Is 'Financial Repression' The Solution to the Trillions In Unpaid Debt Arising From The Pandemic?

As most who read this blog know, financial posts are often a feature when I am not writing about astrophysics, math, deep politics, climate change or atheist ethics.  Right now, for those who may not read the financial pages, a huge concern is the mounting debt loads which have leaders around the world biting their nails.   It is useful here to consult the graphic showing debt as a percentage of GDP for  5 specific nations and a generic "advanced economies" overall.   This is from the recent Wall Street Journal article 'Debt Battle Awaits Post-Virus World', June 15, p. A2)

On top of this, there is now  a sobering article for The Atlantic’s July/August 2020 issue — which warns another banking calamity is a strong possibility and which ought to be required reading for  all sentient Americans.  It also, to me, clearly shows why Trump - the most ineffectual, incompetent leader in over 100 years- cannot be allowed a repeat performance. (Aside from this, I am still puzzled by recent polls showing a plurality of Americans - 48% to 35 %-  favor Trump over Joe Biden to deal with the economy. Ahem...this is the same Bozo who crashed the economy leading to 42 million unemployed, folks!)

Anyway, with respect to the Atlantic piece, UC Berkeley law professor Frank Partnoy writes:

"After months of living with the coronavirus pandemic, American citizens are well aware of the toll it has taken on the economy: broken supply chains, record unemployment, failing small businesses. All of these factors are serious and could mire the United States in a deep, prolonged recession. But there’s another threat to the economy too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed"


The prime culprit?  The 'CLO' or collateralized loan obligation.  According to Prof. Partnoy:

"After the housing crisis subprime CDOs naturally fell out of favor. Demand shifted to a similar — and similarly risky — instrument, one that even has a similar name: the CLO or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses — specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan.”

Adding:

"CLOs have been praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system.”

Understated in all the huff and puff about expanding debt is that  just because CLOs are  "praised" by Powell doesn't mean they aren't risky.  (Recall before the 2008 credit crisis and housing collapse, the then Fed Chair Alan Greenspan praised adjustable rate mortgages - ARMS - at the heart of the housing meltdown).  Also, we know most of the outstanding debt - probably 75 %   - is not from stimulus packages such as the CARES Act- but a combination of extended tax cuts and overleveraging in the financial markets.   Two years ago the warning was sounded by the IMF as reported (April 17, 'IMF Sounds Alarm On Excessive Global Borrowing' )  in The Financial Times, though the leveraging debt was not mentioned specifically, i.e.:

"The world's $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago, the IMF has warned, sounding the alarm on excessive global borrowing.  The fund said the private and public sectors urgently need to cut debt levels to improve the resilience of the global economy, and provide greater firefighting ability it things go wrong... World borrowing is more than twice the size of the value of goods and services produced and 225% of global gross domestic product. This is 12 percentage points higher than the peak of the previous financial crisis in 2009.

Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high."


Meanwhile, in the WSJ Business & Investing section  one is alerted to the understated role of  leverage (i.e.  'In Selloff, A Trading Strategy Is Faulted' (Feb. 9th,  2018, p. B11). So  we learned:

"Risk parity funds aim to reduce the danger from a collapse in any one market by limiting bets on more volatile assets like stocks and commodities, and use leverage to load up on safer assets such as government bonds."

In other words, these funds use debt, i.e. leverage,  to purchase safer bonds.   However, as the piece goes on to point out, when volatility jumps the leverage can force the funds' automated trading strategies to dump those assets, forcing a selloff.  Let me add here both individual investors and whole companies have now taken to the leverage 'drug'  to place their market bets using borrowed money.  The losses they have accrued, along with decades of trillion dollar tax cuts,  have helped to monumentally add to the $164 trillion in global debt.  But WHO is being asked to pay now, even with the party still going on? Well, the average Joe and Jane on Main Street.

In a separate WSJ piece, Paul Hannon warns us:

"In the U.S. and elsewhere, government debt is set to soar this year, reflecting lower tax revenue and the cost of financial aid to households during lockdown. The International Monetary Fund forecasts that U.S. government debt will reach 131%  of annual economic output this year, up from 109% in 2019."

