| | | | Why There Will Soon Be a Riot in the Casino By David Stockman |
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 Shrinking GPP (Gross Planet Product) is not even in the Fed’s vocabulary yet, and even when they do latch onto it, they won’t dare explain it honestly and cogently.
That’s because contracting GPP measures the abysmal failure of the two-decade long global experiment in massive central bank money printing, and the unsustainable credit fueled economic boom it enabled.
So the Fed will have some heavy duty splainin’ to do, but it will be hard-pressed to come up with words that comfort the casino, rather than spook it.
After all, for most of this century the Fed’s post meeting statements and minutes have been progressively degenerating into embarrassingly empty pablum; and its seemingly rock solid voting consensus was an artifact of being on the Easy Button 80% of the time.
In that environment there was little to debate and less to explain. They simply delivered an economic weather report and urged Wall Street to hang on for the ride.
But now the Fed must emerge from the shaded zone shown above for the first time on a sustained basis since the 1980s. Yet as it seeks to explain a macro-economic slump that it absolutely did not see coming, and confesses to its complete lack of policy tools to reverse the worldwide deflationary tide now lapping at these shores, its statements will be reduced to self-evident and self-contradictory gibberish.
Likewise, the 19 members of the Board will take to noisy public quarrelling right in front of the boys and girls on Wall Street for the first time in their lives.
The reason that there will soon be a riot in the casino, therefore, is not owing to the prospect of a 25 bps pinprick after all this time on the zero bound.
The hissy fit will happen because the Fed’s words and actions starting next week will not say “we have your back, keep buying.”
The message will be “we are lost and you are on your own.”
And that’s not “priced in.” Not even close.
Evidence that a completely new monetary policy ball game is commencing comes from John Maynard Keynes’ current vicar on earth himself, Larry Summers. Three days ago he penned a strange op-ed in which he apparently reminded himself that the business cycle has not been outlawed -- something most non-Ph.D.s presumably already knew:
“U.S. and international experience suggests that once a recovery is mature, the odds that it will end within two years are about half and that it will end in less than three years are over two-thirds. Because normal growth is now below 2% rather than near 3%, as has been the case historically, the risk may even be greater now.
“While the risk of recession may seem remote given recent growth, it bears emphasizing that since World War II, no postwar recession has been predicted a year in advance by the Fed, the White House or the consensus forecast.”
Well now. If you wait until month 78 of a business expansion to end the emergency policy, and then hesitate to venture more than a few basis points off the zero bound, you will indeed use up the remaining runway right quick.
That’s because the average of 10 business cycle expansions since 1948 have lasted but 61 months; and the only expansion that was appreciably longer than the present tepid affair was the 119-month stretch of the 1990s.
But let’s see. Back then the Fed’s balance sheet was $300 billion, not $4.5 trillion. The world had less than $40 trillion of debt, or about 1.4 times GDP. Not $225 trillion -- nearly 3 times global income.
And, most importantly, China was still a quasi-agrarian victim of Mao’s destructive experiments in collectivist economics and state generated famine, not today’s towering Red Ponzi.
That is, it was irrelevant then, but is now a bloated economic whale sinking under the weight of $30 trillion of debt and the most reckless spree of over-investment and mindless public and private construction in recorded history.
So as this domestic business expansion cycle get long in the tooth, the U.S. economy is confronted by a veritable engine of global deflation in the form of China and its EM supply chain. After a 20-year credit driven boom, it now payback time. All of these economies find their exports stalled, their exchange rates falling, and their debt service exploding higher.
What this means, of course, is that Wall Street’s “decoupling” myth will soon be on the scrap heap. US exports and imports are now crumbling, and even the standard measures of goods transit are cliff diving.
Likewise, today’s wholesale report for November was a red alert warning that a big recession inducing inventory liquidation is just around the corner. Even if Janet Yellen won’t find this chart on her dashboard of 19 lagging labor indicators, the message is unmistakable.
According to Dr. Summers, the thing to do when recession strikes is to cut interest rates by 300 basis points. But even he admits it ain’t going to happen this time.
Even if were technically possible to have a negative 300 bps federal funds rate, what is already a 2016 election year gong show would take on a whole new level of crazy. The brutally treated savers and retirees of American would well and truly revolt:
“Historical experience suggests that when recession comes it is necessary to cut interest rates by more than 300 basis points. I agree with the market that the Fed likely will not be able to raise rates by 100 basis points a year without threatening to undermine the recovery. But even if this were possible, the chances are very high that recession will come before there is room to cut rates by enough to offset it. The knowledge that this is the case must surely reduce confidence and inhibit demand.
“Central bankers bravely assert that they can always use unconventional tools. But there may be less in the cupboard than they suppose. The efficacy of further quantitative easing in an environment of well-functioning markets and already very low medium-term rates is highly questionable. There are severe limits on how negative rates can become. A central bank that is forced back to the zero lower bound is not likely to have great credibility if it engages in forward guidance.”
So if the clever word-splitter Summers can do no better than the above poorly disguised punt, can you imagine what blithering incoherence will be contained in the meeting statements as the recession gathers force next year?
There will be a riot in the casino. And then? Click here to see.
Regards,
David Stockman
for The Daily Reckoning
David Stockman was a two-term Congressman from Michigan. He was also the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street. He's the author of two books, The Triumph of Politics and The Great Deformation. He also is founder of David Stockman's Contra Corner. |
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