Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  In fact, the demise of the household-credit channel of monetary transmission is far more drastic than implied by the usual Wall Street propaganda suggesting that the ratio of household debt service to disposable personal income (DPI) has come down sharply, and that U.S. consumers are once again in a position to borrow and spend like there is no tomorrow.

  But that’s a risible distortion. Both the numerator and denominator are drastically misleading. The numerator of debt-service costs is artificially low owing to ZIRP, meaning that sooner or later normalization of interest rates will cause debt-service costs to soar. More importantly, households do not pay interest and principal on their massive debt burdens out of DPI, either.

  That’s the wrong denominator. Nearly one-quarter of the household sector’s disposable income, in fact, consists of transfer payments to old people and poor people—most of whom can’t borrow at all or carry only minimal debt.

  Instead, most of the current $14.3 trillion of household debt is owed by middle class wage and salary earners. It is their pool of earned income—amounting to $8.08 trillion at the end of Q1 2016—that services most of the household sector’s debt. And it is here that the household debt ratio went skyward during the era of Bubble Finance, and still remains impaled on Peak Debt.

  To wit, the $2.7 trillion of household outstanding debt when Greenspan took office in Q3 1987 amounted to 1.2X wage and salary disbursements, and was already significantly elevated from the pre-1980 trend of 0.8X income shown in the chart in Chapter 2.

  As of Q1 2008, by contrast, the $14.3 trillion of household debt then outstanding amounted to 2.2X wage and salary income. And it was at that off-the-charts leverage ratio that the household-borrowing spree in America was stopped dead in the water.

  Indeed, that ratio has now fallen partway back to earth at 1.8X income at the end of Q1 2016, but the true implications of that token level of deleveraging are the very opposite of what Wall Street claims. The Fed has been massively pushing on a string—as represented by the tiny 0.02% gain in household debt since Q1 2008—because households still have too much debt.

  So the exhaustion of the Greenspan-Bernanke-Yellen parlor trick is plain as day. Debt soared from historic leverage ratios where it had traditionally been associated with healthy household finance, to 220% of wage and salary incomes by the eve of the financial crisis. But that was not an engine of permanent growth; it was a one-time leverage ratchet that has now reversed direction and entered its “payback” cycle.

  Likewise, the modest growth of business debt since 2008 did not fuel added output, either. As we have demonstrated, instead of spending for plant and equipment, thereby spurring measured GDP growth today and economic productivity and efficiency over the longer run, it went into financial engineering. In so doing, it caused the massive inflation of existing financial assets in the secondary markets and thereby delivered untold windfalls to the 1% who speculate there.

  Thus, at the end of Q1 2008 nonfinancial business debt stood at $10.3 trillion and since then has grown to $12.4 trillion. But about $500 billion of that went into increased balance sheet cash, leaving a net debt gain of $1.6 trillion.

  While this gain is modest compared to the 4X increase in net business debt between 1987 and 2008, the more important point is that the business channel of monetary-policy transmission is broken too.

  The Fed’s drastic falsification of financial-asset prices has turned the C-suites of corporate America into gambling parlors. As we have previously demonstrated, all of the gains in business debt since 2008 have been flushed right back into Wall Street in the form of stock buybacks and debt-financed takeovers.

  The evidence that zero interest rates have not promoted business borrowing for productive investment is also plain to see. During the most recent year (2015), U.S. business spent $429 billion on plant, equipment and software after depreciation. That was 9% less in constant dollars than during 2007 and more than 20% lower than net real business investment of $526 billion in the year 2000.

  So the proof is in the pudding. You don’t need fancy econometric regression analysis or DSGE models to see that ZIRP is a macroeconomic dud. Simple empirical data trends show that it hasn’t goosed household borrowing and consumption spending, nor has it stimulated business investment.

  And that’s what makes Dudley, Yellen and the rest of the posse so detestable. They have deployed formulaic Keynesian incantations about an allegedly incomplete and fragile recovery to pleasure Wall Street speculators with free carry-trade funding for 93 months now, and by every indication are intending several more years of money market rates that are tantamount to zero.

  At the end of the day, this is all about the Fed’s deathly fear that Wall Street will stage a hissy fit if it is not guaranteed free or quasi-free gambling stakes for the indefinite future. That’s why the monetary politburo dispatches B-Dud, Brainard and Yellen herself to periodically calm the robo-machines and hedge fund gamblers when the markets even hint at a smidgeon of decline.

  Yet what about the tens of millions of Main Street savers and retirees who are being financially ruined by the writ of the FOMC? In a word, they are being sacrificed to the harebrained theory that the central bank can create lasting gains in output and societal wealth by rigging the price of debt and inflating the value of risky assets by subsidizing ceaseless gambling in the casino.

  And do not think “harebrained” is an excessive term. The in-grown circle of a few hundred monetary apparatchiks in the world that run the whole central banking horror show have now persuaded themselves, in fact, that the nightmare of NIRP could be made even more efficacious by abolishing cash entirely.

  Indeed, among these are the blatantly Keynesian editorial writers and commentators of the Financial Times. In a recent editorial that is so outrageously daffy that it could have been posted in The Onion, the FT let the cat out of the bag.

