Why Keynesian Market Wreckers Are Now Coming For Even Your Ben Franklins
By David Stockman
Larry Summers is a pretentious Keynesian fool, but I refer to him as the Great Thinker’s Vicar on Earth for a reason. To wit, every time the latest experiment in Keynesian intervention fails——as 84 months of ZIRP and massive QE clearly have—–he can be counted on to trot out a new angle on why still another interventionist experiment or state sponsored financial fraud is just the ticket.
Right now he is leading the charge for the greatest stroke of foolishness yet conceived. Namely, negative interest rates based on the rubbish theory that the “natural” money market rate of interest is at an extraordinarily low point. Accordingly, the central bank should drive the “policy rate” to sub-zero levels in order to achieve the appropriate level of “accommodation” in an economy that refuses to attain “escape velocity”.
As can’t be pointed out often enough, however, there is no such economic ether as “accommodation”. It’s just a blanket cover story for what Keynesian central bankers believe they are accomplishing by pegging interest rates below market clearing levels and by bending and mangling the yield curve to cause more investment.
But after 86 months it is evident that all of this putative monetary “accommodation” has failed. Falsifying the cost of money and capital can only work if it causes households and businesses to borrow more than they would otherwise; and to then lay credit based spending for consumption and investment goods on top of what can be funded out of current production and income. Another name for that is leveraging private balance sheets and thereby stealing production and income from the future.
With $62 trillion of public and private debt outstanding the US economy has hit a economic barrier called Peak Debt. For all practical purposes, it can be measured as the macroeconomy’s aggregate leverage ratio at 3.5X national income. That represents fully two turns of extra debt on the economy relative to the stable 1.50X ratio that prevailed during periods of war and peace and boom and bust during the century before 1970.
Stated differently, the Fed and other central banks have led the world economy into a planetary LBO over the last two decades or so. In the case of the US, the two extra turns of debt resulting from that rolling LBO amount to about $35 trillion.
Yes, that’s a load of anti-growth ballast that explains why there has been no “escape velocity”, and why the rate of real final sales growth since Q4 2007 is only 1.3% compared to peak-to-peak historical rates of 2.5% to 3.5%. And I use peak-to-peak advisedly because it is now clear after the recently released December business sales and inventory numbers that we are on the verge of a recession, if not already in one.
Yet the Vicar and his compatriots in the Eccles Building and on Wall Street insist on pushing harder on the credit string——even though Peak Debt means that household debt is still $400 billion below its pre- crisis peak and that the entire $2 trillion gain in business debt has been recycled back into the Wall Street casino via stock buybacks and mindless M&A deals. Real net investment in business plant, equipment, and technology, in fact, is actually still below its 2007 peak, and even the level which had been attained at the turn of the century.
So that brings us to the harebrained theory of negative interest rates and the supposed collapse of the natural rate of interest in the money market. The latter is just unadulterated economic voodoo. It makes Art Laffer’s magic napkin look like a model of scientific formulation by comparison.
The truth is, there is only one “natural rate” of interest, and that’s the one produced in an honest financial marketplace via the interaction of savers and borrowers. No such rate now exists and hasn’t for decades owing to the massive intrusion of the Fed in the money market. Indeed, as a purely physical matter, even the so-called Federal funds market no longer exists because the Fed has asphyxiated it under a flood of $3.5 trillion of bond-buying and the resulting giant surplus of bank deposits.
So Summers is apparently speaking for the kid who killed his parent and then threw himself on the mercy of the courts on the grounds that he was an orphan. That is, interest rates are in the graveyard of history because the central banks buried them there.
Interest rate pegging and the Fed’s wealth effects doctrine have failed completely, but now Keynesians like Summers claim the contra-factual.
That means the Keynesian medicine didn’t work because the Fed didn’t pump enough drugs into the nation’s quasi-comatose body economic. So now we have to dig even deeper into the netherworld of financial repression in order to align borrowing costs with a non-existent natural rate of interest.
It’s another case of a policy target confected from whole cloth just like the 2% inflation target. But there is one overwhelming practical problem with NIRP. To wit, if pushed deeper and broader than just a few basis points of negative yield on deposits of excess bank reserves at the central bank, NIRP will surely cause a flight to old-fashioned bank notes.
