New York, New York
December 11, 2015
 Dear Reader,
The Fed is stranded in a monetary no man’s land. By the time of next week’s meeting, the federal funds rate will have been pinned at about 10 basis points (bps), or effectively zero, for 84 straight months.
Yet during that same period, the consumer price level has risen by 1.75% per year. And that’s if you give credit to all of the Bureau of Labor Statistics (BLS) gimmicks. These include tricks like hedonic adjustments for quality change, homeowners’ “imputed” rents and product basket substitution, which cause inflation to be systematically understated.
Looked at closer, therefore, the real money market interest rate has been negative 2% for seven years. But that’s so crazy, unjustified and unprecedented that even the Keynesian money printers who run the Fed have run out of excuses.
Presumably, Yellen and her posse know that we did not have seven years running of negative real money market rates even during the Great Depression of the 1930s.
So after one pretension, delusion, head fake and forecasting error after another, the geniuses at the Eccles Building have painted themselves into the most dangerous monetary corner in history. They’ve left themselves no alternative except to provoke a riot in the casino -- the very outcome that has filled them with fear and dread all these years.
Indeed, Yellen and Bernanke before her have made a huge deal out of communications clarity and “forward guidance.” But how do you explain to even the credulous gamblers and day traders on Wall Street that the business cycle has not been outlawed and that free money cannot last forever?
And after all these years of saying that the U.S. Treasury does only domestic monetary policy -- how will the Fed heads explain that they’re impotent to stop the gale force of global deflation and recession imported by the inevitable unwinding of the massive dollar short they’ve spent years fueling?
| For years now, the dollar has been a “funding” currency in the global casino. |
For years now, the dollar has been a “funding” currency in the global casino -- something the gamblers borrowed or sold short in order to pile into higher-yielding emerging-market (EM) debt, equities and commodities until they peaked a while back.
But the fantastic global credit bubble has now reached its zenith. China and the EM economies are rolling over into a terrible deflation, thereby catalyzing the mother of all margins calls. There will be a global capital expenditure (capex) depression. And its contractionary cascade will cause the entire global economy to shrink for the first time since the 1930s.
In fact, it is already happening, even by the lights of the International Monetary Fund. The world’s nominal GDP has dropped 5% in dollar terms during the past year. That’s telling, because the world’s $225 trillion tower of debt is heavily denominated in dollars, or linked to it through exchange rates. The most important of these is the Chinese renminbi (RMB.)
But unlike the short-lived recessionary dips of the past, the southward turn still has a long way to go. Brazil is plunging into its so-called hard landing, and China is not far behind -- along with its supply chain and developed-market (DM) materials exporters like Canada and Australia.
In other words, this train’s just leaving the station. Below, I show you what kind of bind the Fed is in and how the gamblers at the Wall Street “casino” will react when Janet Yellen raises rates.
Regards,
David Stockman
for The Daily Reckoning |
