maandag 17 juli 2017

David Stockman On Peak Bull: Fake Economy And Fake News

The American economy has been mangled by decades of assault on capitalist prosperity. Growth is now dying because the Federal Reserve’s hit on corporate America that has strip-mined its balance sheets to feed the halls of Wall Street. Trillions of dollars have been thrown into financial engineering (stock buybacks, M&A deals and leveraged recaps) while neglecting real investment and productivity in Flyover America...


The single most important thing that speculators and bulls on Wall Street should be looking at now is where we came from. If Wall Street understood this, they wouldn’t continue to expect the “born again” Reagan stimulus that has been imagined since Trump’s inauguration. The extent of what actually happened during the Reagan era is also important to examine. In the eight years after Reagan’s tax bill got handed out, the national debt and defense budget exploded. We had more red ink during in that eight year period than during the first 190 years of the Republic, in fact it doubled...

The national debt, which you can see starting in 1980 went from around $800-900 billion to well over $3 trillion. The share of GDP soared during that period. This is how the Reagan defense and tax cuts were funded. The move left the nation’s fiscal accounts in a dramatically different condition than when it started. Even Ronald Reagan, with his best of intentions, went in believing he was going to end up with less national debt and balanced budgets, though he ended up adding $1.8 trillion. The system in Washington is not as logical, rational and methodical as some of these Wall Street analysts want to believe...


The fact is that what actually happened with the Reagan tax cuts were dramatically bigger than anything that Donald Trump proposed during the campaign or had been found in the one page tax outline from April. The bars on the chart above show, sequentially, the size of the tax cuts relative to GDP over the following decade because it took 10 years to become effective. When it became fully effective, the tax cut seen in the chart were 6-6.2% of GDP by the end of the decade. It took the federal share of GDP in terms of revenue down from a projected 23% to about 16%. That is far beyond what anybody from the administration is talking about today. If you were to put this tax cut in today’s economic scale, it would amount to a $1.2 trillion per year tax reduction, when fully effected. Yes, that would be a jolt in the economy. At the same time, it would add to the massive debt levels already, which is something we can’t afford. The idea that if a tax bill was to be revenue neutral, or at the very least a version of what Trump talked about for a lowered corporate tax, the plan still doesn’t hold a candle to the wind. Such a move would be less than 2% of GDP, and likely at a level of 1%. That is nothing like what actually happened during Reagan. What actually happened then was the tax cut was so massive, the deficit exploded to over $200 billion. For a while that forced interest rates higher as the Treasury plunged into the bond market to try to finance the unintended deficit. Interest rates were being pushed above 10.5%. The Reagan miracle would have fallen on his face had the Fed allowed the market to clear and interest rates to balance supply and demand...


Then a new element came into the equation. Alan Greenspan was appointed Chairman of the Fed, exactly at the end of the chart above. Greenspan then discovered the printing press in the basement of the Federal Reserve’s Eccles Building. He began to heavily monetize the debt. That means when the Treasury was buying bonds with money from “out of thin air” that is then put into the account of the bond dealers who sell the debt to the Fed. The move altered the supply and demand equation. Think of it as putting a fat thumb on a scale that attempts to save the country from withering deficits while running up yields. The policy crowded out of private investments and the free market activity that happened before a dishonest Federal Reserve stepped in again in 1987. The Fed’s now reached a level of $4.5 trillion on its balance sheet. This has suppressed yields, prevented debt movement created from a short economic effect and created a feedback mechanism for politicians in the modern age. Greenspan inaugurated the era of bubble finance and deferred the day of financial reckoning...


As you can see, actual real GDP over the eight years of Reagan’s term. The blue arrow at the top represents the average growth rate of GDP from the end of 1953 to the end of 1980. That’s not a cycle or a short dislocation. That’s the trend rate of growth that was 3.5% and underneath it is there were eight years of the Reagan era and the average growth rate of GDP. By that time that Paul Volcker took over at the Federal Reserve the U.S was facing double digit inflation, in the midst of a recession that was deemed unavoidable. Real GDP in the U.S had declined but under the Fed’s guidance the economy bounced back after Volcker succeeded with having inflation purged from the system. At the beginning of that recession, we were about 10% inflation. By the time Volcker got to the end of the cycle, the Consumer Price Index (CPI) was down to nearly 3-3.5%. Politicians, too afraid to act, feared the bond vigilantes and a run up of interest rates. It caused the small business men, the big corporations and just about everybody else that they responded to complain that they were being crowded out of the market by Uncle Sam’s borrowing...


This evidence above shows the balance sheet of the Fed. At the bottom you can see that the U.S Federal Reserve had around $200 billion in spending when Greenspan took over. It then was driven increasingly higher until the great crisis in 2008. We then saw Fed Chair Bernanke and Yellen climb the mountain to the $4.5 trillion today. Nominal GDP has now grown by 6 times the point then to extend from $3 trillion to $18 trillion. The total credit outstanding (debt on the US economy) has soared 13 times over, reaching from $5 trillion to $64 trillion. Our overall economy has now reached a point of peak debt. The peak bull has now arrived and it is utterly unsafe to be in the casino. This time when the elevator that hurtles into the downshaft after the break, the ride down will be even steeper and more violent. There will be no monetary catapult at the bottom to rescue those who stay on for the rebound....