Hannon makes clear Joe and Jane American are going to have to pay the piper, especially if we are to avoid bank collapses such as forecast by Prof. Partnoy.   While the Federal Reserve has ruled out negative interest rates (for now) three other options are on the table, none of them palatable:

1) Apply more austerity using a combination of spending cuts and higher taxes. However, the worry of the financial elites is that this may trigger even more political division and austerity protests along with the ones against the police.

2) Allow inflation to roar back  diminishing the value of the dollar and thence, the magnitude of the debt owed.

3)Financial repression is therefore preferred. (According to a 2015 paper by economists Carmen Reinhart and M. Belen Sbrancia, it lowered the average interest bill for 12 governments by between 1% and 5% of GDP from 1945 to 1980).  It therefore "played an instrumental role in liquidating the massive debt accumulated during World War II"

Basically, financial repression means sustaining policies that ensure interest rates remain low.  These would include: central bank purchases of gov't bonds and regulations prodding investors to hold such securities.  (Since March, the Fed has slashed its benchmark interest rate to near zero, bought $2.1 trillion in Treasury and mortgage bonds, and rolled out numerous lending programs).

Of course, apart from savaging savers, the repression strategy would cut ordinary citizens' spending even more.   Now, according to the latest data, one will also have to add spending pullbacks by the wealthy.

Economists at the Harvard-based research group Opportunity Insights estimate that the highest-earning quarter of Americans has been responsible for about half of the decline in consumption during this recession. And that has wreaked havoc on the lower-wage service workers on the other end of many of their transactions, the researchers say. According to  Michael Stepner, an economist at the University of Toronto:

“One of the things this crisis has made salient is how interdependent our health was. We’re seeing the mirror of that on the economic side.”

As income inequality has grown in the U.S. , so has inequality in consumption. That means that when the rich spend money, they drive more of the economy than they did 50 years ago. And more workers depend on them.  When workers lose jobs or the rich stop spending in those job areas it translates into acute financial pain. Add in the pandemic and the situation becomes intolerable - which means more stimulus money has to be infused.

This is why Fed Chair Jay Powell told the Senate Banking Committee two days ago that congress needs to pump more money in,  and especially  that it should consider extending unemployment benefits beyond the current July 31 cutoff date.    He also warned the recovery would be long and arduous and jobs not likely to return until consumers felt confident enough to go out and partake in the economy, i.e. in dining out, cinema attendance, even shopping for durable goods. In Powell's words: 

"Some form of support for those (unemployed) people going forward is likely to be appropriate.  There are going to be an awful lot of unemployed people for some time until a vaccine appears."

In the heat of a battle like this, no one is obsessing about how much pandemic -related debt is exploding.   As the World Bank's chief economist explains it (WSJ, ibid.): "This is a war. In a war, you worry about winning the war, and then you worry about paying for it."

So true.

Update: From WSJ  June 19, p. A8 ('Americans Skip Millions Of Loan Payments')

"Americans have skipped payments on more than 100 million student loans, auto loans and other debts since the coronavirus hit the U.S., the latest sign of the toll the pandemic has taken on people and finances.  The number of accounts in deferral, forbearance or some other type of relief reached 108 million at the end of May, according to credit reporting firm TransUnion."

"The surge in missed payments suggests that the flood of coronavirus related layoffs has left many Americans without the means to keep up with their debts. Many people have used up their stimulus checks and unemployment benefits."

From same page story ('Debt Relief Has Ripples'):

"Benign though the many debt forbearance decisions may seem, they're rippling through the financial food chain with unpredictable consequences. America is living out a financial experiment unseen in modern times - testing what happens when the economy deals a devastating blow to millions of borrowers, but lending institutions behave as if it hadn't.

Repo agents and debt collectors may be criticized but they clear the detritus of soured loans, recycling the lent capital.  Their activity helps keep money moving between lender and borrowers, especially high risk borrowers. .. With the credit recycling machinery largely frozen, banks may be less willing to make loans."

