Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).
Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and financial excess (and shorten the Credit cycle).
A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global basis. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.
The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.
The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance. Declining bond yields by 1987 had helped spur rapid expansion in corporate bonds, GSE securitizations, commercial paper, securities financing (i.e. “repos,” Fed funds, funding corps) and derivative trading (i.e. “portfolio insurance”). Post-crash accommodation ensured that the Federal Reserve looked the other way as Bubbles proliferated in junk bonds, leveraged buyouts and commercial and residential real estate on both coasts. Continue reading
Submitted by William Bonner, Chairman – Bonner & Partners
BALTIMORE – The Dow rose on Wednesday morning… after Janet Yellen made soothing remarks about a “gradual” return to normal interest rates. Then investors must have realized that returning to normal is not on the Fed’s agenda. The Dow finished the day down 99 points.
We haven’t seen normal central bank policy since the Nixon years. Normal is a currency backed by gold, not by PhD economists. Only briefly and episodically, over the last 2000 years, has the world flirted with pure paper or “fiat” money. Every time, the affair was over in a short time… and regretted for a long time.
The result of the usurpation of money by government
Under a gold standard, credit comes from savings. Thus limited, interest rates typically stand somewhere in the 3% to 6% range. They do not roll around on the barroom floor with the spilt beer, drunks, and sawdust.
Real credit comes from money that is saved… taken out of the consumer economy so that it can be used for emergencies and capital investments. When it is paid back – usually out of increased output – the world is a richer place.
But try to trick the economy with phony credit – money that was never earned and never saved – and you are just asking for trouble. Said Jörg Guido Hülsmann, a senior fellow at the Mises Institute:
“In no period of human history has paper money spontaneously emerged on the free market. In all known historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private property rights.”
With the release of retail sales, the estimates for inventory across the whole supply chain are completed for December. The inventory-to-sales ratio for total business rose yet again to 1.39; the last time the series was that out of balance was May 2009, a ratio higher than what was registered in October 2008. The ratio for the manufacturing level surged to 1.38 from 1.35 in November, as sales declined quite sharply (by almost $7 billion SA). The inventory imbalance in retail was also the highest since May 2009. If jobs are truly the measure of economic growth through consumerism, they are truly absent here.
The inventory imbalance throughout 2015 was nothing like we have ever seen under similar circumstances of production volume and sales. In terms of manufacturing, this “manufacturing recession” already resembles in many important aspects the dot-com recession. It is entirely different in terms of inventory, though, which can only mean serious trouble. Continue reading