The following is an excellent excerpt from the book “THE GREAT DEFORMATION: The Corruption of Capitalism in America” by David A. Stockman from Chapter 33 on page 701 and I quote: “Sundown and the Endgame of Central Banking – The reason is straightforward: in a financialized economy, the marginal demand for credit consists of funding for the carry trades in one form or another. Yet this is the very perversion which permits the politicians to carry on with deficits without tears. When the Fed drives overnight money to zero and promises to keep it there through long-dated points on the calendar, it creates a false demand for government bonds.
Much of this false demand is financed in the repo market where fast money traders are happy to harvest the spread on the Fed-managed yield curve. They buy ten-year treasuries at a yield of 180 basis points (1.8 percent) and fund 98 percent of their position with 10-basis point overnight borrowings—all the while sleeping peacefully because Bernanke has promised that short-term rates will not rise until 2015. This amounts to robbing a bank without criminal liability. Not surprisingly, the banks themselves have gone in for this kind of legalized larceny. Since Bernanke slashed deposit rates to essentially zero, bank holdings of government and agency bonds have nearly doubled, rising from $1.2 trillion to $2 trillion.
Here lies the Great Deformation. Over the last several decades the implicit choice has always been between a regime of free market interest rates and a mobilized discount rate versus a regime of financial repression and unchecked private and public debt creation. The former route would have limited the Fed to the role of “bankers’ bank,” providing emergency discount loans at market-driven interest rates plus a penalty. The latter route, explicitly chosen by Greenspan and carried to an absurd extreme by the Bernanke Fed, has turned the Fed into a destroyer of honest financial markets, an enabler of financial speculation on a scale never before imagined, and a reallocator of society’s income and wealth to the 1 percent.
But worst of all, it has transformed the nation’s central bank into the handmaiden of fiscal calamity. Today the US Treasury can borrow money from ninety days out to five years, thereby encompassing most of its issuance, at rates between 10 basis points and 80 basis points. Washington’s mega-deficits are thus being funded with essentially free money. The Fed’s utterly foolish interest rate repression has stripped the politicians buck naked in the face of the free lunch propensities of the democracy and the raids and plunderings of crony capitalists in a political system where money rules.
Needless to say, the Fed has painted itself and the nation into a dead-end corner. Sundown comes because the Fed dares not let interest rates rise by even a smidgeon, let alone “normalize” or ever again approach something like an honest price for money and debt on the free market. If it did, the vast army of fast-money speculators who have rented Treasury bonds and notes on 98 percent repo would sell in a heartbeat, causing the price of government debt to fall sharply. Then the slower-footed bond fund managers would be forced to liquidate in the face of retail investor redemptions and eventually even banks and insurance companies would panic, selling into a bidless market for government debt and everything tied to it.
Standing at the edge of a financial abyss, the Fed is thus hostage to its own four-decade excursion in money printing and macroeconomic management. It cannot stop buying government debt because it is being front run by a herd of speculators which will turn on a dime unless it keeps buying and pegging the price of Treasury notes and bonds. At the end of 2012, its policy was to buy government and GSE debt outright at a rate of $1 trillion per year, which means that its balance sheet would be $6 trillion by the end of Obama’s second term.
The Global Monetary Bubble – It won’t get that far, however, because there are powerful countervailing forces gathering momentum; namely, a global beggar-thy-neighbor currency depreciation war that will dwarf the conflagrations of the1930s. As indicated earlier, the Fed has been the lead ship in a convoy of monetary roach motels since the 1970s. Not surprisingly, Bernanke’s balance sheet expansion spree during the BlackBerry Panic spread like wildfire.
The top eight central banks, including the ECB, Bank of Japan, and the People’s Printing Press of China, had combined balance sheet footings of $5 trillion before the financial storm erupted in 2007. Now they total $15 trillion and are expanding at explosive rates. Following in the footsteps of the Fed’s 4X increase in its balance sheet and the embarrassingly blatant spree of money printing by the Bank of England, the practice of buying unwanted sovereign debt has become universal.
The ECB’s $1.2 trillion so-called LTRO money-printing operation during late 2011 and 2012 was merely a thinly disguised backdoor means of financing the debt of Spain, Italy, Greece, and others that genuine investors did not want to buy at current interest rates. And the announcement by Japan’s new LDP government in late 2012 that the Bank of Japan should print money at whatever rate it may take to bring inflation back to life in a bankrupt economy simply carried the money-printing regime to a new extreme.
But it was the Swiss National Bank which was the ultimate canary in the mine shaft: it has been forced into massive expansion of its balance sheet in order offset the destructive flare-up in its exchange rate owing to flight capital out of the euro zone into the “swissie.” Indeed, when the Swiss central bank, the paragon of “hard money” in modern times, is forced into negative interest rates on deposits and an explicit policy of trashing its own money, then the currency wars have started, and there is no turning back.
The new government of Shinzo Abe in Japan has already fired the warning shot on the matte of competitive currency depreciation and the on coming race to the bottom. Its outright attack on the Fed is epochal, and contrasts dramatically with the actions of the Nakasone government which came to the Plaza hotel in 1985 to receive the ‘Texas treatment.” Implicitly referring to the “Connally treatment” of a decade earlier, the Japanese statesmen meekly declaimed, “We enjoyed that, may we have another?”
No longer. The Japanese government has buried itself in debt building roads to nowhere and implementing every hoary fiscal stimulus device ever conceived. With government debt at 250 percent of GDP, it now stands not only as a monument to Keynesian folly, but as a potent warning about how thoroughly and swiftly financial discipline has been destroyed by the Fed and its convoy of monetary roach motels.
