iftttwall

Authored by Sven Henrich via NorthmanTrader.com,

Last week we found out that Dallas Fed president Kaplan knows that the Fed is creating excess and imbalances in stocks. Yes, bloating the Fed’s balance sheet by over $400B  in four months has a massive impact on stock markets. And billions of repo liquidity unleashed each day can be seen impacting the daily action as well (see: Repo Lightning).

So what’s Jerome Powell have to say about all this? Silence. Not a word.

Of course he doesn’t have to because the crack reporters never confront him on the issue in his post Fed meeting press conferences. Bubble away accountability free. Why bother asking the hard questions? That may just get you disinvited from the next press conference. Too strong of an assessment? I let you be the judge, but why are the hard questions not asked when it matters?

But actually we don’t need to wait for the answer from a press conference. Why? Because we already know the answer and the answer is: He knows.

Powell knows exactly the behavior he’s instilling in investors, the artificial levitation of asset prices and the disconnects and dangers that is poses.

All one has to do is dig in the Fed minutes from October 2012. Pages 192-194. It’s all there:

“I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?”

Why stop indeed? Clearly he’s not stopping now, he just went into overdrive launching the most aggressive balance sheet expansion since 2009:

And he knows perfectly well what’s happening as a result:

“Second, I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so.”

” Should give us pause” Cute. Except he’s not pausing now is he? The Fed’s official mission is centered around low unemployment and stable prices. “We will be there to prevent serious losses”. That is the Fed’s actually primary function, hence constant interventions at the first sign of trouble. And Powell knows that expanding the balance sheet takes on more risk taking.

He continues:

“Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy”.

You think?

Mission accomplished.

But then he gets to the fun part:

“My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.

Take selling—we are talking about selling all of these mortgage-backed securities. Right now, we are buying the market, effectively, and private capital will begin to leave that activity and find something else to do. So when it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response.

That’s right and that’s what we saw in December 2018. Markets fell apart and Powell went back to grab the Fed’s safety blanket. More easing and back to balance sheet expansion.

Powell knows. The entire cabal knows.

And so the easy money train has created the most ridiculous debt load ever hanging over the global economy:

“Spurred by low interest rates and loose financial conditions, we estimate that total global debt will exceed $257 trillion in Q1 2020.
A total of more than $19 trillion of syndicated loans and bonds will mature in 2020. https://t.co/RgUypqQhuj pic.twitter.com/FUjWSlavCy

— Sven Henrich (@NorthmanTrader) January 13, 2020

And now we’re back into a Fed created asset bubble.

And who benefits from all this?

The few, not the many:

And I see absolutely nothing changing this paradigm until something serious happens to force the system to change.

What’s the incentive for the global power structure to change any of this? I submit there is none unless they are forced to. But central banks with cheap money give license for politicians to do nothing. And so the runaway train continues.

The crisis of 2008 was the opportunity to change things. Instead we now have more debt, much more debt, more easy money, a lot more easy money, and ever wider wealth inequality.

Yes, it’s different this time. It’s worse, much, much worse.

And Powell knows.

*  *  *

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Former White House strategist Steve Bannon says that President Trump’s hard-line tactics in the US trade war with China has paid off, telling CNBC’s “Squawk Box” on Wednesday that Trump “stood up for the tariffs and he broke the Chinese Communist Party.”

“Today you’re what President Trump is going to do. It’s the beginning of the end of the managed decline of the United States. It was [Trump’s] tariffs. He went against all economic orthodox, and was lambasted by the financial press. He stood up for the tariffs, and he broke the Chinese Communist Party.” -Steve Bannon

“This is a huge win for @realDonaldTrump,” says Steve Bannon on Phase I trade deal. “Trump has changed the entire center of gravity of the way even the elites have to think about China.” pic.twitter.com/xOIsHJen96

— Squawk Box (@SquawkCNBC) January 15, 2020

Bannon also warned Apple that Trump may “drop the hammer” if they don’t work with authorities to unlock iPhones belonging to the Pensacola Naval Air Station shooter.

“If I were the guys at Apple I would pay attention to President Trump’s tweets,” he said, adding “I would treat his tweets like a papal bull.”

“If I were the guys at @Apple I would pay attention to @realDonaldTrump‘s tweets,” says Bannon. “I would treat his tweets like a papal bull.” pic.twitter.com/tCwWpODXQU

— Squawk Box (@SquawkCNBC) January 15, 2020

As an aside, one can’t help but speculate that Bannon and Trump are headed towards a reunion at some point…

Trump retweets multi segments of a Fox News hit by Steve Bannon today 👀 https://t.co/SUrwrSzyMn

— Ben Jacobs (@Bencjacobs) January 13, 2020

Authored by James Rickards via DailyReckoning.com,

In recent decades, the Fed has engaged in a series of policy interventions and market manipulations that have paradoxically left it more powerful even as those interventions left a trail of crashes, collapses and calamities.

This contradiction between Fed omnipotence and Fed incompetence is coming to a head. The economy has been trapped in a prolonged period of subtrend growth. I’ve referred to it in the past as the “new depression.” And the Fed has been powerless to lift the economy out of it.

