http://www.zerohedge.com/news/2013-10-26/new-normal
Submitted by Tyler Durden on 10/26/2013 07:51 -0400
The New Normal?
Submitted by Jim Quinn of The Burning platform
The New Normal?
Our government and financial “leaders” tell us that things are back to normal and we are well on our way to economic recovery. They report rising GDP, declining unemployment, and record corporate profits. The legacy media propaganda machines, controlled by corporations dependent upon the government and Wall Street to funnel them advertising dollars in return for reporting falsehoods and mistruths, have been informing the masses that all is well. Just go back to staring at your iGadgets and tweeting your every thought to your followers, because the best and brightest in D.C. and Wall Street have it all figured out. The new normal is here to stay.
I guess my interpretation of normal deviates slightly from our glorious leaders’ definition. During the long-term bond bull market, from 1982 until 2007 the 10 Year Treasury steadily declined from 16% to 5%. This was normal because inflation declined at the same rate. Inflation declined from 13% to 3% over this same time frame according to the BLS. In reality, measuring inflation as it was measured in the 80?s and early 90?s would have yielded an inflation rate closer to 6% in 2007. During the decade prior to 2007, which consisted of supposedly strong economic growth, the 10 Year Treasury ranged between 4% and 7%. Even during the 2001 recession, it never dropped below 3.5%.
In a normal world an investor in a 10 Year Treasury bond would require a yield 2% to 3% above the rate of inflation. If the yield was below the rate of inflation they would be guaranteed to lose money. Only a fool, Federal Reserve chairman, or a CNBC bubble headed bimbo would buy a bond yielding less than the inflation rate. The BLS reported inflation rate has been between 2.1% and 3.2% over the last two years. Over this time frame, the 10 Year Treasury yielded 2% or below until the threat of tapering reared its ugly head this past summer. Would this happen in a normal free market? If things are back to normal, why aren’t supposedly free markets acting normal? The Chinese and Japanese reacted normally. They stopped buying Treasuries with a real negative yield.
The only fool willing to buy negative yielding Treasuries is none other than Ben Bernanke. He thinks they are the investment of a lifetime. He is so sure they are a can’t miss investment, he buys $2.5 billion of them per day, which just so happens to be the government deficit per day. Ben now has $3.8 trillion of bonds on his books, versus $900 billion in 2008. His balance sheet is leveraged 60 to 1, versus the 30 to 1 of Lehman and Bear Stearns prior to their implosions. When even the hint of reducing bond purchases from $85 billion per month to $75 billion per month caused 10 Year rates to jump from 1.5% to 3% in a matter of weeks, you realize how “normal” our economy and financial system is functioning.
If our financial system was functioning normally and free market capitalism was allowed to operate according to true supply and demand, the 10 Year Treasury would be yielding 4% to 5% and 30 year mortgage rates would be 6% to 7%. Think about that for a minute. This scenario was normal from 2002 through 2007. That is what normal looks like. Now open your eyes and observe what your owners are telling you is normal. The slight increase in mortgage rates from 3.5% to 4.5% has brought the Wall Street buy and rent housing recovery scheme to it knees. Imagine if mortgage rates were allowed to rise to their true market rate. Housing would collapse in a heap.
Allowing Treasury rates to adjust to a true market rate, based on true inflation, would double or triple the annual interest expense on the $17 trillion national debt and blow a gigantic hole in Obama’s already disastrous $1 trillion annual deficits. Does this sound like “normal” to a rational thinking human being with the ability to understand simple math? Luckily, there are very few rational thinking Americans left and even fewer with the ability to understand simple math. We have been programmed to believe rather than think. As long as the stock market continue to rise, then everything is normal.
Do you think Ben Bernanke and his cohorts at the Federal Reserve worry about the average person who doesn’t own stocks, has to fill up their gas tank, feed their kids, make the mortgage, auto, and credit card payments, and figure out Obamacare, while working two part time jobs? Quantitative Easing (MONEY PRINTING) has one purpose and one purpose only – to further enrich the owners of the Federal Reserve – Wall Street banks. The .1% own most of the stocks in this country and their greed and avarice can never be satisfied.
This artificial prosperity plan for Wall Street has the added benefit of allowing the captured politicians in Washington D.C. to continue their $1 trillion per year deficit spending with no consequences for their squandering of future generations’ wealth. Bernanke and Yellen will never taper, because they can’t. The Fed balance sheet will continue to grow by at least $1 trillion per year until they crash the financial system again. Except this time, there will be no money printing solution. We are all trapped like rats in this monetary experiment being conducted by evil mad scientists. No one will get out alive. Welcome to the new normal. Now eat your cheese.
http://www.zerohedge.com/news/2013-10-25/guest-post-fed-can-only-fail
Submitted by Chris Martenson of Peak Prosperity,
The basic predicament we are in is that the current crop of leaders in the halls of monetary and political power do not appear to understand the dimensions of our situation.
The mind-boggling part about all this is that it's not really all that hard to grasp.
Our collective predicament is simply this:Nothing can grow forever.
Sooner or later everything must cease growing or it will exhaust its environs and thereby destroy itself. The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what they consider to be "normal."
But the problem is -- or the predicament I should more accurately say -- is that the recent past was not normal. You've probably all seen this next chart. It shows total debt in the U.S. as a percent of GDP:
Somewhere right around 1980, things really changed and debt began climbing far faster than GDP. And that, right there, is the long and the short of why any attempt to continue the behavior that got us to this point is certain to fail.
