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NMLS #1136
By David Stockman
Wednesday, 15 Jun 2016 07:20 AM
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Sad to say, you haven’t seen nothin’ yet. The world is drifting into financial
entropy, and it is going to get steadily worse. That’s because the emerging-
stock market slump isn’t just another cyclical correction; it’s the opening
phase of the end-game.
During the last two decades the major central banks of the world have been
colonized lock, stock and barrel by Keynesian crackpots. These academic Take A Look At This
scribblers and power-hungry apparatchiks have now pushed interest rate
Secret So Powerful It Was Banned From
repression, massive monetization (QE) and relentless rigging of the The Bible
financial markets to the limits of sanity and beyond. Honest, market-driven "Universal Fuel" Discovered; Saudi Oil
price discovery is dead as a doornail. Obsolete
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David Stockman: Tyranny of the PhDs Page 2 of 5
At a 135% debt-to-GDP ratio, Italy is not far behind. Its economy is still
Larry Kudlow: 'Overthrow the
smaller than it was in 2007, its banking system has more than $200 billion Establishment' to Fix the Economy
of bad debt, its public sector squanders more than 50% of GDP and its Friday, 10 Jun 2016 | 49 comments
politically fractured and corruption-ridden government is paralyzed. "Overthrow the Establishment?" Thought that's what
this election was all about...
Yet these are only advanced cases of the universal fiscal condition of the Obama's Latest Whopper — Let's Raise
Social Security Benefits!
world’s sovereigns. With $80 trillion of public debt and unfunded
Friday, 03 Jun 2016 | 300 comments
entitlement liabilities, the US government is hardly more solvent than the Any story that starts off labeling Social Security as a
socialist basket cases of Europe. "entitlement" has lost...
That is, at least until the GOP took a powder on social security and other
entitlement reforms. At length, a tax-cut bidding war and DOD war
spending spree supplanted most of the old-time fiscal religion. And then
Greenspan finished the job when he threw in the towel on monetary
discipline in 1994.
Once upon a time, too, the interest rate on debt reflected compensation for
credit risk and inflation — and a real return to boot.
At the moment, however, “investors” aren’t getting paid for any of these
costs. Instead, thanks to the mad-men running our central banks they are
actually being forced to pay governments to borrow.
Moreover, that’s not an aberrant condition in the far recesses of the global
bond market. There is now $10 trillion of sovereign debt securities with
negative yields — and that figure is growing by the week as it cascades
across government bond markets and out the maturity spectrum.
There could be nothing more perverse than for the central banking branch
of the state to destroy the very government bond market on which modern
state finances ultimately depend. But that’s exactly what they are doing,
and the end-game could not have been expressed more colorfully than in
the recent musings of the once and former bond king,
Bill Gross:
Bill Gross, the manager of the $1.4 billion Janus Global Unconstrained
Bond Fund, warned central bank policies that pushed trillions of dollars
into bonds with negative interest rates will eventually backfire violently.
“Global yields lowest in 500 years of recorded history,” Gross, 72, wrote
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David Stockman: Tyranny of the PhDs Page 3 of 5
Thursday on the Janus Capital Group Inc. Twitter site. “$10 trillion of neg.
rate bonds. This is a supernova that will explode one day.”
Not NIRP. There is nothing natural or scientific about it. And it’s the
opposite of brilliant.
Fed officials disagree about their likely end point, in part because they
are struggling to understand why another underlying interest rate—the
mysterious natural rate—has fallen in recent years. And for that many are
turning to the musings of Knut Wicksell, a Swedish expert on the subject
who died 90 years ago.
The natural rate can’t be observed directly; the Fed knows it has been
reached only by how the economy responds. “It’s like discovering Pluto:
you can only see the effect of the gravitational pull,” said Eddy Elfenbein,
an investor and blogger at the site Crossing Wall Street, comparing it to the
dwarf planet whose existence was inferred from the orbits of Uranus and
Neptune.
There are pegged rates confected by central bankers who flood the market
with printing press cash, thereby artificially tilting the supply/demand
balance of savings and borrowings; and there are market rates discovered
by the continuous interaction of savers and borrowers.
In an honest free market, savers need a rate high enough to induce them to
forgo current consumption from their earnings and profits, while
borrowers are constrained by their capacity to service their debts from
current income and/or the return on funded assets.
One thing is certain, however. When the animal spirits get too
rambunctious and the herd of speculators cause the demand for credit to
soar, bubbles get shutdown. When no more savings can be coaxed out of
current income by rising interest rates, the market clears; the business
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David Stockman: Tyranny of the PhDs Page 4 of 5
cycle self-corrects.
We’re seeing no pickup, none whatsoever, in the natural rate even as the
economy has gotten back to full strength,” John Williams, the San
Francisco Fed president who has spent years studying it, said in a recent
interview with The Wall Street Journal.
That’s right. By the lights of John Williams the natural rate of interest has
dropped from 2-3% as recently as the first decade of this century to a
negative level at present. And that implies, according to this PhD
soothsayer, that nominal interest rates must be pegged to the floorboard, or
even lower, for the indefinite future because the US bathtub of potential
GDP has not yet been filled to the brim.
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