See Also:

Economic Policy

Instead of Bailing Out For-Profit Colleges, Congress Should Cancel Student Debt

Yield Curve Inversion Occurs - But Is Anyone Paying Attention?

Fed chief Jerome Powell and yield curve for March 25, 2019 (from T. Rowe Price Investor Bulletin, December, 2018)

For some time now, over the past 4 months, I've warned of potential yield curve inversion and how it's often signaled recession or massive downturn  I noted recessions tend to occur once the "flat" yield curve becomes "inverted" - with short term (e.g. 2 -year)  bond rates higher than long term (e.g. 10 year) rates. As a recent T. Rowe Price Investor Bulletin warned (p. 4) this condition has transpired before each of the past nine recessions dating back to 1955.  Hence, while it isn't a 100% absolute predictor, it is a significant historical marker..

The T. Rowe warning - assuming one can take it as such - is (ibid.):

"The yield curve is not flat yet ...but it could be by next March if the Fed maintains its 0.25 percent per quarter pace of rate hikes and the 10-year Treasury continues to meet resistance above the 3.0 percent level.  Starting the historical average 16-month clock from the spring of 2019 would raise the specter of a major downturn by 2020."


Interestingly, last Thursday we learned (WSJ, 'Treasury Yields Tumble After Fed Restraint', p. B12)  that "the yield on the two year Treasury notesettled at 2.402% on the day before compared with 2.471 % Tuesday. This marked the biggest one day slide since the start of the year, according to Dow Jones Market data."

 Given what happened March 21st, it shouldn't have been totally surprising the yield curve might actually have inverted on Friday - March 22nd - which it did.   One of my favorite go-to financial forecast sources, James Mackintosh in the Wall Street Journal wrote:   

"The market’s most reliable recession indicator is finally flashing red. With the Treasury yield curve inverting on Friday—the 10-year yield fell sharply to be lower than the three-month for the first time since 2007—is it finally time to prepare for an economic downturn?”

Good question! I believe so, as I've written before given I suspect the correlations over time (see graphic are almost as reliable as sunspot activity curves in predicting large flares.   It is therefore of interest to inspect the yield curve for March 25th, with Treasury bills designated along the abscissa, e.g. with bond terms from less than five years to 30.  Note also the curve behavior and how it changes with the specific bonds.


Look carefully and you will see the evidence for yield curve inversion, rates, hence the freak out for may. Subsequently economist and NY Times columnist Paul Krugman wrote the following in a tweet:


Mackintosh, for his part, has always been somewhat agnostic on the value of the yield curve as forecaster of recession. He writes, for example:

The yield curve might be less reliable than its recent U.S. history suggests. It has a terrible record internationally, for instance. It flat-out hasn’t worked in Japan, also has a poor record in the U.K. and in Germany provided no advance warning of the 2008 recession, the worst since reunification. At the moment the curve isn’t inverted in any of them thanks to superlow or negative interest rates, even though all are struggling with greater economic troubles than the U.S.


In other words, one needs to bring to bear skepticism as to the historical evidence.

But then in subsequent text  we behold some very crucial points:

“Previous inversions took place at much higher short rates — 5 or 6 percent, versus 2.5 percent now.”

He continued: “So this inversion actually reflects a worse outlook for the economy than the number itself suggests. Again, it’s not a direct read on the economy; it’s a read on what the average bond investor thinks is happening to the economy. But still not encouraging.”

We should also bear in mind what Mackintosh wrote back on July 3, 2017, as regards the assumption that bear markets only come with recessions, i.e.:

"Investors believe that bear markets only come with recessions, and so reassure themselves that there is no sign a recession is imminent, repeating the mantra that 'economic cycles don't die of old age'. Unfortunately, this is both wrong and useless.

First, 20 percent drops happen outside recessions, as in 1987 and 1966. Second, economic cycles can be killed by a financial crash, and as the late Hyman Minsky pointed out, the longer a financial cycle goes on, the more likely it is to turn to excess and end badly. Worse, there is no reliable method of forecasting a recession, so even if it were true that only a recession can end a bull market, that isn't a lot of use to investors."

