Thursday, May 14, 2015

The Fed Encouraged Packing TNT round the Blazing Ponzi Fire-Pit - The Impending Explosion is no Accident

Today, I explain why the Fed's rate-hike hype is simply ludicrous.

But to begin...a quick definition of a Ponzi...Ponzi schemes occasionally begin as a legitimate "business", until the "business" fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new "investors" to sustain the scheme.

The chart below shows the growth, peak, and decline of the 25-54 year old US population segment (aka, "investors").  The decline since '07 has been a small three quarters of 1%.  However, the fall in employment of this segment has been a disproportionately higher 5%...and the situation is even worse given that full time jobs have fallen even further among this segment only partly offset by the rise in part time jobs.

The reason this 25-54yr/old segment is so critical is it represents the portion of our population in asset accumulation mode (401k's, IRA's, etc.), buying homes, forming and raising families with all the consumption around clothing, feeding, raising children, etc. 

In contrast, the 55+ and 65+ year old segments are entering and inhabiting liquidation mode as they have relatively little money but are asset rich.  Generally, they look to sell these assets and downsize to smaller homes.  Their spending is generally falling in retirement and they look to social safety nets to augment their income in retirement.

The chart below shows the Fed's activities since 1980 encouraging ever greater levels of debt via lower interest costs.  Remember the Ponzi definition and consider it's impossible the Fed didn't foresee the demographic time-bomb so their encouragement of greater indebtedness was essentially packing TNT around the blazing Ponzi fire-pit.  Their credibility is at zero and so should their further responsibilities for guiding the American economy!  Their criminal responsibility should be their primary future concern.

When the chart 1 trend-lines of the core population and growth in employment were broken...consumption (chart below) fell across the board from total oil consumption to mortgage debt, etc..

Population Source; OECD, Main Economic Indicators; Oil Source; IEA; Mortgage Debt Source; Federal Reserve System; Federal Debt Source, Dept. of Treasury
And markets swooned without the inflow of new investors and consumers.  The chart below shows the '08-'09 fall in equity and housing prices...and my, what a recovery since despite the recovery of 25-54yr/old employment?!?

Employee Source, US Bureau of Labor Statistics; Salary/Wage Source, US BEA; Real Estate Source, Federal Reserve System, Z.1 Financial Accounts; Equity
In lieu of markets determining supply and demand and allow prices to find a balance...the Federal Government ran massive deficit spending doubling total federal debt in 7 years. 

And the Federal Reserve bought the newly created Federal debt to ensure interest payments for the government (and the private sector) debt would pose no impediment to incurring further debt.  The chart below highlights the 100% increase in debt vs. the 15% increase in interest payments on the federal debt.

And nearly all Treasury purchasing has shifted to the Fed and "Foreign Held".

But what has become clear in the below chart is the "foreign held" purchasing has fallen to a select few nations not coincidentally, now with standing Federal Reserve currency swap lines.  These nations are not credible buyers and the origination of the dollars to buy the "foreign held" US debt is almost surely via the Fed.

So for 3.5 decades, rates have gone down, debt has gone up...but the peaking and falling working age population and employees has collapsed the Ponzi scheme...and the Fed's solution was to initiate a Ponzi scheme of far greater size and impact.  The net result is the below chart of Debt to GDP vs. interest rates since 1969.

Now, for some strange reason Janet Yellen and the Fed are discussing raising rates this year.  The below charts detail the implications of these potential rate hikes.

The first chart shows historical interest payments as a % of total federal Treasury debt 'til now plus three scenarios...

  1. Interest rate hikes and interest costs rising to the 50yr average as a % of Treasury debt.
  2. Interest rate hikes and interest costs as a % of federal debt, rising to approx. 2000 levels.
  3. No interest rate hikes and rates remain near current record lows

The dollar impacts of the interest rate hikes are spelled out below (vs. federal income taxes to offer some perspective of the implications).  Even a modest set of hikes would result in interest expenses consuming in excess of 50% of all federal income tax receipts.  A move to the 50yr average of interest costs would result in 75% of all income taxes utilized only to pay interest on the US debt. 

And for those who believe the Fed's retribution of interest to the Treasury will relieve the situation, please note the Fed only holds about 14% of all Treasury debt.  "Foreign held" debt is at a record 33%...interest payments generally leaving the US with no multipliers or velocity!  

And BTW, on average the US has had a recession every 7 years since the end of WWII...and it's been 7 years and the first and second quarter GDP is looking awfully recessionary!?!

So, why is the Fed talking about interest rate hikes when the timeline for these hikes would have the US raising rates directly into a likely recession coupled with skyrocketing interest payments consuming 50% to 75% of all federal income tax revenue?