The Endless Emergency—–Why It’s Always ZIRP Time In The Casino

Based on the headline from the latest Jobs Friday report you wouldn’t know that we are still mired in an economic emergency—–one apparently so extreme that it might entail moving to the 81st straight month of zero interest rates at next week’s FOMC meeting. After all, the unemployment rate came in smack-dab on the Fed’s full-employment target at 5.1%.

But that’s not the half of it. The August unemployment rate was also in the lowest quintile of modern history.

That’s right. There have been 535 monthly jobs reports since 1970, yet in only 98 months or 18% of the time did the unemployment rate post at 5.1% or lower.

Monthly Unemployment Rate Below And Above 5.1% Since 1970

In a word, the official unemployment rate is now in what has been the macroeconomic end zone for the past 45 years. Might this suggest that the emergency is over and done?

Not at all. The talking heads have been out in force insisting on yet another deferral of “lift-off” on the grounds that the economy is allegedly still fragile and that the establishment survey number at 173,000 jobs came in on the light side. Even the so-called centrists on the Fed—–Stanley Fischer and John Williams—–have gone to full-bore, open-mouth, two-armed economist mode, jabbering incoherently while they await more “in-coming” economic data.

Self-evidently, the only “incoming”information that can matter between now and next Wednesday is the stock market averages. To wit, if last October’s Bullard Rip low on the S&P 500 holds at 1867, the FOMC will declare “one and done”, at least for the year; and if the market succumbs to another spot of vertigo, the Fed will concoct yet another lame excuse for delay.

Indeed, the Fed’s true Humphrey-Hawkins target is transparent. Namely, avoidance of a “risk-off” hissy fit at all hazards.

So let’s just call the whole thing a cosmic farce and dispense with the macroeconomic hair-splitting. Ordinary people everywhere on the planet are in grave danger because governments and their central banking branches have put the gamblers in charge of the economic show.

That’s self-evident in Europe where the Brussels/Frankfurt apparatchiks are deathly afraid of a stampede toward the exits by the front-running gamblers who “rented” (on repo) the sovereign bond market on Draghi’s “whatever it takes” ukase. So they have now turned Greece into an outright debtors’ prison, extinguishing the last remnants of democratic self-rule and imposing debt obligations that will approach $500 billion when Greece’s new bailout and existing massive ECB debits are reckoned.

Greece’s battered and still shrinking $200 billion economy, therefore, will either become an economic Atlantis lost under the Aegean or an exploding debt bomb. That is, when Greece finally defaults, it will trigger the demise of the Euro, the European Project and the continent’s rickety banking system——-stuffed to the gills, as it is, with the unpayable debts of aging, sclerotic socialist economies.

Likewise, the lunatic twosome of Abe and Kuroda in Japan have succeeded in putting the Japanese economy back into recession—-even as they run the greatest sovereign buyback Ponzi in history. To wit, the BOJ is buying up Japan’s stupendous one quadrillion yen of public debt faster than new debt is being created, thereby pegging the 10-year JGB at a ridiculous 36 basis point yield and flushing Japan’s domestic investors into a rampaging stock bubble that is an accident waiting to happen.

In the nearby land of red capitalism the statist fix gets more preposterous by the day. Having sent out Brink’s trucks loaded with $300 billion to buy unwanted stocks and a fleet of paddy wagons to arrest anyone even a tad too eager to sell, China’s chief money printer told the G-20 on Saturday that China’s $5 trillion stock market meltdown was over.

But when the Shanghai market opened nearly 2% down last night, the “national team” went berserk hitting the “offers” in a desperate effort to prove him right. On a dime, the red casino suddenly ripped to 3% higher by the market’s close.

So the suzerains of red capitalism now depend on a blunderbuss PPT (Plunge Protection Team) to keep the grim reaper at bay. With more retail stock account holders (90 million) than communist party members (80 million) and more separate trading accounts (287 million) than the combined population of Japan, South Korea, Taiwan and Thailand (267 million), a supreme irony has come to pass.  Namely, that Beijing’s heirs of Mao’s anti-capitalist revolution have no choice except to prop-up the stock market in order to obfuscate the deflationary whirlwind battering Mr. Deng’s hothouse economy.

Even then, the giant Red Elephant in the room is hard to hide. That’s why capital is in full flight, as underscored by last night’s disclosure that China’s vaunted FX reserves dropped by $94 billion in August alone—-notwithstanding a huge current account surplus.

