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Stanley Fischer Speaks——-Airballs From A Dangerous Academic Fool David Stockman

A Great Explanation of the Zero Interest Rate Policy (ZIRP) Effect

http://davidstockmanscontracorner.com/stanley-fischer-speaks-airballs-from-a-dangerous-academic-fool/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+PM+Monday


With every passing week that money markets rates remain pinned to the zero bound by the Fed—–the magnitude of the financial catastrophe hurtling toward main street America intensifies. That’s because 80 months—– and counting—–of zero interest rates are fueling the most stupendous gambling spree that Wall Street has ever witnessed or even imagined. Sooner or later, therefore, this mother of all financial bubbles will splatter, bringing untold harm to millions of households which have been lured back into the casino.

Then truth is, zero cost in the money market is irrelevant to main street. As we have repeatedly demonstrated the household sector is stranded at “peak debt” and, consequently, there is no interest rate low enough to elicit a pre-crisis style spree of consumer borrowing and spending. Based on the clueless jawing that occurred this weekend at Jackson Hole, the following simple chart that I laid out last week bears repeating:

On the eve of the financial crisis in Q1 2008, total household debt outstanding—including mortgages, credit cards, auto loans, student loans and the rest——– was $13.957 trillion. That compare to $13.568 trillion outstanding at the end of Q1 2015.

That’s right. After 80 months of ZIRP and an unprecedented incentive to borrow and spend, households have actually liquidated nearly $400 billion or 3% of their pre-crisis debt.

Likewise, zero money market rates are irrelevant to legitimate business finance. That’s because no sane executive would finance the life blood of his enterprise—–the working stock of raw, intermediate and finished goods——in the overnight money market; and self-evidently free overnight money is beside the point when it comes to funding long-term, illiquid but productive assets such as plant, equipment and software.

In fact, the only impact that free money market funding has on corporate America is round-about and perverse. To wit, it flushes money managers into a desperate quest for yield and provides stock speculators with endless opportunities to load up their trucks with zero cost carry trades, thereby driving the stock averages to lunatic heights.

As a result of this double-whammy, the C-suites of corporate America have been turned into glorified gambling parlors. The stock option obsessed executives domiciled there are endlessly and overpoweringly presented with the opportunity to sell cheap corporate credit to yield hungry fund mangers and use it to buyback their own over-priced stock or to acquire at a hefty premium the equally over-priced stock of their competitors, suppliers and customers, or any other company that Wall Street bankers happen to be peddling.

Again, as I demonstrated last week, after 80-months of the absurd proposition that money has no natural and inherent economic cost the pettifoggers who held forth at Jackson hole betrayed no clue whatsoever that they are aware of the obvious:

On the margin, all of the gains in business debt since 2008 has 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 (2014), US business spent $431 billion on plant, equipment and software after depreciation. That was 7% less than net business investment in 2007.

And these are nominal dollars! So all other things being equal, net business debt could have fallen over the past 7 years. The actual gain in net debt outstanding shown above self-evidently went into financial engineering—-that is, back into the Wall Street casino.

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

So this is how it boils down. The only thing zero money market interest rates are good for is to subsidize financial market speculation. ZIRP means that the speculator’s cost of goods (COGS) is essentially zero whenever yielding or appreciating assets are funded in the repo market or its equivalent in the options pits and Wall Street confected OTC trades.

Accordingly, after 80 months of showering Wall Street with what is a wholly unnatural and perverse financial windfall—-that is, zero cost in the money market—–the Fed has ignited a rip-roaring inflation. But the inflation is in the financial market, not the supermarket.

Needless to say, there was not even a faint trace of recognition of this fundamental reality in Stanley Fischer’s much heralded Jackson Hole speech on inflation. As usual, it was an empty bag of quasi-academic wind about utterly irrelevant short-term twitches in various inadequate measures of consumer inflation published by the Washington statistical mills. Indeed, Fischer went so far as to acknowledge that one of the more plausible consumer prices indices—–the Dallas Fed’s trimmed mean—–was up 1.6% in the past year.

Here’s the thing. No one except the modern equivalent of medieval theologians counting angels on the head of a pin could think that the difference between this reading and the Fed’s arbitrary 2.0% inflation target is of significance to any economic actor in the real world. That fleeting and miniscule difference would never in a thousand years impact the wage and price behavior of firms competing in the world market for tradable goods; nor would it alter the behavior of the overwhelming share of purely domestic service firms that inherently face an elastic supply curve owing to low entry barriers.

Likewise, firms with deep brand equity everywhere and always try to raise prices to capture the heavy marketing and other investment which went into creating their brands’ value and consumer franchises. But only clueless academic modelers like Fischer would ever think that 40 basis points of shortfall in the short-run consumer inflation trend would impact the pricing strategy of brand name service firms——-such as Amazon, for example.

In short, Fischer’s entire meandering discourse on this and that inflation index and his speculations about immeasurable “inflation expectations” was irrelevant drivel. It could have been delivered by any student who had passed Economics 101 at Podunk College.

In fact, the only real value of Fischer’s pretentious bloviation was that it was a reminder that the financial system of the world is in thrall to a tiny, insuperably arrogant posse of Keynesian academics who have invented from whole cloth a monetary theory of plenary control. They have effectively ended free market capitalism in the financial system and beyond and made democratic fiscal governance essentially irrelevant.

Here’s why——starting with the Fed’s specious mantra that “Humphrey-Hawkins” makes us do it.