  What these unspeakably dangerous monetary cranks argued was that cash should be abolished so that the central banks could get on with their job of stimulating “depressed” economies by setting interest at negative nominal rates.

  In other words, it is apparently not enough that our hypothetical retiree, who saved $250,000 over a lifetime of work and forgone consumption, should earn just one cappuccino per day of interest on liquid savings deposits or Treasury bills.

  No, the central bankers’ posse now wants to actually expropriate these savings by extracting a monthly levy, and by throwing anyone in jail who attempts to hide their wealth outside the controlled banking system by keeping it in private script or unconfiscated greenbacks.

  Since this very idea amounts to a frontal assault on civil liberties and economic justice, the FT should be left to condemn itself with its own words:

  But even as individuals have taken recent crises as reasons to stock up on banknotes, authorities would do well to consider the arguments for phasing out their use as another “barbarous relic,” the moniker Keynes gave to gold . . . But even a little physical currency can cause a lot of distortion to the economic system.

  The existence of cash—a bearer instrument with a zero interest rate—limits central banks’ ability to stimulate a depressed economy. The worry is that people will change their deposits for cash if a central bank moves rates into negative territory. The Swiss, Danish and Swedish central banks have pushed rates lower than many thought possible; but most policymakers still believe in an “effective” lower band not far below zero.

  The dominant argument for beginning the tightening cycle is to have enough “ammunition” for a new stimulus when the next downturn comes. Removing the lower band would leave central banks well equipped to deal with a slowdown even from near-zero starting points.

  There you have it. The private economy and its millions of savers exist for the convenience of the apparatchiks who run the central bank.

  And this view is not limited to the editorial scribblers at the FT. Their reasoning was identical to that offered by Harvard Professor Kenneth Rogof
f, the former chief economist of the International Monetary Fund, who recently advocated abolishing high-denomination banknotes such as 100 and 500 notes.

  So in their palpable fear of a Wall Street hissy fit and unrelieved arrogance, would they now throw millions of already-ruined retirees and savers completely under the bus by confiscating their cash?

  Yes, they would.

  THE CENTRAL BANKERS’ BIG LIE—THE RISIBLE MYTH OF THE “SAVINGS GLUT”

  The central bank war on savers is also rooted in a monumental case of the Big Lie. To wit, they claim that one Starbucks cappuccino per day on a $250,000 nest egg is owing to a global “savings glut” and low economic growth, not their deliberate pegging of interest rates on the zero bound and flattening of the yield curve through massive QE. Thus, Mario Draghi insisted recently that ultra easy monetary policy and NIRP

  “[are] not the problem, but a symptom of an underlying problem” caused by a “global excess of savings” and a lack of appetite for investment . . . This excess—dubbed as the “global savings glut” by Ben Bernanke, former US Federal Reserve chairman—lay behind a historical decline in interest rates in recent decades, the ECB president said.

  Nor did Draghi even bother to blame it solely on the allegedly savings-obsessed Chinese girls working for 12 hours per day in the Foxconn factories assembling iPhones. Said Europe’s mad money printer, the single currency area was “also a protagonist.”

  Actually, that’s a bald-faced lie. Europeans are not saving too much. The household savings rate, in fact, has been declining ever since the inception of the single currency. And, as shown below, that long-term erosion has not slowed one wit since Draghi issued his “whatever it takes” ukase in August 2012.

  Yes, double-talking central bankers like Draghi slip in some statistical subterfuge, claiming current-account surpluses are the same thing as a savings glut.

  Actually, they are nothing of the kind. Current-account surpluses and deficits are an accounting identity within the world’s Keynesian GDP accounting schemes, and for all nations combined they add to zero except for statistical discrepancies.

  In fact, current-account surpluses and deficits are a function of central bank credit and foreign-exchange policies and their impact on domestic wages, prices and costs. Chronic current-account surpluses result from pegging exchange rates below economic levels and thereby the deflation of domestic wages, prices and production costs. By contrast, chronic current-account deficits, as demonstrated in Chapter 4, stem from central bank inflation of domestic debt, consumption, wages and costs.

  Stated differently, what central bankers claim to be “excess savings” generated by households and businesses, which need to be punished for their sins, are actually deformations of world trade and capital flows that are rooted in the machinations of central bankers themselves.

  During the 14 years before Draghi’s mid-2012 “whatever it takes” ukase, which meant that he was fixing to trash the then-prevailing exchange rate of $1.30–$1.40 per euro, the Eurozone did not have a current-account surplus.

  What Draghi cites as the “savings glut” problem is mainly his own creation.

  That is, the Eurozone’s recent current-account surpluses are the short-term result of the 20% currency depreciation the European Central Bank effected under his leadership, and also the temporary improvement in Europe’s terms of trade owing to the global oil and commodities glut.

  And even in the latter case, as we will demonstrate in Chapter 18, it is central bank action that originally led to the cheap-credit boom of the last two decades and the resulting overinvestment in global-energy and mining production capacity. It was that malinvestment-rooted deflation that the Eurozone imported, not a glut of internal savings.

