Dictators Fall, but States Remain: Zimbabwe’s (Already) Missed Chance

Last week, the fall of Robert Mugabe’s regime made headlines across the world, and was greeted with relief and hope by international commentators as well as Zimbabweans. Overall, the general feeling was that of a new beginning, long awaited in a country that had been stuck for four decades under rampant inflation, corruption, and an oppressive rule. There seemed to be little doubt, given how the news was presented, that this is a pivotal and far-reaching transformation for this African nation.
And yet, if one looks closely, there are signs that, despite the current sense of hope in Zimbabwe, Mugabe’s removal will not bring the long awaited change. Mugabe “retired’ with immunity, a $US 10 million severance check, and a promise to be paid a salary for the rest of his life. He has now been succeeded by his vice-president, who lead the coup d’tat and capitalized on the year long public protests against his disputed predecessor. With the new president, the rule of the ZANU-Patriotic Front will continue, as will the party’s Marxist-Leninist ideology and its politburo.
How can one know that things won’t change? There are many similarities between the recent history of Zimbabwe and the not too distant history of socialist republics, like Romania, from the decades of oppression and poverty to the overwhelming hope of a new start following the revolution. But one important common aspect of the two regimes – Ceausescu’s and Mugabe’s – is that neither or them were actual autocracies, or ‘personal’ states. A forty year totalitarian rule is not a one-man feat, but must be necessarily supported by an entire state apparatus for which the dictator himself often becomes no more than a mouthpiece.

This post was published at Ludwig von Mises Institute on November 28, 2017.

Central Banks Have a $13 Trillion Problem

Paycheck to Paycheck
GUALFIN, ARGENTINA – The Dow was down 118 points on Wednesday. It should have been down a lot more. Of course, markets know more than we do. And maybe this market knows something that makes sense of these high prices. What we see are reasons to sell, not reasons to buy.
Nearly half of all American families live ‘paycheck to paycheck,’ say researchers. Without borrowing, 46% couldn’t raise $400 to cover an emergency. This is at least part of the reason why retail sales dropped for the second month in a row in March. Despite seven years of economic ‘recovery,’ millions of Americans don’t have much money.
According to Census Bureau figures, 110 million Americans receive benefits from means-tested federal programs – food stamps, disability, and the like. And according to the Bureau of Labor Statistics, about 125 million Americans have full-time work (with another roughly 112 million without jobs).
That means there are only 125 million people in full-time jobs supporting the whole kit and caboodle of the U. S. economy, with a total population of 323 million. At that rate, each full-time worker supports about 2.6 people… including almost one person receiving money from the feds.
They are also supporting a government debt of $20 trillion and private debt of another $40 trillion or so. That puts the debt-to-full-time-worker ratio at $480,000. The average salary for a full-time worker is just $48,000. At a modest 5% interest, his share of the debt cost would set him back $24,000 each year.
He’d have only the remaining $24,000 to support (1) his own family… and (2) all the malingerers, cronies, and zombies who are drawing government benefits. Obviously, those numbers don’t work. But they explain much of the weakness in the U. S. economy.
The feds’ cheap credit keeps moving money (mostly in the form of asset price increases) to the wealthiest ZIP codes… while the average person’s budget gets tighter and tighter.

This post was published at Acting-Man on April 21, 2017.

Nassim Taleb Explains “How To Go Bankrupt & Be Loved By The Many”

Inequality vs Inequality
There is inequality and inequality.
The first is the inequality people tolerate, such as one’s understanding compared to that of people deemed heroes, say Einstein, Michelangelo, or the recluse mathematician Grisha Perelman, in comparison to whom one has no difficulty acknowledging a large surplus. This applies to entrepreneurs, artists, soldiers, heroes, the singer Bob Dylan, Socrates, the current local celebrity chef, some Roman Emperor of good repute, say Marcus Aurelius; in short those for whom one can naturally be a ‘fan’. You may like to imitate them, you may aspire to be like them; but you don’t resent them.
The second is the inequality people find intolerable because the subject appears to be just a person like you, except that he has been playing the system, and getting himself into rent seeking, acquiring privileges that are not warranted -and although he has something you would not mind having (which may include his Russian girlfriend), he is exactly the type of whom you cannot possibly become a fan. The latter category includes bankers, bureaucrats who get rich, former senators shilling for the evil firm Monsanto, clean-shaven chief executives who wear ties, and talking heads on television making outsized bonuses. You don’t just envy them; you take umbrage at their fame, and the sight of their expensive or even semi-expensive car trigger some feeling of bitterness. They make you feel smaller.
There may be something dissonant in the spectacle of a rich slave.
The author Joan Williams, in an insightful article, explains that the working class is impressed by the rich, as role models. Michle Lamont, the author of The Dignity of Working Men, whom she cites, did a systematic interview of blue collar Americans and found present a resentment of professionals but, unexpectedly, not of the rich.
It is safe to accept that the American public -actually all public -despise people who make a lot of money on a salary, or, rather, salarymen who make a lot of money. This is indeed generalized to other countries: a few years ago the Swiss, of all people almost voted a law capping salaries of managers . But the same Swiss hold rich entrepreneurs, and people who have derived their celebrity by other means, in some respect.

