Bernanke’s Balderdash

The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.

The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.

The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.

The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of GDP.

And even that ratio is an understatement. That’s because measured GDP has been artificially bloated by the monumental worldwide malinvestment and excess capacity arising from the credit bubble. That is, phony “growth” which under the laws of economics will be liquidated in due course.

Global Debt and GDP- 1994 and 2014

But you wouldn’t have known that the global economy is about to hit the skids from Monday’s action. Bernanke kicked off the day in a Wall Street Journal op ed taking a bow for “saving the world”.

Then the stock market completed a rally from Friday’s post-NFP low, which amounted to 84 points (4.5%) on the S&P 500 during a seven-hour span of trading.  That was even less time to “mission accomplished” than last October’s three-day Bullard Rip.

So here we are again circling the 2000 mark on the S&P 500—a level first crossed 440 days ago. Undoubtedly, the casino is knee-jerking upward because Goldman has already made an unsecret audible call, instructing the Fed to substantially defer lift-off well into next year.

As its New York based chief economist and B-Dud doppelganger, Jans Hatzius, informed clients:

“……..a slowdown in output and employment may justify the Fed keeping the near-zero rate policy for much longer, well into 2016 or potentially even beyond………Further bad news on output and employment could potentially result in quite a large shift in the monetary policy outlook.”

^SPX Chart

^SPX data by YCharts

That Goldman Sachs is peddling the lunacy of potentially 100 straight months of zero money market rates is not surprising. There is no greater gift to the gamblers who comprise its clientele than free money for their carry-trades—-and especially when accompanied by the absolute certainty that there will be months of forewarning through Goldman’s house organ before the Fed permits even a 25 bps change in the cost of speculation.

Oddly enough, however, the Goldman bull-hug on the Fed is exactly why the casino has become a clear and present danger to the main street economy. To wit, under the Hatzius-Dudley-Wall Street mantra of perpetual ease the Fed has become a serial bubble machine, but the retrograde academics and career apparatchik’s who nominally run it do not have a clue about this destructive modus operandi.

Exhibit number one for that proposition is Bernanke’s self-justifying balderdash printed in today’s WSJ. The kindest thing you can say about it is that now that he is cashing in big time he ought to hire a better qualified intern to write his articles while he’s out flogging his book.

This gem is an embarrassing smattering of banality and bunkum. Above all else it does not give even a passing nod to the fact that the US operates in a tightly integrated global economy and financial system; that the very warp and woof of it have been bloated and distorted by central bank enabled leverage and speculation; and that the central banks of the world are now engaged in a desperate and self-evident scramble to keep the financial bubble they have inflated over two decades from collapsing upon itself.

Bubble vision was chattering endlessly yesterday, for example, about the sudden implosion of Du Pont and the expulsion of its CEO. Well, its crashing sales in Brazil were as much a part of the global bubble as the now abandoned ramshackle man-camps of North Dakota.

In the latter case, the Bernanke-Yellen lunacy of ZIRP drove desperate money managers into a scramble for yield that caused them to buy the debt of shale drillers and suppliers dependent upon stable $75 oil prices in radically volatile global commodity markets. In the former case, DuPont’s booming ag sales in Brazil ultimately were derived from a rampaging printing press in Beijing that caused China’s debt to soar by 56X in less than 20 years.

That’s right.  Brazil’s massive export boom was indirectly funded by China’s hideous credit expansion under which outstanding debt soared from $500 billion in 1995 to $28 trillion at present, according to the cautious estimates of McKinsey and probably by far more if it could all be honestly reckoned.

Yet DuPont’s tumbling earnings came as a surprise not only to Wall Street analysts but apparently to its CEO as well. All had been drinking the central bank Kool-Aid that Bernanke was still dispensing in his WSJ blather.

To hear him tell it, the Fed’s policy has been a roaring success, having ended the financial crisis, pushed the US economy nearly back to its full potential at 5.1% unemployment and nudged inflation upwards at 1.5% or nearly to its 2.0% target.

Indeed, Bernanke took special pains to boast about the Fed’s success on the jobs front:

But there is no doubt that the jobs situation is today far healthier than it was a few years ago. That improvement (as measured by the unemployment rate) has been quicker than expected by most economists, both inside and outside the Fed.

Well, as Bill Clinton might have said it all depends on what a few years ago means. Never has the Bernank explained why the financial markets and the main street economy crashed in the fall of 2008. But counting job growth from the bottom of a bursting domestic housing and credit bubble that was self-evidently  enabled by the Fed hardly counts as proof of anything.

Here’s a better take on the jobs front. The September jobs report showed the grand sum of 96,000 jobs gains for the entire US economy outside of the government financed Health, Education And Social Services sectors (HES Complex) since December 2007.

Needless to say, the Fed’s ZIRP and QE policies had absolutely noting to do with the hiring of more home health care workers, nurses and teachers aides. Yet outside of those fiscally-dependent domains all of Bernanke’s radical financial repression and $3.5 trillion monetization of the public debt barely got the jobs market back to where it started before the recession; and, actually, not much beyond where it stood in January 2001.

So lets see. The Fed’s balance sheet has grown from $500 billion to $4.5 trillion or 9X during that span, but job growth outside the HES Complex amounts to less than 2%. For crying out loud, that’s a 12,000 per month rounding error in an economy which has 250 million adults.

Yet Bernanke has the nerve to take credit for jobs and claim that the “labor market is close to normal”!

Nonfarm Payrolls Less HES Jobs - Click to enlarge

Then there was the claim that the higher rate of growth from the pre-crisis top in the US compared to Europe was further proof of the Fed’s wisdom.

(to be completed)