A Couple Of Indisputable Facts
A couple of indisputable facts:
We are living through the greatest credit bubble in history.
If credit bubbles do not continue to expand then they pop.
We are reaching the absurd stage in the attempt to keep growing the credit bubble. Ford is saying they will look past credit scores when people wish to purchase a new Ford (Note: the auto industry is already plagued by sub-prime loan repossessions). Some government-guaranteed mortgages are now ‘no appraisal’ loans. Central banks around the globe continue to inject credit into markets – to find people and entities willing to absorb that credit is getting more difficult and as a consequence standards are being continually lowered.
Government officials are encouraging people to take loans against the equity in their homes and more and more people are now doing just that. Even the anemic sub-2% GDP growth that we have been suffering through is now in danger – the government needs people to take out more loans to buy more stuff to keep GDP growth on the positive side.
‘Your-home-as-an-ATM’ is back with a vengeance.
GDP growth has indeed been anemic, auto sales are dropping, housing may have reached a plateau and Americans have individually and collectively more debt that ever before. The ability of central banks such as the Federal Reserve to continue levitating markets may be reaching a logical end. Janet Yellen and her cronies insist that is not true – but all of these same people insisted that the economy was in no danger in 2007 and 2008 as well so keep that in mind.
Some smart people believe we have reached peak asset value.
We have decided to substitute liquidity injections for actual growth. Central banks have now purchased assets equivalent to 40% of global GDP. How much more is out there to buy and propel ever upward? The Japanese bond market has effectively ceased to exist – the Bank of Japan is assumed to be the buyer of everything. The ECB is running out of things to buy – including corporate bonds.
It is generally assumed that the Federal Reserve will re-start Quantitative Easing, i.e. the purchase of assets, if the bubble starts to slip. As of this moment the Federal Reserve is still promising to ‘normalize’ their balance sheet – in other words sell the assets they had purchased under previous QE efforts.
This could get very sporting. There is a school of thought that all financial crisis are liquidity crisis. This is the reason that central banks began the liquidity injections eight years ago – the question that begs is if removing the liquidity injections would simply land us back to where we were eight years ago? In other words – all the central banks provided was eight years of CPR and when they stop will the patient die? All evidence indicates that is the case. If it is not the case the central banks would have ceased the liquidity injections years ago. This is the trap that we find ourselves in.
The flip side of that is that to continue the liquidity injections also continues the wealth and income disparity. During the eight years of Obama 60% of all economic growth took place in a single sector of the economy: financial services. In other words, Wall Street Banks received 60% of the GDP growth during the Obama years. Insurance companies got about 20% of the economic growth during the Obama years – so only 20% of economic growth went to people not on Wall Street or the insurance companies. Additionally Obama is the first President to never reach a 3% GDP growth rate – what little growth went to the rest of the economy was atrocious to begin with.
Why are those percentages so terrible and one-sided? The policies of the Federal Reserve combined with legislation such as Dodd-Frank and the Affordable Care Act distorted markets in a manner where it was less profitable to invest in productive business and more profitable, and much less risky, to invest in assets which the government and Federal Reserve were essentially guaranteeing and funding. What happened is pretty straightforward. It was theft pure and simple, but straightforward. On top of that the rehypothecation and collateralization of credit combined with the implicit and explicit government and central bank guarantees has created a situation where simply introducing credit, or being in a spot where you can invest in credit, is much more profitable than anything being funded by the credit.
Absolutely distorted markets created an absolutely distorted economy where a few people profit beyond imagination while the bottom 90% continually bleed wealth and income.
The error – or cowardice depending on how you view it – of Bush and Obama and Bernanke and Yellen was in not allowing the economy to reset after September of 2008. Firms that should have gone out of business were rescued and have become zombies. They are only profitable – and only continue to exist – due to the largesse of the government and Federal Reserve. At the same time legislation such as Dodd-Frank and the Affordable Care Act along with enhanced EPA regulations and other enterprise stifling actions raised the bar to new business enterprises being formed. The Obama administration each and every year saw more businesses go out of business than were started – that had never occurred before in all of American history. The lack of startups combined with the zombies is the reason why nearly 9 million full-time private sector jobs were lost during the Obama years – and that leads directly to why you have a President Trump.
How the governments and central banks will escape the trap they have laid for themselves without collapsing the entire house of cards is unclear. Any successful escape will have to include real moral courage, the ability to explain what is happening, the ability to stand up to the entrenched interest gaining wealth from these distortions and the ability to gain the co-operation of and co-ordinate with many entities around the world.
What are the odds…