At a meeting in early 1981, a high-ranking delegation of Japanese financial officials came to the White House to politely and discreetly ascertain whether the Reagan administration really intended to create massive and permanent fiscal deficits. At that point, Japan’s niggardly public debt stood at less than 35 percent of GDP and their officials were genuinely astonished that the American government would risk violating every standard of fiscal prudence by implementing big tax cuts without paying for them.
Needless to say, today Japan raises in tax revenue less than 50 percent of what its government spends, and it doesn’t dare ask about fiscal prudence. With taxation at levels needed to finance its current spending, Japan’s economy of old people and increasingly old industries would sink rapidly into the Pacific. Yet Japan’s domestic savings rate has fallen from 18 percent at the time of the aforementioned White House visit to essentially zero today, and its long-running current account surplus is turning sharply and rapidly into deep deficits.
Accordingly, there is no place left to sell the vast outpouring of government debt promised by the new LDP government except a the Bank of Japan. Were Japanese interest rates ever to rise even to 3 percent for the current comically low rates pegged by the Bank of Japan (80 basis points for ten-year notes), the interest cost on Japan’s gargantuan debt would absorb every single penny of government revenue. Japan’s economy would thus sink into the Pacific by another route.
So the Bank of Japan is also hostage to its sovereign debt, and will print yen faster and faster in stride with the QE-to-infinity posture of the US Fed. The ECB will also have no alternative to rapid money printing, as its constituent national economies shrink into permanent recession under the weight of fiscal austerity policies needed to keep their bloated welfare state budgets afloat. More likely than not, the Germans will revolt in the face of extreme ECB money printing and the euro will blow up, sinking the continent into deeper recession still.
Likewise for China. It goes without saying that this towering edifice—of bank credit, rampant speculation by much of the populace, massive state-financed construction of what amount to pyramids and other unusable public infrastructure and unspeakable corruption—cannot function without its export economy: that’s where it earns the real capital to keep going the monumental excesses and imbalance of Communist party-managed economy.
So China’s central bank must keep printing, too, and dares not allow the currency to appreciate much more than the token amounts of recent years in order to keep its export sector above water. Indeed, in a world of honest money much of China’s export economy would have never arisen or would have sunk below the waves long ago. And with it, of course, would have gone the whole system of tributary raw materials and intermediate components suppliers that feed on the great Chinese Factory; that is, Australia and Brazil in the former category and South Korea, Japan, Taiwan, Malaysia, and Singapore in the latter.
In short, the world economy is now extended on the far edge of a monetary bubble that has been four decades in the making. The next phase of money printing, however, may be the last because all the major, aging consumer economies of the world are failing; that is, the United States, Europe, and Japan. Accordingly, democratic politics will turn increasingly ugly, strident, and nationalistic in the face of chronic fiscal crisis recession and quasi-recession, middle-class austerity, and bubble opulence among the 1 percent. It will result in protectionism, currency wars, and anti-capitalist policy interventions, including capital controls, punitive taxation of the “rich” (which few will actually pay), and endless bailouts and boondoggles.
During the final phase of the global monetary bubble, economic growth in the United States will be ground to a halt. As this happens, the $20 trillion of prospective debt now obscured in CBO’s rosy scenario will become increasingly visible., causing the fiscal cliff to loom ever more forbidding and unmovable. American politics will consequently become more fractious and paralyzed, and the Keynesian state will inexorably sink into insolvency and failure.
The interim winners from this ordeal will be the gangs of crony capitalism and the opulent 1 percent who thrive off the central bank’s money printing. But in the end sundown will descend upon the entire nation—even on the 1 percent.”
ELLEN BROWN’S EXCELLENT ARTICLE TITLED “THE ARMAGEDDON LOOTING MACHINE: THE LOOMING MASS DESTRUCTION FROM DERIVATIVES” IN THE OCTOBER 15, 2013 ISSUE OF “THE PROGRESSIVE POULIST’”ON PAGE 13, IS PRETTY MUCH SIMILAR TO DAVID STOCKMAN’S EXCERPT, WHERE THEY BOTH TALK ABOUT SHADOW BANKING. IT’S A $60 TRILLION INDUSTRY AND THE EFFECT IT’S HAVING WORLDWIDE ON THE BOND MARKET AND HOW IT’S BYPASSING THE DODD-FRANK BILL. READ BOTH OF THESE ARTICLES AND YOU MAKE THE COMPARISON AND WRITE YOUR CONGRESSMAN AND TELL THEM YOU WANT THE BANKING SYSTEM CHANGED, CONCERNING THOSE UNREGULATED, TOXIC DERIVATIVES. DAVID STOCKMAN WOULD MAKE AN EXCELLENT GUEST IN FRONT OF CONGRESS BECAUSE HE MADE SOME GREAT SUGGESTIONS, IF THEY WANT TO USE THEM, CONCRNING THE USE OF JUNK BONDS AND DERIVATIVES, RUINING OUR MARKET. SINCE I’M NOT GOING TO MENTION THEM ON MY BLOG SITE, YOU’D HAVE A GOOD IDEA OF WHAT I’M LEADING UP TO BY READING HIS 700 PAGE BOOK LIKE I DID AND SOME EXCERPTS I PUT ON MY BLOG SITE TO TEMPT YOUR IMAGINATION. HIS SUGGESTIONS OF HOW TO REVERSE THE TRAGIC CONDITIONS THE COUNTRY IS GOING IN, YOU’RE GOING TO HAVE TO GET THE BOOK YOURSELF AND READ IT AND THE INTERESTING SOLUTIONS I KNOW WOULD HELP, SUCH AS RETURNING TO THE GOLD STANDARD.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer & Public Citizen & AARP Members