They finally did it – 25 bps, for the first rate increase since 2004. Surely it’s the most dovish Fed “tightening” ever. Indeed, it was really no tightening at all. One has to go all the way back to 1994 for the last time the Federal Reserve commenced a true tightening cycle. That episode proved so destabilizing that the Federal Reserve assured the markets that they’d learned their lesson. And this (dovish and market-pandering) mindset was fundamental to the little baby step rate increases that ensured no tightening of financial conditions throughout the historic 2002-2007 mortgage finance Bubble inflation.
This week’s policy move will be debated for years to come. Lost in the debate is how the Fed (along with global central bankers) found itself stuck at zero for seven years (with a $4.5 TN balance sheet) and then saw it necessary to move to raise rates in the most gingerly, market-pleasing approach imaginable.
Traditionally, tightening cycles are necessary to counter mounting excess, including ill-advised lending, speculating and investing. Rate increases back in 1994 exposed what had been a dangerous expansion in speculative leveraging, derivatives and market-based Credit (at home and abroad). With the “bond” market in disarray and Mexico at the precipice, the Greenspan Fed turned its attention to bolstering the markets and non-bank Credit more generally.
Market-based Credit is unstable. This remains the fundamental issue – the harsh reality – that no one dares confront. I would strongly argue that long-term stability in a Capitalistic system requires sound money and Credit (hopelessly archaic, I admit). Over the years, I’ve tried to differentiate traditional finance from unfettered “New Age” finance. The former, bank lending-dominated Credit, was generally contained by various mechanisms (including the gold standard, effective currency regimes, bank capital and reserve requirements, etc.). This is in stark contrast to the current-day securities market-based global financial “system” uniquely operating without restraints on either the quantity or quality of Credit created. Continue reading
Markets have been extraordinarily complacent about the bad debts building up in the financial system. In the wake of the Fed’s decision to raise interest rates this week, the effect on debt was barely mentioned in the subsequent analysis by any of the mainstream media’s talking heads. Establishment economists are even claiming that in 2016 we can now gradually get back to more normal interest rates of three or four percent as the US economy continues its recovery. This simply cannot happen when one considers the effect on outstanding debt.
In considering the debt position, one should start by asking a very basic question: of total global debt, which currently exceeds $200 trillion equivalent, how much has been taken out without any intention of repaying it? We know that nearly all governments never intend to repay debt, instead looking to roll it, add to it, and inflate it away. Household debt continues to build in aggregate, and we know that the easiest way to make money is to take out a mortgage and buy a home. And how many company treasurers think about actually reducing debt, as opposed to refinancing it? One could go on, but the point is that monetary inflation has turned us all into habitual borrowers and debt continues to compound.
Complacency and markets are a dangerous combination. So far, there have been some rumblings about the position of lower quality borrowers with junk status. But even here, no one worries much, dismissing it as a liquidity problem. Note the evasion: the problem is not regarded to be the borrowers so much as market liquidity. Well, there is now a real issue that challenges this complacency, and that is commodity-related debt.
Energy-related liabilities are where most of the trouble lies. The annualised gross value of oil sales has fallen during 2015 by about $2 trillion. The effect on oil company profits and the decline in tax revenue for oil exporting countries is obvious. The effect on suppliers, ancillary businesses and retailers in the vicinity of oil production is perhaps less so. But the biggest problem for the oil industry is the loss of cash-flow to support the debt that has financed the investment and working capital involved. And because oil is priced in dollars, most of this debt is also denominated in dollars, not in local currencies that can be devalued to depreciate the debt. Continue reading
The FOMC at least still knows how to throw a party. It may not be what it once was, but for one day there was the familiar euphoria predicated upon the wish that central bankers might know something about anything. All-too-quickly, however, it vanished as it becomes increasingly clear, despite all attempts to rewrite this history, that there are no answers. After but a day, reality rudely intruded on the recovery, perhaps suggesting that it was the simultaneous recession announcement people are now more attuned to.
U.S. stocks dropped Thursday on persistent concern over faltering global economic growth, led by declines in energy and materials shares, a day after shares had rallied on the Federal Reserve’s decision to raise interest rates.
The selloff continues so far this morning as global, for once, means global which includes the US much to the dismay of the mainstream that still clings to the idea that the US economy is in primary condition for overheating. The dichotomy remains simply how it defined QE’s influence; “stimulus” is assumed to be stimulative, so at the end of it the intended target must have been stimulated even when it doesn’t show it. Therefore, according to orthodox mythology, if that isn’t truly apparent it only means it is about to be.
In Japan, however, this mysticism is contrarily naked. Redistribution and “inflation” suggestions are revealed in all their gruesome horror. The Bank of Japan has no plausible outlet for “overheating” since the entire Japanese economy is a gaping wound; Japanese households most especially. Further, as to leave little doubt about any of it, that hole in the Japanese economy coincides exactly with what the Bank of Japan infuriatingly claims will heal it.