Put aside yield curve inversion, as yields fell and the curve merely flattened, "investors punished bank stocks ... A flatter yield curve hurts banks stocks because it narrows the gap between what lenders pay on deposits and lend on loans- a spread known as the net interest margin."  (WSJ, Mar. 22,  p. B10 ).  What especially bothered me even earlier (than seeing the yield curve inversion) was reading WSJ columnist Greg Ip's March 21  warning piece:

The Fed's New 'Normal' Looks Worrisome - WSJ

https://www.wsj.com › Economy › U.S. Economy

And how we needed to be wary of the Fed's sudden dovish inclination. Quoting Mr. Ip, which I believe is important to get the context:

"The Federal Reserve now believes its monetary policy is back to normal. That should worry you.  If this is normal then the Fed has precious little ammunition for when economic conditions again turn abnormal."

Ip then goes on to note that since 2005 the Fed had been 'normalizing' monetary policy by raising interest rates and shrinking its bond holdings."  (From the quantitative easing or QE policy.)

But:   "This week it declared the process all but done"  Adding to this,  the Fed big wigs see "no more rate increases this year"  and "they will stop shrinking the balance sheet".   This is nothing short of mind boggling, given almost $4 trillion of toxic bond assets remains on its balance sheets.   Even by September the bond balance will only be down to $3.5 trillion or 17 % of GDP.

Also, ceasing to increase interest rates puts the screws to millions of senior savers - who'd been saddled with pathetic low rates for over a decade. As one of the few segments of the ordinary citizen financial demographic with money to spend, this is not a sound move.   Ip also warns  (ibid., this is all from the original print version, not the digital update):

"Should the economy stumble again, the Fed won't have much ammunition with which to respond."

Well, unless it resorts to the "negative interest rate'"  route which the Swiss also attempted with adverse results, and millions actually stuffing money (cash) under their mattresses. I mean, who the hell wants to keep it in the bank and lose $$?

But perhaps there is method to the Fed's madness. As James Piereson writes ('How Debt Makes The Markets Volatile',  Feb. 28, p. A17):  "Stocks are becoming more sensitive to interest rate hikes because the global economy is over-leveraged."

Something I've also addressed before, in conjunction with IMF warnings and : 

"Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high.  

The fund urged policymakers to stop 'providing unnecessary stimulus when economic activity is already pacing up' and called on the U.S. to 'recalibrate' its fiscal policy and increase taxes to start cutting its debt." 

So no, the GOP-Trump tax cuts - which effects are driving millions crazy now in terms of low or  no tax refunds -  did not help the situation. Assorted experts have estimated $1.5- 2 trillion in added deficits. And as the WSJ's Gerald Seib put it (Feb. 19, p. A4): "As the accumulated debt rises, the bill to pay the interest on the debt rises too."   See e.g.

Brane Space: IMF Debt Warning Ought To Send Chills Through Every ...

brane-space.blogspot.com/2018/04/imf-debt-warning-ought-to-send-chills.html

As 

Trump's Asset Bubble Economy - Based On Irrational Exuberance- Contains Seeds Of Destruction Within It

The Trump buffoons, and Preznit "Gaslight" himself,  are busy bragging on the 4.1 percent growth over the last quarter -  the largest since a 5 percent spurt after Obama took office. As we know from previous Bull Market terminations, market crashes, irrational exuberance reigns before the fall - as it does now. Scanning over the financial headlines in both the WSJ and Financial Times the past six months all I've seen are warnings and insinuations the alarms are "blinking red" - as they did before 9/11. But too few are paying attention, they're too drunk on Gaslight's Kool aid.

Too many citizens are drunk with their seemingly flush investments, including 401(k)s and IRAs, and they are failing to see the warning lights, far less pay any attention to them. It's much too easy to just coast and enjoy the economic bounty while it lasts  - besides it's believed it's about the only positive aspect to the Trump Imperium's reign.  Most economists, even those who are citing the warning signs, grudgingly concede the dousing of regulations (i.e. citizen protections) as well as the tax cuts of last year- have ginned up the economy.  Others have rightly warned that basic economics says you do not gin up or stimulate an already humming economy because it risks inflation - and that means the Federal Reserve raising interest rates. That scenario carries the same horrific specter for the markets as crucifixes do for vampires.