Lo and behold, after all these years of doctoring the economy, Professor Summers and fellow travelers like Professor Peter Sands at Harvard, have up and joined the war on crime!
But their newfound abhorrence of crime amounts to an economist’s version of the NRA mantra that guns don’t kill, people do. In this case, it might be said that criminals don’t launder money, avoid taxes and commit act of terrorism, large denomination bills do!
Of course, the latter have been around for centuries. Yet suddenly every NIRP advocate on the planet has joined the campaign to abolish large bills including the Benjamin Franklin here and the EUR 500 note on the other side of the pond.
Thus, Professor Summers opined as followed in a recent Washington Post op-ed:
The fact that — as Sands points out — in certain circles the 500 euro note is known as the “Bin Laden” confirms the arguments against it. Sands’ extensive analysis is totally convincing on the linkage between high denomination notes and crime. He is surely right that illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note. And he is equally correct in arguing that technology is obviating whatever need there may ever have been for high denomination notes in legal commerce.
Let’s see. A million dollars worth of weed currently weighs about 200 pounds. If push came to shove couldn’t El Chapo have the mules who deliver it to the street carry 50 pounds of bills on the backhaul? Better still, if drug money laundering is such a huge social blight, why not legalize the drug trade and turn the business over to Phillip Morris?
They would surely use digital money to pay their vendors. And if we want to get rid of tax evasion does the good professor really believe that Wall Street high rollers and silicon valley disrupters or just every day rich people actually get paid for whatever they do in bank notes?
The fact is, it is gardeners, waitresses and delivery boys who get paid in cash, not people with meaningful incomes. Yet bringing such slackers to justice doesn’t require the abolition of cash in any event. Just exempt them from income and payroll taxes entirely and let them pay their social dues at the cash register when they purchase goods and services.
In short, there is one reason alone for the sudden campaign to abolish large denomination bills. It is a necessary predicate for the imposition of NIRP. That is to say, it would pave the way for central bank mandated confiscation of the wealth and savings of millions of American citizens in the pursuit of a cockamamie theory that would bring about the final destruction of honest price discovery and financial discipline in the Wall Street casino.
Surely, there is not much more of such destructive intervention that can be tolerated before the booby-traps of leverage and risk that have been built up over the last two decades, but especially since the financial crisis, blow sky high. Indeed, the very idea that the foolish advocates of Keynesian central banking would even entertain the notion of providing outright subsidies to carry trade gamblers—–and that’s where money market NIRP would end up——is a warning sign of the danger that lurks in the financial misty deep.
Central bankers have been massively and relentlessly deforming financial markets and rewarding the most outlandish and unstable forms of leveraged gambling and risk-taking throughout the warp and woof of the financial system, but have no more clue about the financial time bombs they have planted than they did last time around when CDS and CDOs squared were erupting everywhere.
It is only a matter of time, and a few more bear market rallies before the meltdown commences again. Indeed, when the impending global recession becomes fully evident, the gamblers in the Wall Street casino will panic like never before.
After a 30-year bubble, they have come to believe that the central banks are infallible and that all economic downturns and market corrections are quickly remedied with new rounds of monetary stimulus. But that is not a permanent financial truth; it’s a false generalization based on a fabulous one-time monetary trick that is already played out.
To wit, central banks have used up their dry powder. After more than two decades of reckless monetary pumping, they are now stranded on the zero bound and possessed of hideously bloated balance sheets.
So the correction scenario this time will be very different. There will be no quick deflation, meaning that the liquidation of economic malinvestments and overvalued financial assets will run for years.
In fact, during the coming down-cycle, the central banks may turn out to be wreckers, not saviors. As they resort to increasingly novel and illogical maneuvers such as negative interest rates (NIRP) they are generating fear, not confidence.
There can be no better proof than what has transpired in Japan since its lunatic central banker, Haruhiko Kuroda, announced a shift to NIRP within days after he said it was off the table. Since his January 29 statement, however, the Japanese stock market has plunged by 16% from its early January level and 25% since last summer’s peak, thereby wiping out much of the three-year long stock bubble generated by Abenomics.
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