A Full Trunk Of Combustible Junk – The Wages Of ZIRP

Shuffling uncomfortably with paint brushes in hand in the tight monetary corner into which they have painted themselves, our monetary suzerains are about to demonstrate the folly of their seven-year stint of “extraordinary” policy accommodation.

Even as ZIRP and QE have failed to rejuvenate the main street economy, they did trigger a far-reaching scramble for yield that has now left the casino bobby-trapped with FEDS (financially explosive devices). The current rumblings in the junkyard are just the warning signs of the explosions sure to follow.

These little nasties are not the product of free financial markets and honest price discovery; they are the deformed off-spring of relentless financial repression and the systematic falsification of prices in the money and capital markets.

As shown below, the volume of outstanding high yield debt has reached record levels; and more importantly, it has climbed in a relentless progression over the Fed’s serial bubble cycles.

On the eve of the dotcom collapse, there was about $375 billion of high yield bonds and bank loans outstanding – a figure which was not in the slightest set back by the dotcom crash and recession which followed.

In fact, by the time Greenspan had slashed money market rates from 6.5% on Christmas eve 2000 to 1.0% by the end of 2003, the amount of high yield debt outstanding had doubled to $700 billion; and it eventually grew another half trillion dollars as the housing/credit bubble inflated, reaching $1.2 trillion by 2007.

During the Great Recession the level of outstandings plateaued during, but there was no purge of the rot or liquidation on a net basis of the excesses that had been generated during the Greenspan housing/credit boom.

Instead, it was rolled over in a vast refi operation triggered by ZIRP and the Fed’s massive suppression of bond yields via QE. Specifically, leveraged bank loan balances were paid down by about 10% between the 2007 peak and 2010 to about $500 billion.