It is simply not possible to grow your debts faster than your income forever. However, that's been the practice since 1980; and every current politician and Federal Reserve official developed their opinions about 'how the world works' during the 33 year period between 1980 and 2013.
Put bluntly, they want to get us back on that same track and as soon as possible. The reason? Because every major power center, be that in DC or Wall Street, tuned their thinking, systems and sense of entitlement during that period. And, frankly, a huge number of financial firms and political careers will melt away if/when that credit expansion finally stops.
And stop it will; that's just a mathematical certainty. It's now extremely doubtful that the Fed or DC will willingly cease the current Herculean efforts towards reviving this flawed practice of borrowing too much, too fast. So we have to expect that it will be some form of financial accident that finally breaks the stranglehold of failed thinking that infects current leadership.
The Math
As a thought experiment, let's explore the math a little bit to see where it leads us. After all, I did just say that a poor end to all this is a "mathematical certainty", so let's test that theory a bit. I think you'll find this both interesting and useful.
To begin, Total Credit Market Debt (TCMD) is a measure of all the various forms of debt in the U.S. That includes corporate, state, federal, and household borrowing. So student loans are in there, as are auto loans, mortgages, municipal and federal debt. It's pretty much everything debt-related.
What it does not include, though, are any unfunded obligations, entitlements, or other types of liabilities. So the Social Security shortfalls are not in there, nor are the underfunded pensions at the state or corporate levels. TCMD is just debt, plain and simple.
As you can see in this next chart, since 1970 TCMD has been growing exponentially and almost perfectly, too (the R^2 is over 0.99 for you science types):
I've pointed out the tiny little wiggle that happened in 2008 - 2009 which apparently nearly brought down the entire global financial system. That little deviation was practically too much all on its own.
Now debts are climbing again, at a quite nice pace. That's mainly due to the Fed monetizing US federal debt just to keep things patched together.
As an aside, based on this chart, we'd expect the Fed not to end their QE efforts until and unless households and corporations once more engage in robust borrowing. The system apparently 'needs' this chart to keep growing exponentially or it risks collapse.
Okay, one could ask: Why can't credit just keep growing?
Here's where things get a little wonky. But if you'll bear with me, you'll see why I'm nearly 100% certain that the future will not resemble the past.
Let's start in 1980 when credit growth really took off. This period also happens to be the happy time that the Fed is trying to (desperately) recreate.
Between 1980 and 2013 total credit grew by an astonishing 8% per year, compounded. I say 'astonishing' because anything growing by 8% per year will fully double every 9 years.
So let's run the math experiment as ask what will happen if the Fed is successful and total credit grows for the next 30 years at exactly the same rate it did over the prior 30. That's all. Nothing fancy, simply the same rate of growth that everybody got accustomed to while they were figuring out 'how the world works.'
What happens to the current $57 trillion in TCMD as it advance it by 8% per year for 30 years? It mushrooms into a silly number: $573 trillion. That is, an 8% growth paradigm gives us a tenfold increase in total credit in just thirty years:
For perspective, the GDP of the entire globe was just $85 trillion in 2012. Even if we advance global GDP by some hefty number, like 4% per year for the next 30 years, under an 8% growth regime U.S. credit would be twice as large as global GDP in 2043(!)
If that comparison didn't do it for you, then just ask yourself: What exactly would US corporation, households and government borrow more than $500 trillion for over the next 30 years? The total mortgage market is currently $10 trillion, so might the plan include developing an additional 50 more US residential real estate markets?
More seriously, can you think of anything that could support borrowing that much money? I can't.
So perhaps the situation moderates a bit and instead of growing at 8%, credit market debt grows at just half that rate. So what happens if credit just grows by 4% per year?
That gets us to $185 trillion, or another $128 trillion higher than today -- a more than 3x increase:
Again, What might we borrow (only) $128 trillion for over the next 30 years?
When I run these numbers I am entirely confident that the rate of growth in debt between 1980 and 2013 will not be recreated between 2013 and 2043. With just one caveat: I've been assuming dollars remain valuable. If dollars were to lose 90% or more of their value (say, perhaps due to our central bank creating too many of them?), then it's entirely possible to achieve any sorts of fantastical numbers one wishes to see.
Think it could never happen?
Conclusion (to Part I)
This is the critical takeaway from all the math above: for the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. I truly believe this is the Fed's grand plan, if we may call it that, and it has nothing to do with what's best for the people of this land. Instead, it's entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.
That is, the Fed is beholden to a broken system; not anything noble.
In Part II: The Near Future May See One of The Biggest Wealth Transfers In Human History, we dive fully into the logic why GDP growth is very unlikely to support the rate of credit expansion the Federal Reserve wants (more accurately: needs). And what will happen if it indeed doesn't? A lot of painful, awful things -- but central among them, a currency crisis.
Amidst the ensuing unpleasantness will be an awakening within today's hyper-financialized markets to the huge imbalance now existing between paper claims and ownership of real things. A massive wealth transfer from those with 'paper wealth' (stocks, bonds, dollars) to those owning tangible assets (the productive value of which can't easily be inflated away) will occur -- and quickly, too.
Suggesting the key objective for today's investor is answering: How do I make sure I'm on the right side of that wealth transfer?
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