This post was published at Zero Hedge on Dec 28, 2016.

‘Swamp-Dwellers’ In Full Panic Mode Over Lack Of Trump “Access” – “A Lot Of Lobbyists Are Scrambling”

The lobbying game is simple. The first step is to work on “The Hill” for a while to build up your sphere of relationships and influence. Of course, you don’t have to work in an elected capacity, being a high-level staffer for a prominent Senator or Congressman is more than sufficient. Then, after you’ve hobnobbed with enough people on The Hill to be deemed worthy, you get recruited by a lobbying firm just down the road that’s willing to pay you several multiples of your government salary in return for peddling your newly acquired influence. And, so you join the lobbying ranks where your sole mission is to peddle your influence to rake in millions of dollars from wealthy special interests.
But, in 2016, there’s just one problem: Trump. For the past 12 months Trump has toured the nation telling his voters that he has every intention to “Drain The Swamp” in Washington D. C. and lobbyists are the epitome of everything that regular Americans see as broken with the system.
Needless to say, the prominent lobbying firms of Washington D. C. are in full-on panic mode. As BuzzFeed notes, presidential transitions are typically business as usual for the lobbyist because “normal” administrations are staffed with Washington insiders. But, that’s not the case with Trump.

This post was published at Zero Hedge on Nov 18, 2016.

Ukrainians “Shocked” At Vast Wealth Amassed By Their Corrupt Politicians

Ukraine is the latest country to discover that cronyism and corruption in politics pays – a lot – and is very unhappy about it.
As a result of an anti-corruption reform requiring senior Ukrainian officials to declare their wealth online, the local population has been been exposed to the vast difference between the fortunes of politicians and those they represent.
As Reuters reports, some declared millions of dollars in cash. Others said they owned fleets of luxury cars, expensive Swiss watches, diamond jewelry and large tracts of land – revelations that will crush public confidence in the authorities in Ukraine, where the average salary is just over $200 per month. Officials had until Sunday to upload details of their assets and income in 2015 to a publicly searchable database, part of an International Monetary Fund-backed drive to boost transparency and modernise Ukraine’s recession-hit economy.

This post was published at Zero Hedge on Oct 31, 2016.

Flyover America: Duped By MEW And Hustled To The Last Rodeo Of Subprimes

How Flyover America Was Duped By MEW
For a time this artificial goosing of living standards by the central bank money printers did help insulate Flyover America from feeling the full brunt of its shrinking job opportunities and the deflating purchasing power of its pay checks. What it couldn’t afford, it borrowed.
No more. As is evident in the chart below, the household LBO is over and done. After peaking at 225% of wage and salary income in 2007, the household leverage ratio has retracted to about 180%.
Yet that modest decline does not mean American households are out of the woods; the household leverage ratio is still more than double the 75%-85% level that pre-dated the Greenspan era and remains far above pre-1980 levels that had been consistent with healthy and sustainable household finances.
At the same time, the modest deleveraging so far is a leading indicator of the distress that has been felt in Flyover America since the Great Recession. Self-evidently, the preponderant majority of households have been forced to cut their consumption expenditures back to the levels of current earnings, which, in turn, are not rising nearly as fast as the 3.1% inflation rate afflicting Flyover America.

This post was published at David Stockmans Contra Corner on August 11, 2016.