The other aspect missed by too many in their stock and bond hubris, is the fact the stock market was revved up after GE was replaced in the Dow Jones Industrial Average lineup by Walgreens, after being a member company for more than a century.. 

How many are aware, for example, that that Dow was also 'adjusted' ('juiced' by might be a better term) on March 17, 1997? And by the people that invented it (Dow Jones, Inc.)? As Jay Hancock notes ('Dow Index Detaches from Reality', The Baltimore Sun, April 4, 1999, p. 1E):

Quote:

A committee of green eyeshade types juiced the lineup, blackballing four down-at-heel Dow members and picking ringers as replacements. Out went Bethlehem Steel, Woolworth, Texaco and Westinghouse. In came Johnson & Johnson, Wal-Mart, Hewlett-Packard and Travelers. One -eighth of the Dow membership changed that day, but you'd never know it from looking at those mountainous Dow graphs....Without the switch, by my calculation, the Dow would have been near 9,000 last week. Not 10,000.

What Hancock is basically saying, is that the alleged stock market upon which folks are basing their retirements and long term investments is a myth. It doesn't really exist because it lacks any fixed identity, e.g of component companies, over time..  It's like a human who changes personas every so often so no one can remotely know who he is.. That may sound like no problem, but it means the human's short and long term behaviors are unpredictable and it means the same for a stock market predicated on a DJIA subject to expedient reshuffling.  It also renders the frequent citations of rate gains over long periods of time, e.g. "7 % per year"  gains or whatever, totally fictitious. Since the identity of the DJIA alters with each replacement, or substitution it can't be the same over long duration. So you can't cite a fixed average gain - which implies component stability - over decades,. say from 1987 until now.  

Indeed as a WSJ piece notes ("In GE Ouster, Dow's limits Stand Out', June 21, p. B12):

"The Dow Jones Industrial Average has ejected numerous Blue Chip companies over the past decade including miner Alcoa Inc., Westinghouse Electric Corp. and this week General Electric Co."

Nor are serious market watchers particularly happy with this state of affairs.  Robert Pavlik, senior portfolio manager and chief investment strategist at SlateStone Wealth said of the decision to drop GE (ibid.):

"Honestly, I didn't like the move. It's supposed to be an industrial average that is reflective of the overall economy of the United States, and if that's the case then why replace it with Walgreen's?"

Well, the only reason would be to juice the index, by changing its identity - again reinforcing my point that what people are investing in lacks any persistent identity. Basically, people are pouring their money into an extravagant "pig in a poke". Most ominously (ibid.):

"The removal of troubled businesses appears to have helped keep the index moving higher."

Or, three card Monte on steroids.

Having dealt with the artificial identity of the DIJA - and hence the DOW overall   and how the several replacements of member companies  renders the "market" a fiction,  we now come to the more immediate factors destabilizing this fiction. Three article alerts that appeared in March and April and remain relevant today include:

1) 'Investors Fear Goldilocks Market Is Ending', noting "Nine years into a roaring stock bull market, fund managers are paying their last respects to Goldilocks".

2) 'Bear Markets Can Fly In On Their Own'  warning "stock market bulls shouldn't be basing their bullishness on recent bullish activity."

3) From The Financial  Times , April 17, ('IMF Sounds Alarm On Excessive Global Borrowing') :

"The world's $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago, the IMF has warned, sounding the alarm on excessive global borrowing.  The fund said the private and public sectors urgently need to cut debt levels to improve the resilience of the global economy, and provide greater firefighting ability it things go wrong.

Fiscal stimulus to support demand  is no longer the priority the IMF said Wednesday in a report published at its spring meetings in Washington. "

Let's note here that "support demand"  referenced in the FT account means support of  "aggregate demand", i.e. getting citizens to spend more - which was the basis for the Trump-GOP tax cuts. This was an incredibly bad play given how much these cuts will add to the deficit, going forward, and how little they would contribute in terms of a job picture then already near full employment. And as the WSJ's Greg Ip showed, they will now increase the trade deficit as well, approximately $35 for each $100 increment in the budget deficit.  Since the tax cuts are now conservatively estimated to add $1. 5 trillion to the deficit, you can do the math for the trade deficit using Ip's ratio. 

