Salient to Investors:

David Stockman writes:

The real danger comes from the official institutions who have lapsed into empty ritualism and contrivance while the global economy and financial system becomes more unstable by the day. No sane person would inject $95 billion of new debt into busted Greece, or consider another round of fiscal stimulus in Japan to add to their one quadrillion yen of debt, or fix China’s bankrupt local governments by swapping trillions of bank loans for equivalent mountains of new municipal bonds.

The Fed is still manning the emergency fire hoses despite the US economic ‘recovery’ being 74 months old and much longer than the post-war average. The real reason the Fed doesn’t raise rates is that it fears that its first increase in nearly a decade will upset Wall Street.

ZIRP is the mother’s milk of Wall Street speculators, who know that the Fed would never allow the money market to become illiquid or allow a temporary surge in the overnight rate to clear their speculation. No businessman with productive inventories would be foolish enough to fund his working capital in the overnight markets.

The FOMC telegraphs to traders exactly what it intends to do for months in advance, thereby removing risk entirely from the oldest sin of finance, borrowing short and investing long, creating an endless inflation of financial asset prices, and depriving the real economy of true risk capital.

The ratio of the market cap of the Wilshire 5000 to GDP is now 133%, higher than the 112% in the dotcom bubble and the 104% in the housing blow-off.

US households reached peak leverage in 2008, and are still at 180%, which is way above historically proven healthy levels. ZIRP merely subsidized the most imprudent of household borrowers and transferred income and wealth to borrowers and gamblers at the expense of savers and producers.

There is no evidence that real output and wealth increase faster at 2.0% inflation than they do at any inflation rate. The BLS has been under-measuring housing inflation since switching methodologies in the early 1980s in order to save money on indexed government transfer programs. Market rent has risen at a compound annual growth rate of 3.7% over the last 15 years versus 2.5% calculated by BLS.

Stephen D. Williamson at The FRB of St. Louis said:

  • Zero interest rates since 2008, designed to spark good inflation, have only produced the opposite.
  • The Fed’s “forward guidance” has been a muddle of broken vows that has only confused investors.
  • QE have at best a tenuous link to actual economic improvement, while there is no proven link between QE and inflation and real economic activity – QE has been ineffective in increasing inflation.

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