You may think of depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment. Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline. But that is not the definition of depression.

The best definition ever offered came from John Maynard Keynes in his 1936 classic, The General Theory of Employment, Interest and Money. Keynes said a depression is, “a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.”

Keynes did not refer to declining GDP; he talked about “subnormal” activity. In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt. That is exactly what the U.S. is experiencing today.

Long-term growth is about 3%. From 1994 to 2000, the heart of the Clinton boom, growth in the U.S. economy averaged over 4% per year.

For a three-year stretch from 1983 to 1985 during the heart of the Reagan boom, growth in the U.S. economy averaged over 5.5% per year. These two periods were unusually strong, but they show what the U.S. economy can do with the right policies. By contrast, growth in the U.S. from 2007 through today has averaged something like 2% per year.

That is the meaning of depression. It is not negative growth, but it is below-trend growth.  And growth under Trump has been no greater than it was under Obama.

The bigger problem is there’s no way out, as I said. One manipulation leads to another. My greatest fear is that the U.S. is becoming like Japan, which has used every trick in the book to no avail.

In my 2014 book, The Death of Money, I wrote, “The United States is Japan on a larger scale.” That was six years ago now.

Japan started its “lost decade” in the 1990s. Now their lost decade has dragged into three lost decades. The U.S. began its first lost decade in 2009 and is now entering its second lost decade with no real end in sight.

What I referred to in 2014 was that central bank policy in both countries has been completely ineffective at restoring long-term trend growth or solving the steady accumulation of unsustainable debt.

In Japan this problem began in the 1990s, and in the U.S. the problem began in 2009, but it’s the same problem with no clear solution.

Now in 2020, central banks have been cutting rates again, as the trade war and slowing global growth have policymakers considering the implications of a new recession without the firepower they need. As things stand, the next recession may be impossible to get out of. And the odds of avoiding a recession are low.

The only way out is for the Fed to guarantee inflation “whatever it takes.” Nothing else has worked. So why not try a more active fiscal policy? Why not load the helicopters with cash and dump it out over Main Street?

First, we need to understand what helicopter money is, and what it isn’t.

The image of the Fed printing paper money, and dumping it from helicopters to consumers waiting below who scoop it up and start spending is a popular, but not very informative way to describe helicopter money.

In reality, helicopter money is the coordination of fiscal policy and monetary policy in a way designed to provide stimulus to a weak economy and to fight deflation.

Helicopter money starts with larger deficits caused by higher government spending. This spending is considered to have a multiplier effect. For each dollar of spending, perhaps $1.50 of additional GDP is created since the recipients of the government spending turn around and spend that same money on additional goods and services. The U.S. Treasury finances these larger deficits by borrowing the money in the government bond market.

Normally this added borrowing might raise interest rates. The economic drag from higher rates could cancel out the stimulus of higher spending and render the entire program pointless.

This is where the Fed steps in. The Fed can buy the additional debt from the Treasury with freshly printed money. The Fed also promises to hold these newly purchased Treasury bonds on its balance sheet until maturity.

By printing money to neutralize the impact of more borrowing, the economy gets the benefit of higher spending, without the headwinds of higher interest rates. The result is mildly inflationary offsetting the feared deflation that would trigger helicopter money in the first place.

It’s a neat theory, but it’s full of holes.

The first problem is there’s not much of a multiplier at this stage of the U.S. expansion. The current expansion is already the longest in U.S. history. It’s also been the weakest expansion in history, but an expansion nonetheless. The multiplier effect of government spending is strongest at the beginning of an expansion when the economy has more spare capacity in labor and capital.

At this point, the actual multiplier is probably less than one. For every dollar of government spending, the economy might only get $0.90 of added GDP; not the best use of borrowed money.

The second problem with helicopter money is there is no assurance that citizens will actually spend the money the government is pushing into the economy. They are just as likely to pay down debt or save any additional income. This is the classic “liquidity trap.” This propensity to save rather than spend is a behavioral issue not easily affected by monetary or fiscal policy.

Finally, there is an invisible but real confidence boundary on the Fed’s balance sheet. After printing $4 trillion in response to the last financial crisis, how much more can the Fed print without risking confidence in the dollar itself?

Quantitative tightening brought the balance sheet back down to $3.8 trillion. But now it’s over $4 trillion again, as the Fed has added hundreds of billions to its balance sheet since September, when it starting shoring up short-term money markets. It’s basically been “QE-lite.”

Modern monetary theorists and neo-Keynesians say there is no limit on Fed printing, yet history says otherwise.

Importantly, with so much U.S. government debt in foreign hands, a simple decision by foreign countries to become net sellers of U.S. Treasuries is enough to cause interest rates to rise thus slowing economic growth and increasing U.S. deficits at the same time.

If such net selling accelerates, it could lead to a debt-deficit death spiral and a U.S. sovereign debt crisis of the type that hit Greece and the Eurozone periphery in recent years.

In short, helicopter money could have far less potency and far greater unintended negative consequences than its supporters expect.