Why does the U.S. run a trade deficit? Well, because "it consumes more than it produces while its trading partners collectively do the opposite."  Ip notes "another way of saying this is that the U.S. invests more than it saves while other countries save more than they invest."

The FT piece on the IMF warning goes on noting what is most worrisome:

"World borrowing is more than twice the size of the value of goods and services produced and 225% of global gross domestic product. This is 12 percentage points higher than the peak of the previous financial crisis in 2009."

And the U.S. is singled out as a primary debt offender, e.g.

"Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high.

The fund urged policymakers to stop 'providing unnecessary stimulus when economic activity is already pacing up' and called on the U.S. to 'recalibrate' its fiscal policy and increase taxes to start cutting its debt."


This previous significant reporting is relevant to the following more recent  WSJ reports:

1)'Markets Flash Caution For Stocks' (p. B1, April 14-15):

Evidence for crowded positioning, elevated valuations and fears that growth may be losing momentum.


2)'The National Debt Is Worse Than You Think', (p. A18, April 18)

"Today's outlook for revenue growth is based on policy that's unlikely to pan out. The CBO estimates that if current policy continues the cumulative deficit will rise a further $2.6 trillion over the next decade, to a staggering $15 trillion.


'3)Supply Starts To Crimp Growth' (p. B1, April 25)

Economic data are showing a strained supply side.  Set against global demand, supply chains are 'struggling to keep up'. This is increasingly a global phenomenon. 

4) 'Don't Get Hung Up On Yields' (p. B16, April 25)

Yields marching higher comes at an odd time, since the recent economic news hasn't been great. But what it also shows is that investors are operating with blinders on and ignoring events, such as the rise of right populists in Europe, and staggering global debt,  that they ought to have on their radar. Too much irrational exuberance, including using leverage to purchase more stock shares. 

 5) In GE Ouster, Dow's Limits Stand Out' (p. B12, June 21)

See earlier description of effects.

6) 'Consumer Spending Rise Has Dark Side (p. B1, July 16)

The Federal Reserve reported outstanding consumer credit debt rose $24.6 billion n May from a month earlier, or nearly double the $12.8 billion economists expected.

6) 'Tariff Threat Gets Closer To Consumers' (p. A8, July 18)

Massive increased costs on a variety of consumer products from cars and car parts, to furniture, to mobile phones, home improvement items, networking gear and seafood.  Takeaway? Consumers may have to go into more credit card debt to afford the higher prices of durables, especially, if their wages continue to stagnate. 

7) 'Fed Shouldn't Ignore Yield Curve' (p. B9, July 23)

The Fed isn't worried about the yield curve, for the same reason it wasn't worried before the 2008-09 financial crisis, but it should have been. (The yield curve is the difference between shorter and longer term Treasury yields - a key indicator for the future of the economy.)

"Today evidence abounds  - from supertight spreads, to negative yields, to high stock valuations to the popularity of structured products - that investors are willing to take risks to capture yield."

More irrational exuberance!

8) 'Stock Outflows Swell In Flight For Safety' (p. B13, July 27)

Investors are fleeing U.S. stocks at a rapid clip  as continuing market volatility and trade tensions pushes them to seek safety among less risky assets such as U.S. Treasurys. The exodus coincides with the implementation of the first round of tariffs between the U.S.  and China.

9) 'Stocks Are Up Despite Troubles' (p. B1, July 27-28):

Four primary risks exist now to the market's momentum: i) higher bond yields, ii) global economy - debt impacts, iii) Trump's trade war, especially new tariffs, iv) European politics.  Investors aren't pricing in much of a drag from the rest of the word, wrongly."

10)'Save Interest For Rainy Day' (Martin Feldstein,  p. A17, July 27):

"The downturn is almost certainly on its way. The likeliest cause would be a collapse in the high asset prices that have been created in the exceptionally relaxed monetary policy of  the last decade. It's too late to avoid an asset bubble. Equity prices have already risen far above their historical trend.  The price -earnings ratio of the S&P 500 is now more than 50 percent higher than the all time average, sitting at a level reached only three times in the past century.