Abolish the FBI

Like all employees of the FBI, James Comey lives off the sweat of the American taxpayer. His large salary, upon retirement, will be converted into a very generous pension. Like most federal employees in a high ranking position like his, Comey continues to look forward to decades of living at a standard of living far above what is experienced by ordinary people in the private sector.
To maintain this life of comfort, all he had to do was agree to look the other way as a powerful politician clearly – by Comey’s own admission – broke federal law.
Naturally, this same treatment would never be afforded to an ordinary taxpayer, who would likely be looking at years in federal prison for offenses similar to that which Hillary Clinton has apparently committed. Moreover, Comey even went out of his way to do his best to ensure no federal prosecutor would proceed with charges when he claimed that “no reasonable prosecutor” would proceed with charges. It wasn’t enough for Comey to simply not recommend charges. He had to pre-emptively condemn any prosecutor who might proceed with charges.
Some have claimed that Comey was forced to cave to Obama administration pressure in order to protect his family. Of course, Comey could have resigned his position rather than take a position he regarded as unethical. Then the task of clearing Clinton would have fallen to Comey’s successor. There are precedents for this. When ordered by Nixon to fire the special prosecutor in the Watergate scandal, Attorney General Elliot Richardson resigned rather than do what the president mandated. Comey could have done the same, but then he would have had to give up some of his comforts and privileges. To find work, he might have had to move to an unexciting place like Indianapolis or Albuquerque.

This post was published at Ludwig von Mises Institute on July 7, 2016.

The Dreadful Kagan Clan – – Hillary’s Warmongers In Waiting

The US is heading straight for a fiscal calamity in the next decade. Even if you believe the CBO’s Rosy Scenario projections – – -which assume that we will go 207 months thru 2026 without a recession or double the longest expansion on record and nearly 4X the normal cycle length – – we will still end up with $28 trillion of national debt and a $1.3 trillion annual deficit (5% of GDP) by 2026.
But that’s the optimistic case! As I demonstrated recently, if you get real about all the enormous headwinds down the road – -including the virtual certainty that the Red Ponzi will have a crashing landing and take the global economy down with it – – you end up with a truly dismal picture.
To wit, just assume economic performance during the next ten years is no better or worse than the average of the last ten years, including the last decade’s 2.5% growth rate of wage and salary income.

This post was published at David Stockmans Contra Corner by David Stockman ‘ May 20, 2016.

State of Fear – Corruption in High Places

Mr. X and his Mysterious Benefactors
As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia’s ‘big four’ banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank’s customers, a certain Mr. X, in truly staggering amounts.
Hundreds of millions of dollars were paid into the account of Mr. X by a Saudi prince described as ‘mysterious’, and two British Virgin Island companies characterized as ‘shadowy’.
Overall, more than $1.05 billion landed in Mr. X’s private account in a little over two years. This was bound to raise eyebrows, considering Mr. X’s official salary only amounts to approx. $100,000 per year. Not a bad salary to be sure, but even if he were to save half of it every year, it would take him 210,000 years to save up $1.05 billion, not just two.
Then the head of a government-owned Malaysian company put millions of ringgit into Mr. X’s credit card accounts, which had been a tad overdrawn (by slightly over $ 1m.), due to Mr. X’s wife splurging a bit on jewelry in 2014.

This post was published at Acting-Man on April 13, 2016.

Next Up In The Workers Paradise – – Strikes And Labor Unrest In China

While most of the world has fixated on the plunging Shanghai and Shenzhen stock exchanges and Beijing’s missteps managing the currency, China’s labor market has become increasingly fragile. As wage arrears and layoffs grow, unrest in factories and on construction sites is spreading.
Worker protests and demonstrations doubled last year, to 2,774, with December’s total of more than 400 such incidents, setting a monthly record. The protests come as China’s slower growth crimps profits and concerns about poor policymaking sap investor confidence. ‘The increase in strikes and protests began last August around the time of the yuan devaluation and subsequent stock market crash and continued to build during the final quarter of the year, as the economy has showed little sign of improvement,’ says Geoffrey Crothall, communications director at the Hong Kong-based workers’ advocacy organization China Labour Bulletin.
‘I am not satisfied with my salary. But everywhere’s pretty much the same.’ -anonymous 30-year-old Chinese toy factory employee That’s worrisome for China’s Communist Party, which came to power in 1949 claiming to represent the working masses. In a sign of its nervousness, Beijing on Jan. 8 formally arrested four labor organizers in Guangdong, amid a broad crackdown on rights activists. ‘The situation is not so good these days,’ Zhang Zhiru, a Shenzhen-based labor campaigner, said in a text message. ‘It is not convenient to accept interviews from the foreign media.’