  In any event, the Eurozone surpluses since 2011 shown below do not represent consumers and businesses failing to spend enough and hoarding their cash. To the contrary, these accounting surpluses are just another phase of the world’s massively deformed system of global trade and capital flows. The latter, in turn, is the fruit of a rotten regime of central bank falsification of money and capital markets.

  In fact, when savings are honestly measured, there is not a single major developed-market economy in the world that has not experienced a severe decline in its household savings rate over the last several decades. The U.S. household savings rate, for example, has not only dropped by more than half, but in so doing it was going in exactly the wrong direction.

  That is, the giant 78-million-plus baby boom generation was demographically ambling toward the inflection point of massive retirement waves beginning in 2010. The savings rate should have been rising toward a generational peak, not sliding into the sub-basement of history.

  In this regard, Japan is the poster child for the truth of the matter, which is that we have actually had the opposite—an antisavings famine in most of the developed world.

  Thus, Japan’s much-vaunted high-saving households back in its pre-1990 boom times have literally disappeared from the face of the earth. Yet this baleful development occurred just when Japan needed to be building a considerable savings nest egg for the decades ahead when it will essentially morph into a giant retirement colony.

  The deep secular decline of household savings rates throughout the developed-market world is in itself the tip-off that central banks have drastically deformed the financial system. They are now telling the proverbial Big Lie about a phony “savings glut” in order to justify their continued savage assault on depositors.

  In fact, under any historical rule of sound money, the kind of investment boom experienced by the emerging-market world during the last two decades would have been financed by the upsurge of a large savings surplus in the developed-market economies. So the world’s monetary central planners have turned the laws of economics upside-down.

  THE UPSIDE DOWN OF KEYNESIAN CENTRAL BANKING

  During the great global growth and industrialization boom between 1870 and 1914, for example, Great Britain, France, Holland and, to a lesser degree, Germany were huge exporters of capital. By contrast, the emerging markets of the day—the United States, Argentina, Russia, India, Australia and so on—were major capital importers.

  That made tremendous economic sense. The advanced economies earned trade surpluses exporting machinery, rolling stock, steel, chemicals and consumer manufactures, and then reinvested these surpluses in loans and investments in ships, mines, railroads, factories, ports and public infrastructure in the developing economies.

  The lynchpin of this virtuous circle, of course, was common global money—that is, currencies that had a constant weight in gold and which, accordingly, were convertible at fixed rates over long stretches of time.

  English investors and insurance companies, for example, held sterling-denominated bonds issued by foreign borrowers because they knew the bonds were good as gold, and that their only real risk was borrower defaults on interest or principal.

  Today’s world of printing press money has turned the logic of gold standard capitalism upside-down. Accordingly, during the last several decades the East Asian export manufacturers have purportedly become voracious savers and capital exporters, while the most advanced economy on the planet has become a giant capital importer.

  Indeed, Keynesian economists and so-called conservative monetarists alike have proclaimed these huge, chronic U.S. current-account surpluses to be a wonderful thing.

  No, they aren’t. Donald Trump is right—even if for the wrong reason.

  The United States has borrowed approximately $8 trillion from the rest of the world since the 1970s, and not pursuant to the laws of economics, as the Keynesian/monetarist consensus proclaims. Instead, the unbroken string of giant current-account deficits shown next—the basic measure of annual borrowing from abroad—were accumulated in violation of the laws of sound money and were, in fact, enabled by Richard Nixon’s abandonment of the dollar’s convertibility to a fixed weight of gold in August 1971.

  At length, t
he unshackled Fed found one excuse after another to flood the world with dollar liabilities. In fact, the Fed’s balance sheet liabilities (that is, dollars) totaled just $65 billion before August 1971, meaning that it has exploded by 70X to $4.5 trillion in the years since.

  This vast inflation of the monetary system, in turn, enabled total credit outstanding in the U.S. economy to soar from $1.7 trillion at the time of Camp David to nearly $64 trillion at present. As we documented in Chapter 6, that means the U.S. economy’s ratio of total public and private debt to national income surged from its historic level of 1.5X in 1971 to 3.5X today.

  Needless to say, the evil of this kind of massive money and credit inflation is that it is contagious. The last 45 years have proven in spades that there is no such thing as printing press money in one country.

  In fact, the borrowing binge in America, Japan and Europe played right into the hands of the mercantilist policy makers in East Asia and the petro-states.

  By pegging their currencies not to a fixed standard like gold, but to the massive emission of floating dollars, they appeared to become prodigious capital exporters and “savers.” That’s because in order to keep their currencies from soaring against depreciating dollars and euros, their central banks accumulated huge amounts of U.S. Treasuries and euro debt in the process of chronic, heavy-handed intervention in the foreign-exchange markets.

  Folks, that’s not a savings glut; it’s the consequence of massive money printing and credit expansion on a worldwide basis. Had China not depreciated its currency by 60% in 1994 and kept it more or less linked to the Fed’s flood of dollars ever since, its vaunted $4 trillion of FX reserves and the 60X expansion of its domestic credit—from $500 billion in the mid-1990s to $30 trillion at present—would not have happened in a million years.