The inevitable return of these asset prices to their historical norms is likely to cause a sharp decline in household wealth and in the rate of investment in commercial real estate. If the P/E ratio returns to its historical average, the fall in share prices will amount to a $9 trillion loss across all U.S. households."


Feldstein's argument - given the preceding  - is that it is essential to keep raising interest rates (the Federal funds rate) to at least 4 % over the next two years, to have room to maneuver out of a recession and stock crash should  these occur. And again, all the alarms are blinking red, despite the hubris and denial of so many, inebriated by irrational exuberance.

Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warned (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

But even if Silver's statistical projections don't get you roused, the highlights of the preceding six months should, if you've taken the time to read them.  This brings us to collation of the information and then asking the question: Okay, the Trump asset bubble economy is like the "Titanic" heading for the iceberg, so what will be the signs of imminent sinking?  What warnings will we have?

Actually, very little if you're not already paying attention  - including to three things that could trigger a massive deleveraging: a) Trump's insane trade war, b) the ever mounting global debt c) the unwinding of  the Fed's remaining $3.8 trillion in QE (quantitative easing) assets.

In the first case the situation is vastly more perilous than either the political pundits or corporate media let on.  The fact Trump had to go to a Depression- era program to snatch $12b of taxpayer money for a bailout (sorry, Mnuchin, that's the word I'm using) is not a good sign.  It is indeed only a temporary fix and not a very good one. If it doesn't work - and it won't - then what?  Added to that, only a few of the more insightful farmers in flyover country appear to grasp it isn't just a loss of current revenue to pay their outstanding debts, but a loss of their markets - i.e. in China, Mexico which they'd spent years cultivating. Once those markets are gone to competitor nations there will be little, if any, chance of regaining them. That means permanent debts - many farm foreclosures- and little money for more bailouts.  (Apart from which many other trade sectors, e.g. the fishing industry, may also be looking for gov't handouts by then.)

It is also well for people of any sense to treat ALL Trump's statements on trade as LIES.  I cite here the WSJ piece, 'Europeans Dispute Trump Trade Claim' (July 28-29, p. A5)  in which we learn:

"While Mr. Trump told an Iowa crowd Thursday that "we just opened up Europe for you farmers", officials in Brussels later said he did no such thing."

Adding later:

"The U.S. side 'heavily insisted to insert the whole field of agricultural products', Mr. Juncker told reporters immediately following the meeting, 'We refused that because I don't have a mandate and that's a very sensitive issue in Europe."

Part of what he was referring to was GMO crops, a very "sensitive" issue for the EU citizens indeed..  In any case, given Trump's claims were palpable bullshit, the farmers again are left with no outlets for  their produce. Their wares will then keep piling up in silos, storage bins while other nations, like Japan, step in and reap the benefits.  Chance of getting their original markets back after Trump's trade war games are over? Slim and none.

Meanwhile, the mounting global debt has reached stupendous levels and already been warned abut by the  IMF which took a dim view of the U.S. tax cuts,  that only added to that debt.  As per a Bloomberg report from May, "the U.S ran a $466 billion current account deficit last year, meaning it imported far more than it exported".  In addition, the U.S. remained the "largest driver of global current account balances in 2017, running the world's largest deficit and adopting policies - i.e. a shift to much larger deficits via tax+ cuts - likely to increase imbalances in coming years."

The U.S. rightfully and properly ignored deficits to staunch the Great Recession and pull the nation back from the fiscal- credit  abyss, i.e. via stimulus spending ($797 b) in 2009 . But Washington not only failed to wipe out the red ink when the economy rebounded, but added much more via massive, uncalled for tax cuts. Now the red ink is a red tsunami and the entire global debt has rendered most assets suspect, or under water, meaning based on using leverage for purchases.