This post was published at David Stockmans Contra Corner on January 15, 2016.

The Explosive Growth Of Luxury And Debt – -A Leading Indicator?

In 1979, as a law clerk to a Federal district court judge in Baltimore, I earned a whopping annual salary of $17,500. For a newly minted law-school graduate, the compensation was well below the starting salary at major law firms, but I was nonetheless able to live reasonably well and, memorably, launched a wine collection that year by purchasing a bottle of 1973 Chateau Petrus.
Petrus – a first growth Pomerol from Bordeaux – is, perhaps, the most famous (and expensive) red wine in the world. My bottle was not from an especially good vintage, but it had sentimental value, since I graduated from college in 1973.
I finally opened my Petrus in 1998, convinced I had kept it too long. Once the wine had time to breathe, it opened up remarkably and was like drinking liquid silk. This was a great wine in an off year. I wondered: what would Petrus be like in a stellar year?
The amusing part of the story? The price tag was still on the bottle: a modest $19.95.
What caught my attention was a recent e-mail advertisement from a prominent New York wine merchant offering a 2000 Petrus. Today’s price was a less modest $4,295.00. Per bottle. Wine guru Robert Parker scored the 2000 Petrus at a perfect 100 and noted that it would be drinking quite well until at least my 115th birthday.
Do the math: a case of 2000 Petrus at that price runs $51,540. With tax and shipping, we’re looking at a price tag around $54,000. That figure is important, because it roughly equals the median income for a family of four, not to mention a price multiple of 215 times what I paid for my 1973 Petrus

This post was published at David Stockmans Contra Corner on December 29, 2015.

Separation Of Church And State?

I was quite irritated by the spectacle of the Pope giving a speech to Congress today. Perhaps if the circus had been hosted at the National Cathedral and the Congressmen were forced to donate their Taxpayer funded salary attributable to the time spent listening to the Pope, I would have been okay with it. But, then again, if the Congressmen were docked pay for time spent in the Pope’s audience, I doubt very many would have attended.
I will say that I was somewhat consoled by noticing that the Supreme Court Justices remained seated and solemn during the entire event, not even clapping along with the Congressional hypocrites at the designated ‘clap times.’
I would love to see a full accounting of the amount of Taxpayer funds that were spent hosting the Pope, including the mentioned prorated salary attributable to Congress’ attendance.
I would like to bring your attention to commentary published by Wall Street On Parade. For me it embodies the extreme hypocrisy and tragic corruption that engulfs not only the Vatican City but the entire Catholic Church. I have no doubt that seated in that audience are Congressmen who have been victimized and/or participate in the white elephant topic that the Papacy deftly avoids ever addressing:

This post was published at Investment Research Dynamics on September 24, 2015.

How Wall Street’s Bankers Stayed Out of Jail

On May 27, in her first major prosecutorial act as the new U.S. attorney general, Loretta Lynch unsealed a 47-count indictment against nine FIFA officials and another five corporate executives. She was passionate about their wrongdoing. ‘The indictment alleges corruption that is rampant, systemic, and deep-rooted both abroad and here in the United States,’ she said. ‘Today’s action makes clear that this Department of Justice intends to end any such corrupt practices, to root out misconduct, and to bring wrongdoers to justice.’
Lost in the hoopla surrounding the event was a depressing fact. Lynch and her predecessor, Eric Holder, appear to have turned the page on a more relevant vein of wrongdoing: the profligate and dishonest behavior of Wall Street bankers, traders, and executives in the years leading up to the 2008 financial crisis. How we arrived at a place where Wall Street misdeeds go virtually unpunished while soccer executives in Switzerland get arrested is murky at best. But the legal window for punishing Wall Street bankers for fraudulent actions that contributed to the 2008 crash has just about closed. It seems an apt time to ask: In the biggest picture, what justice has been achieved?
Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, not individual bankers. (Settlements were levied on corporations, not specific employees, and paid out as corporate expenses – in some cases, tax-deductible ones.) In early 2014, just weeks after Jamie Dimon, the CEO of JPMorgan Chase, settled out of court with the Justice Department, the bank’s board of directors gave him a 74 percent raise, bringing his salary to $20 million.

