Tag Archives: housing crash

Paul Craig Roberts: “How Long Can The Federal Reserve Stave Off the Inevitable?”

IRD Note: The average household is bloated with debt, housing prices have peaked, many public pensions are on the verge of collapse in spite of 9-years of rising stock, bond and alternative asset values. But all of this was built on a foundation of debt, fraud and corruption. Dr. Paul Craig Roberts asks, “does the Fed have another ‘rabbit’ to pull out its hat?…

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

The job loss from offshoring also has had a huge and dire impact on Federal Reserve policy. With the decline in income growth, the US economy stalled. The Federal Reserve under Alan Greenspan substituted an expansion in consumer credit for the missing growth in consumer income in order to maintain aggregate consumer demand. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy.

The credit expansion and consequent rise in real estate prices, together with the deregulation of the banking system, especially the repeal of the Glass-Steagall Act, produced the real estate bubble and the fraud and mortgage-backed derivatives that gave us the 2007-08 financial crash.

The Federal Reserve responded to the crash not by bailing out consumer debt but by bailing out the debt of its only constituency—the big banks.

Click here to read the rest: Paul Craig Roberts/Fed

The Fed’s Everything Bubble And The Inevitable Asset Crash

Do not mistake outcomes for control – remember, there is no such thing as control – there are only probabilities. – Christopher Cole, Artemis Capital

Central Banks globally have created a massive fiat currency fueled asset bubble.  Stock markets are the largest of these bubbles – a bubble  made worse by the Fed’s attempt to harness the “power” of HFT-driven algo trading.  At least for now, the Fed can “control” the stock market by pushing the buttons that unleash hedge fund black box momentum-chasing and retail ETF  buy orders whenever the market is about to head south quickly.

However, the ability to push the stock market higher without a statistically meaningful correction is a statistical “tail-event” in and of itself. The probability that the Fed can continue to control the market like this becomes infinitesimally small. The market becomes like a like a coiled spring. The laws of probability tell us this “spring” is pointing down.

The Fed announced in no uncertain terms that it was going to begin “normalizing” – whatever “normalize” means – its balance sheet beginning in October.  Going back to 1955, the furthest back in time for which the data is readily accessible, the Fed Funds rate has averaged around 6%.  But for the last 9 years, the Fed Funds rate has averaged near-zero.  Back in May 2013 Ben Bernanke threatened the markets with his “taper” speech.  More than four years later the Fed Funds rate is by far closer to near-zero than it is to the 62-year Fed Funds rate average.  Can you imagine what would happen to the stock market if the Fed actually “normalized” its monetary policy by yanking the Fed Funds rate up to its 62-year average of 6%?

In September the Fed announced that it would begin reducing its balance sheet by $10 billion per month starting in October. Before the Fed began printing money unfettered in 2008, its balance sheet was approximately $900 billion.  If we define “normalize” as reducing the Fed’s balance back down to $900 billion, it would take 30 years at $10 billion per month. But wait, the Fed’s balance sheet is going the wrong way.  It has increased in October by $10 billion (at least thru the week ending October 18th).  So much for normalizing.

The Fed is stuck. It has created its own financial Frankenstein. Neither can it continue hiking interest rates nor can it  “normalize” its balance sheet without causing systemically adverse consequences.  The laws of probability and randomness – both of which are closely intertwined – tell us that, at some point, the Fed will lose control of the system regardless of whether or not it decides to keep rates low and maintain the size, more or less, of its balance sheet.

Jason Burack invited me onto his Wall Street For Mainstreet podcast to discuss the Fed’s “Everything Bubble,” why the Fed can’t “normalize” its balance sheet and the unavoidable adverse consequences coming at the system:

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