Salient to Investors:

David Stockman writes:

  • Chris Rupkey at MUFG Union Bank says consumers have emerged from the winter blues and if they spend anywhere as great as they feel, the economy will roar over the next few months. Rupkey and others have been expecting a roaring economy for several years but are wrong because they use a business cycle model that is erroneous and obsolete.
  • We are in a bubble finance world driven by Wall Street speculation.
  • The business cycle is essentially a product of central banking, which generates credit inflation and economic boom and bust.
  • The Fed of yesteryear was reactive, prudent and pre-Keynesian and mostly a passive watchman.
  • Global central banks are racing in the same direction of ease and rampant money printing, while for 80% of today’s debt saturated household balance sheets, spending is constrained to current wages and income regardless of the price of credit.
  • Capital markets are no longer honest with debt and equity capital priced correctly and executives rewarded for investing in long-term productive assets. Today, debt is drastically under-priced and financial engineering – stock buybacks and pointless M&A deals – are deeply subsidized and powerfully rewarded.
  • In the past, you got inflation in one country because there was no mobilized cheap labor pool and export factories in Asia to constrain the classic wage-price-cost spiral. Eventually, the Fed had to extinguish the very wage-price spiral it had caused.
  • The reason for the late 1970s consumer price explosion was not the presence of OPEC in the world oil market but the absence of the China labor force and the “china price” for tradeable goods in the face of massive monetary expansion.
  • ZIRP and QE have inflated financial assets rather than wages and prices as it did during the era of inflation in one country.
  • Central bankers believe that they can keep easing until a 1970s style inflationary spiral arises, but that will not come because their money printing of the last two decades has generated massive excessive capacity and malinvestment. Instead, expect an unprecedented global deflation as the financial bubbles burst for the third time this century.

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