This post was published at The Atlantic

The Wall Street Ponzi At Work – – The Stock Pumping Swindle Behind Four Retail Zombies

In the nearby column Jim Quinn debunks Wall Street’s latest claim that the American consumer is bounding back. He points out that on an inflation-adjusted basis retail sales are barely higher than they were a year ago, and, for that matter, are still only 4% greater in real terms than they were way back in November 2007.
That’s right. Nearly eight years and $3.5 trillion of Fed money printing later, yet the vaunted American consumer is struggling to stay above the flat line, not shopping up a storm.
And there is no mystery as to why. After a 40-year borrowing spree culminating in the final mortgage credit blow-off on the eve of the great financial crisis, the US household sector had reached peak debt. It was tapped out with $13 trillion of mortgages, credit cards, auto, student and other loans – – a colossal financial burden that amounted to nearly 220% of wage and salary income or nearly triple the leverage ratio that had prevailed before 1971.

This post was published at David Stockmans Contra Corner by David Stockman ‘ August 17, 2015.

How To Alleviate The Alleged ‘Worker Shortage’ – – -Stop Subsidizing Non-Work

The great conundrum of the U. S. economy today is that we have record numbers of working age people out of the labor -force at the same time we have businesses desperately trying to find workers. As an example, the American Transportation Research Institute estimates there are 30,000 – 35,000 trucker jobs that could be filled tomorrow if workers would take these jobs – a shortage that could rise to 240,000 by 2022.
While the jobs market overall remains weak, demand is high for in certain sectors. For skilled and reliable mechanics, welders, engineers, electricians, plumbers, computer technicians, and nurses, jobs are plentiful; one can often find a job in 48 hours. As Bob Funk, the president of Express Services, which matches almost one-half million temporary workers with emplo’yers each year, ‘If you have a useful skill, we can find you a job. But too many are graduating from high school and college without any skills at all.’
The lesson, to play off of the famous Waylon Jennings song: Momma don’t let your babies grow up to be philosophy majors
Three years ago the chronic disease of the economy was a shortage of jobs. This shortage persists in many sectors. But two other shortages are now being felt – the shortage of trained employees and of low-skilled employees willing to work. Patrick Doyle, the president of Domino’s Pizza, says that the franchises around the country are having a hard time filling delivery and clerical positions. ‘It’s a very tight labor market out there now.’
This shortage has an upside for workers because it allows them to bid up wages. When Wal-Mart announced last month that wages for many starter workers would rise to $9 an hour, well above the federal legal minimum, they weren’t being humanitarians. They were responding to a tightening labor market.
The idea that blue collar jobs aren’t a pathway to the middle class and higher is antiquated and wrong. Factory work today is often highly sophisticated and knowledge-based with workers using intricate scientific equipment. After several years honing their skills, welders, mechanics, carpenters, and technicians can, earn upwards of $50,000 a year – which in most years still places a household with two such income earners in the top 25 percent for income. It’s true these aren’t glitzy or cushy jobs, but they do pay a good salary.
So why aren’t workers filling these available jobs – or getting the skills necessary to fill them. I would posit four impediments to putting more Americans back to work:

This post was published at David Stockmans Contra Corner on April 6, 2015.

