The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.
The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.
The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world’s convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.
The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of global GDP.
And even that ratio is an understatement. That’s because measured GDP has been artificially bloated by the monumental worldwide malinvestment and excess capacity arising from the credit bubble. That is, phony “growth” which under the laws of economics will be liquidated in due course.
But you wouldn’t have known that the global economy is about to hit the skids from Monday’s action. Bernanke kicked off the day in a Wall Street Journal op ed taking a bow for “saving the world”.
Then the stock market completed a rally from Friday’s post-NFP low, which amounted to 84 points (4.5%) on the S&P 500 during a seven-hour span of trading. That was even less time to “mission accomplished” than last October’s three-day Bullard Rip.
So here we are again circling the 2000 mark on the S&P 500—a level first crossed 440 days ago. Undoubtedly, the casino is knee-jerking upward because Goldman has already made an unsecret audible call, instructing the Fed to substantially defer lift-off well into next year.
As its New York based chief economist and B-Dud doppelganger, Jans Hatzius, informed clients:
“……..a slowdown in output and employment may justify the Fed keeping the near-zero rate policy for much longer, well into 2016 or potentially even beyond………Further bad news on output and employment could potentially result in quite a large shift in the monetary policy outlook.”
^SPX data by YCharts
That Goldman Sachs is peddling the lunacy of potentially 100 straight months of zero money market rates is not surprising. There is no greater gift to the gamblers who comprise its clientele than free money for their carry-trades—-and especially when accompanied by the absolute certainty that there will be months of forewarning through Goldman’s house organ before the Fed permits even a 25 bps change in the cost of speculation.
Oddly enough, however, the Goldman bull-hug on the Fed is exactly why the casino has become a clear and present danger to the main street economy. To wit, under the Hatzius-Dudley-Wall Street mantra of perpetual ease the Fed has become a serial bubble machine, but the retrograde academics and career apparatchik’s who nominally run it do not have a clue about this destructive modus operandi.
Exhibit number one for that proposition is Bernanke’s self-justifying balderdash printed in today’s WSJ. The kindest thing you can say about it is that now that he is cashing in big time he ought to hire a better qualified intern to write his articles while he’s out flogging his book.
This gem is an embarrassing smattering of banality and bunkum. Above all else it does not give even a passing nod to the fact that the US operates in a tightly integrated global economy and financial system; that the very warp and woof of it have been bloated and distorted by central bank enabled leverage and speculation; and that the central banks of the world are now engaged in a desperate and self-evident scramble to keep the financial bubble they have inflated over two decades from collapsing upon itself.
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