That’s also why China’s imports plunged by 14% and exports by nearly 6% last month, and why car sales have dropped sharply again in August. Indeed, flat-lining industrial production, power consumption and freight shipments all show an economy floundering at stall speed or worse.

At least the rulers in Beijing make no bones about the fact that they are rigging the stock index. After all, “command and control”is what the communist party does.

Not so for the hypocritical posse of cowards, dissemblers and Keynesian dogmatists who run the Fed. These folks presumably have a passing regard for the rudiments of capitalism and free markets.

Yet they insist that the most important market in all of capitalism—–the money market where traders and speculators fund trillions of positions and inventories—-is no market at all; and that, instead, it’s an administrative department of the central bank to be governed by the writ of 12 FOMC members based on their subjective assessment of the “incoming” macroeconomic noise.

Stated differently, the Fed has extinguished any and all market prices for money, and indeed any price at all; and in the process has caused the falsification throughout the capital markets of that which the money market funds—–that is, debt and equity securities and their derivatives. So Wall Street and its equivalents around the world have become little more than casinos where the gamblers trade against the croupiers domiciled in the major central banks.

But heavens forfend that our monetary central planners should admit to the unseemly bended knee estate to which they have been reduced. So in what amounts to mindless ritual incantation they persist in gumming about what is self-evidently seasonally maladjusted, constantly revised, inherently incomplete noise. At the end of the day that’s the frail reed on which the whole contemporary central banking enterprise is based.

The truth is, central banks emit credits conjured from thin air into a borderless planetary financial system that is now populated by the demons and furies of bubble finance. These free money enabled gamblers and speculators never stop confecting new forms of carry trades, collateralized finance and momentum chasing algorithms that rip the casino loose from the real economy.

Moreover, all the central bank interest rate pegging at zero is beside the point insofar as the real economy is concerned. That’s because over the last two decades the central banks have fueled a debt binge of staggering proportions. Overall credit market debt has grown from $40 trillion in 1995 to $200 trillion last year. That $160 trillion credit expansion was nearly 4X the modest global GDP growth of $45 trillion during the same period.

Accordingly, the world has simultaneously reached a condition of “peak debt” in the DM world, where 90% of households are tapped out or on welfare; and “peak capacity” in the EM world, where a digging, building and investment spree has left economies drowning in excess industrial capacity and white elephant public infrastructure.

In that context, the only thing that zero interest rates can do is fuel a few more spasms of “risk-on” rips in the casino; and supply a drip of cheap capital to DM companies wishing to buy back their own drastically inflated shares, and a temporary lifeline to EM and commodity sector zombies hemorrhaging cash.

But what it can’t do is anything to deliver the so-called Humphrey-Hawkins target of maximum employment; or the goal of price stability as per the Fed’s perverse definition of it as 2% on the PCE deflator—— less food and energy or whatever else the monetary politburo chooses to delete from the figure.

The measured inflation rate, of course, is now being powerfully suppressed by the very global deflation flowing from peak DM debt and peak EM capacity that the central bank money printers have generated over the last two decades. Beyond that, there is not a shred of valid evidence from economic history or logic that says you get more sustainable growth in living standards from 2% consumer inflation than from 0%.

But at the end of the day all of the Fed’s jawing in support of ZIRP is rooted in an utterly obsolete model of bathtub economics in one nation. That is, the notion that central bank credit is injected into a closed domestic economy, not a wide-open global casino, and that these injections will eventually cause an invisible economic ether called “aggregate demand” to rise to the brim of full employment.

Since the year 2000 the Fed has emitted $4 trillion of central bank credit. But as the Friday Jobs report actually showed, 5.1% on the official unemployment rate has had nothing to do with filling the US economic bathtub to its purported full employment potential.

As shown below, notwithstanding hitting the 5% unemployment target three times since the late 1990s, the real measures of labor inputs employed by the US economy have gone steadily south. The civilian employment-population ratio is down by five full percentage points or 12.5 million workers, and total nonfarm labor hours deployed by the business economy have not broken the flat-line in 15 years.

Even more to the point, the number of breadwinner jobs paying  a fulltime living wage was still nearly two million below its turn of the century level in Friday’s report.

Breadwinner Economy Jobs

Needless to say, Friday’s report perfectly underscores why basing Fed policy on “incoming data” like the BLS employment report is so copasetic to the casino.

If the Fed takes no action after the September release, it’s hard to imagine a report that wouldn’t support ZIRP or near-ZIRP in the minds of the money printers and the Wall Street gamblers they pleasure.

By David Stockman
ContraCorner– August 28, 2015