is even more dramatic. Real final sales actually declined by 0.5% during Q1 and, more importantly, reflected a mere 1.1.% annual growth rate since the pre-crisis peak in the winter of 2007-2008.

The long and short of it, therefore, is that there has been a dramatic downshift in the trend rate of economic growth during an era in which central bank intervention and stimulus has been immeasurably enlarged. In this regard, the size of the fed’s balance sheet is the telltale measure of its policy intrusion. That’s because the only mechanism by which the Fed can actually impact the real economy is through open market purchases of treasury bills, bonds and other existing securities for the purpose of raising their price and lowering their interest rate or yield. And it doesn’t matter whether the Fed is buying short term T-bills to peg the federal funds rate or 10-year notes to drive down long-term interest rates and flatten the yield curve.

Thus, the old-fashioned business of pegging the Federal funds rate and the new-fangled intrusion of massive bond buying under QE are all the same maneuver. They both involve expansion of the central bank balance sheet and, therefore, the systematic injection of fraud into the financial system.

That is to say, growth on the asset side of the Fed’s balance sheet involves the acquisition of financial claims that arise from the utilization of real labor and capital resources. This happens, for example, when the Fed buys treasury notes that were issued to fund the purchase of concrete and bulldozer operators under the highway program or when new homes embodying carpenters’ wages and lumber are financed with Fannie Mae guaranteed mortgages purchased by the Fed.

That contrasts with the liability side of the Fed’s balance sheet, which expands dollar for dollar with the asset side, but represents nothing more than bottled monetary air confected from its digital printing press. Stated differently, the Fed’s fundamental tool of open market purchases of public debt and other securities, and thereby the expansion of its balance sheet, embodies the exchange of claims based on something for credits made from nothing.

The Fed’s current $4.5 trillion balance sheet, in fact, could be expanded to sport liabilities of $10 trillion or even $100 trillion by a few keystrokes on the Fed’s computers—–if the open market desk could find enough public debt, private debt, equities and even seashells to buy and stash on the asset side. But questions of practicality or likelihood aside, the basic principle is that the liability side of the Fed’s balance sheets represents spending power made out of nothing. Accordingly, the greater the size of the Fed’s balance sheet, the greater is the amount of fraud released into the financial system and the more intrusive is its deforming and distorting impact on the capital and money markets and ultimately the real main street economy.

Self-evidently, the Fed’s 5X balance sheet expansion since December 2008, which has resulted in 77 straight months of zero money market interest rates, has massively subsidized carry trade speculators. The latter use this free short-term money to fund (i.e.”carry”) their stock, bond and other asset positions, and thereby bid the market for these assets to higher and higher levels. So doing, they are not bringing new savings into the investment market and thereby augmenting honest demand for stocks, but are merely enlarging their bids with zero cost credit made from nothing.

Japan Needs A Bigger Hole?

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Japan continues to provide the best refutation of monetary policy as anything other than destructive. With its economy stripped bare of dynamic essentials after thirty years of the Bank of Japan’s “lead”, marginal changes are left as remnants of nothing more than monetary transmission. In the space of QQE, that has used up and destroyed what was left of Japan’s once-dominant trade position, leaving the economy to hollow out from the inside as Japan Inc transfers to Offshore Inc.

Even the press toward the 2% inflation target has been pushed back, as if 2 years and a quadrillion (give or take a few trillions) yen were not enough to begin with. Back in April 2013, BoJ Governor Haruhiko Kuroda mentioned that his policy would be “flexible” (using that exact term) with regard to reaching the target and the manner in doing so, but it was clear then that he was talking about the exact opposite case – not doing more QQE if he fell far short but scaling back if it proved to be too powerful. The misplaced confidence and overestimation toward, really, zealotry is remarkable in hindsight of what has actually and instead taken shape.

The country’s economists have been scrambling to rewrite forecasts, particularly as the stock market soars and the yen has fallen sharply in global currency markets, giving Japan’s exporters a lift. Goldman Sachs, which has called the BOJ’s moves a “sea change” compared with prior policy, said in a Thursday report it now expects Japan’s economy to grow 2.5% rather than 2.3% in the year starting April 1—in part because the rise in shares may precipitate spending by consumers who feel a bit wealthier than before.

Again, the above quotation was from April 2013 detailing how great and wonderful QQE was about to be. Now, after all but admitting that the BoJ is behind and will miss its initial expectations for 2% (they now call for 2% inflation into 2016 instead of this month), and that whole recession that was totally “unexpected”, there is nothing left of those blanket expectations from the start – only a survey of deepening wreckage. As to that point, and the above allusion to “feel a bit wealthier”, there is a great deal about where orthodox theory falls so very short, as there has actually been an enormous “wealth effect” in Japan.

Japan’s economy is hobbling out of a recession, inflation is a quarter of the central bank’s target and wages adjusted for price changes fell last year. And yet sales of luxury goods are growing and the stock market hita [SIC] 15- year high.
Sales of high-end imported cars and luxury goods have been rising since Prime Minister Shinzo Abe took office in December 2012, outpacing the increase of total retail sales. Department stores sold 333 billion yen worth of luxury goods including watches, artworks and jewelry in 2014, up 20 percent from 2012. Over the same period, total retail sales rose 2.6 percent.

