Tuesday, June 30, 2015


The Fed has claimed victory and determined late 2015 is the time to begin a rate hike cycle.  The chart below shows the woeful lack of recovery of full time jobs lost in the last recession vs. continued population growth against previous recoveries.  Be that as it may, the Fed believes we have full employment and it's time to "normalize" interest rates and balance sheets.

What I find interesting is that the Fed's 99.9% decrease in the cost of funding from early '08 til present was supposedly to spur private sector lending and economic activity.  But what is so strange is that all net new credit and debt was via the government.  Private sources not only did not take on debt, they net deleveraged by over a $1 trillion over this period into record low rates.

Now the Fed wants us to believe it intends to raise rates and not engage in QE or other stimulative programs and, in lock step, reduce it's balance sheet by further trillions to the private sector...and the Fed anticipates private sources will take over credit and debt creation into this rising rate environment???  The same private sources that de-leveraged with rates at zero...these same sources are expected to refinance homes, refinance corporate debt, boost buybacks, and take on large quantities of new debt into a rising rate cycle?  This is the financial equivalent of the Fed telling tales of the tooth fairy or Easter bunny...the Fed must be counting on the stupidity of Americans to tell such a lie so openly and brazenly to the citizens of this nation.

The chart below shows as interest rates collapsed to the zero bound, only the government sources were willing to provide credit and take on new debt.  But without more credit and debt growth, there is no more GDP growth (flawed as the metric is).  The idea a handoff of credit and debt creation from government back to the private sector in a rising rate environment is plain dumb.  Home owners will not refinance to higher rates.  Corporations will not rollover and extend their debt for buybacks into rising rates.  They will pay down debt and net deleverage even faster.
Please think about this misnomer that private sector will take over for a moment coupled with the demographic reality the US is facing (below).  It's worse than ludicrous at a time when nearly all population "growth" is shifting to the 65+yr/old set, a group cutting back on spending, facing forced liquidation of assets, and generally deleveraging into retirement.  This is not a group that will be taking on more credit or debt.
So, with no driver for greater credit or debt, there is no economic driver for greater GDP, and there is no chance to organically "grow" our way out of the debt and unfunded liabilities owed.  The idea some transition back to normalcy is imminent is laughable and instead the reality is much greater Fed and CB "activism" is certain and likely to be on a scale unseen as of yet.