Bottom line: this current economic "explosion" is built on quicksand. You cannot base a sound economy on exploding debt. Rising debt also threatens to weaken the global power of the U.S. as it increasingly depends on foreign investors to lend money to the Treasury. As of now, the Chinese own 5.7% of all U.S. Treasury securities to the tune of $1.2 trillion. Americans had better pray every night Trump doesn't piss them off in his goofy trade war to the extent of calling in those markers.

In addition, we know that tax cuts added to an already stimulated economy can destabilize it into depression or serious recession. As I pointed out in my Nov. 29 post from last year:

"Calvin Coolidge signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.  Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October,  1929."

But. most of us suspect the immediate trigger could well be the Fed's unwinding of the 3+ trillions for easy money during the QE era.  As The UF puts it:

"As reported by Business Insider, a report from the global head of Société Générale's asset allocation team projected that the unwinding of easy money policies and broken politics in Washington will cause  today's market to unravel."

The 'broken politics' refers to an inability to resolve issues like the debt ceiling and out of control spending, especially with inadequate revenue coming in owing to addle- brained tax cutters.  And already Preznit Gaslight is threatening a government shutdown if he doesn't get his cockeyed "border wall", expecting the Dems to give in to his extortion.   The next debt ceiling increase is likely to exceed $22 trillion, and the money still to be unwound from the Fed's QE program is nearly $4 trillion.  Adding money for DoTurd's border wall would be one more spark to ignite the final unraveling of his "great" economy. Put it all together and you are looking at a major catastrophe ready to happen, never mind the current economic growth happy talk dominating much of the press.

The Forecaster goes on to note that other sources predict an even more dire end to this Bull, viz.:

"Legendary investor Jim Rogers says we're about to suffer the biggest stock market crash in our lifetime. And he believes it could happen later this year."

The UF goes on:

" Why should we listen to him?  The 74 year old not only helped found one of the most successful hedge funds of all time, he's made a number of market calls including the last housing crash. As Rogers observed, the debt that fueled the last downturn is nothing compared to the debt we've piled up since then. Over the last 10 years our national debt has more than doubled. His advice, 'Be worried!'

Would a stock crash- recession be the worst thing to happen? That depends on your perspective and political tribe affiliation.  Especially if you're a member of the Trump personality cult. If you're delirious about Trump and love his deregulation, tax cuts and so on, you will be hysterical after a 50 percent crash, followed by recession. You're best bet now is to stock up on anti-depressants.

For the rest of us, such events - horrific as they may be - finally portend an end to Trump's  "Teflon" cover via a fake economy based on asset bubbles and stock buybacks. As WSJ columnist Greg Ip put it regarding the current expansion based on debt and fumes (my terms), "this benefits Mr. Trump since it makes a recession less likely before he faces voters again in 2020."

My bet?  A stock crash either this year or next, coupled with Mueller's probe finding for conspiracy of the Trumpies with Russkies, will finally send this deadbeat pretender and traitor back to whatever crack in hell from which he crawled.

See also:

http://www.smirkingchimp.com/thread/robert-reich/80418/why-wages-are-going-nowhere

Excerpt:

"The typical American worker now earns around $44,500 a year, not much more than what the typical worker earned in 40 years ago, adjusted for inflation. Although the US economy continues to grow, most of the gains have been going to a relatively few top executives of large companies, financiers, and inventors and owners of digital devices. America doesn’t have a jobs crisis. It has a good jobs crisis."

And:

http://www.smirkingchimp.com/thread/will-bunch/80381/that-raise-you-were-promised-last-year-wall-street-took-it-from-you

Excerpt:

"Now, the post-tax-cut numbers are coming in, and you’ll be shocked, shocked to learn that America didn’t get that pay raise after all. In a widely read column last week for Bloomberg, Noah Smith pointed to statistics from PayScale showing that so-called real wages — your paycheck, but adjusted for inflation — actually fell in the just-ended second quarter of 2018, by 1.8 percent."

And:

http://www.smirkingchimp.com/thread/reese-erlich/80391/us-losing-trade-war-with-china

And:

http://www.smirkingchimp.com/thread/william-rivers-pitt/80403/will-this-trade-war-be-donald-trump-s-political-waterloo