As it turns out, Japan may not be hobbling out of recession at all, despite the huge gains in “luxury” spending due to artificial, financial redistribution. In fact, quite relatedly, Japan’s recession may still be digging deeper as March’s retail sale figures can attest.

While there were huge base distortions related to last year’s frontloading ahead of the tax increase, March 2015 retail sales were nearly 10% below March 2014. Confirming of the trajectory apart from that yearly distortion, retail sales fell 1.9% M/M in March after February’s +0.7% M/M gain. That negative direction persists across a range of figures which, of course, has economists calling for the BoJ to visit some further injury.

“If you look at the larger data points of the past three to six months, they’ve been pretty bad all around,” Joe Zidle, a portfolio strategist at Richard Bernstein Advisors, told CNBC. “If you think about the consumer’s importance … it’s 60 percent of the Japanese economy, I think this ratchets up the pressure on the Bank of Japan (BOJ) in order to introduce more stimulus.”

I think that is exactly the problem, as consumers in Japan right now seem to be preparing themselves for more “stimulus.” It has become so disastrous as monetary policy itself may have been sorely turned upside down (if it was ever right to begin with) but yet nobody in policy or the media has the intestinal fortitude to call it what it clearly is: destructive.

The record of so much “stimulus” is absolutely clear, as the Japanese people, most of them, are becoming poorer by the day.

Stocks, Fundamentals and Valuations

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Stocks and Interest Rates

How important are macro-economic fundamental data and valuations in deciding on whether or not to buy stocks, and how does this influence long term returns? Are there any universally valid rules that can be applied? At the very least we can state that there is plenty of empirical evidence that supports certain conclusions.

Mish has just posted a review of a recent weekly market comment by John Hussman, who probably writes more about market valuations than anyone else we know of. One of the most interesting aspects Mr. Hussman’s discusses in his missives on the topic in our opinion concerns the connection between stock market trends and interest rates, or what we might term his “empirical debunking of the Fed model”.

Photo credit: Issei Kato / Reuters

To be sure, interest rates are an important determinant in the valuation of capital and future earnings streams. Given that stocks are titles to capital, it can be posited that ceteris paribus, low and/or declining real interest rates will tend to increase their prices, while high and/or rising real interest rates will tend to do the opposite. It is important to keep in mind that real rather than nominal rates are decisive here. As Mises once pointed out, the 90% discount rate charged by Germany’s Reichsbank in 1923 certainly looked very high in nominal terms – but in real terms it was ridiculously low.

So why does the empirical record show that there can be severe bear markets even while interest rates are extremely low or declining? The answer is that economic history is an amalgam of contingent circumstances – interest rates are just one piece of the puzzle. Investors or speculators cannot base their decisions on economic theory alone. In fact, a great many successful speculators know very little about economic theory, and most theorists know little about successful speculation.

An investor or speculator is, to paraphrase Mises, “a historian of the future”. He has to attempt to foresee above mentioned contingent circumstances as well, not only the trend of interest rates. When the financial crisis broke out in 2007-2008, central banks were furiously slashing their administered interest rates and started outright money printing on a massive scale in the final quarter of 2008. And yet, stock markets collapsed anyway. There is no need to recount why they collapsed – most people are well aware of the factors that triggered the plunge. The only point we want to make is that the market was overwhelmed by data that were considered far more important at the time than the interest rate cuts provided by the world’s central planners.

Japan’s stock market has largely ignored all time lows in interest rates for more than 20 years. Anyone buying the Nikkei in 1986-1989 based on the knowledge that call money rates would be close to, or at zero for most of the time between the mid 1990s to today would still be nursing nominal losses ranging from 30 to 50% – in spite of the Nikkei having risen about 150% from its 2009 lows by now.

The Nikkei Index and overnight interbank lending rates – never has the Fed model failed more spectacularly – click to enlarge.

When Exactly Will the Fed Launch QE4?

Submitted by William Bonner, Chairman – Bonner & Partners

Money From Nowhere

On Friday, the S&P 500 and the Nasdaq closed at record highs. It’s the first time both indexes have done so since December 31, 1999. Why such optimism? High profits, you say. But where do profits come from?

Households have less money to spend than they did 15 years ago. And companies cannot make money just by selling things to each other. The only explanation is that customers – including the US government – continue to borrow and spend.

Corporations borrow money to buy their own shares. Consumers borrow to buy products. Either way, the money comes “out of nowhere” and falls on balance sheets like manna from heaven.

The great money temple, from whence fresh pronouncements shall issue today. How long before it floods us with fresh money again?

Photo credit: Susan Candelario

The Limits of Debt

US households appeared to reach “peak debt” in 2007. Now, the corporate and government sectors – not to mention students and auto buyers – are pulling up to their maximum debt limits, too.

Credit to US households and non-profits stood at $13.384 trillion as of March 18 2015 – still below the 2007 peak and declining in relative terms – click to enlarge.