The Pathetic ‘Talk Therapy’ Of Janet Yellen

What in god’s name does Janet Yellen think she is doing? Just a few weeks ago she established the ridiculous Fedspeak convention that ‘patient’ means money market rates will not rise from the zero bound for at least two meetings. Now she has modified that message into ‘not exactly’.
As her Wall Street Journal megaphone, Jon Hilsenrath, was quick to amplify:
Ms.. Yellen signaled the Fed is moving toward dropping the reference to being patient from its statement, but sought to dispel the notion it would mean rate increases were certain or imminent.
‘It is important to emphasize that a modification of the [interest-rate] guidance should not be read as indicating that the [Fed] will necessarily increase the target rate in a couple of meetings,’ Ms.. Yellen told the Senate panel.
So two meetings is no longer two meetings. That’s worse than Greenspan’s double talk at his worst, and here’s why. It’s all make believe!
After 74 months of ZIRP, a hairline increase in the money market rate to 25 bps or even 100 bps will have absolutely no impact on the main street economy – – nor on whether the ‘in-coming’ data deviates up or down by a few decimal points from 5.7% on the U-3 unemployment rate or 1.7% on the CPI.
The Fed is absolutely incapable of impacting the short-run ticks on its so-called inflation and unemployment ‘mandates’ because its ‘credit channel’ of monetary transmission is broken and done. The household sector is still saturated by peak debt and the ZIRP fueled runaway stock market rewards corporate executives for share buybacks and M&A deals, not investment in productive assets – even with borrowed money.
So there is absolutely no reason to peg interest rates at freakishly low levels. It has manifestly not enabled household to supplement spending from their tepidly growing incomes by means of ratcheting up their leverage ratios. That Fed trick worked for about 45 years until households used up their balance sheet runway in 2007 and thereupon smacked straight into ‘peak debt’.
The graph below shows household debt relative to wage and salary incomes, and the latter is the true denominator for computing leverage ratios. The Wall Street stock peddlers – who are pleased to call themselves economists – -always use personal income as the denominator, but that’s completely misleading. Upwards of 25% of personal income represents transfer payments including more than $1 trillion of Medicare, Medicaid and housing vouchers. Try paying sending you credit card bill to your Medicare carrier for reimbursement!

This post was published at David Stockmans Contra Corner on February 26, 2015.

What ‘Escape Velocity’? December Business Sales And Inventories Repudiate The Money Printers’ Myth

It is plain as day that massive central bank money printing and perpetual ZIRP do not rejuvenate the main street economy under conditions of ‘peak debt’. And the reason is so obvious that only Keynesian economists can’t grasp it.
To wit, if the balance sheets of households and businesses are tapped out – – then artificially suppressing interest rates cannot induce them to borrow even more money. Accordingly, spending is constrained to what can be funded from current income and cash flow after any set aside for new savings. In contrast to the four decades of the great credit expansion between 1970 and 2008, therefore, GDP can no longer be stimulated by incremental outlays derived from hocking household and business balance sheets.
The graph below of the long-term trend of household leverage – measured as total mortgage, credit card and other consumer debt compared to wage and salary income – – demonstrates the new normal. During the long period of credit expansion, the Fed’s resort to low interest rates to stimulate borrowing and spending worked because households started the period with relatively clean balance sheets. As a result, central bank monetary stimulus caused leverage ratios to be ratcheted higher and higher in response to each round of rate cutting.
Self-evidently that ratcheting process has stopped, and household leverage ratios have fallen, albeit to levels which are still aberrantly high by historical standards. What this means is that after the peak debt inflection point was reached, the constraint on borrowing would not be the interest rate, as had been the case during the great credit inflation, but the availability of income to leverage.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 13, 2015.

Why Crony Capitalism Will Be Hard To Uproot: Interview Of David Stockman

David Stockman was elected to Congress at age 29 back in 1976; he was an avid student of Austrian economics and supported a gold-backed money system and a balanced budget. He later joined the Reagan administration as Budget Chief, where he watched in awe as the Reagan administration quickly became the most profligate spenders in the history of the United States.
After leaving the Reagan Cabinet, he worked at the well-known investment house Salomon Brothers, and later co-founded the Blackstone Group alongside legendary hedge-fund manager Steve Schwarzmann.
In his most recent book, The Great Deformation: The Corruption of Capitalism in America, Stockman systematically repudiates and dismantles the myths surrounding the Fed’s supposed past successes at helping the US economy avoid major breakdowns, going all the way back to the crash of ’29. Instead, as he explains, ‘Programs born out of desperation or idealism 75 years ago have ended up as fiscal time bombs like Social Security or as captive fiefdoms of one crony capitalist syndicate or another… Policies undertaken in the name of public good inexorably become captured by special interests and crony capitalists.’
The most important lesson I took from the book and the interview? Remember that there has never been a time of such profound debt saturation, coupled with intense crony capitalism, as today. No one has ever been here to tell how it turns out. We truly are in an unprecedented era…
David, can you explain how the ‘Fed put’ works on the stock markets and bond markets? How exactly does it translate into artificially higher stock prices and lower interest rates?
The Fed injects massive amounts of liquidity into Wall Street through the dealer system – that is, the 21 authorized treasury-bond dealers. The liquidity comes in the form of new credits to their bank accounts supplied by the Fed in return for the governments bonds, notes and bills, and even the GSE (Government-sponsored entity) obligations that it buys from them. The credit that the Fed supplies to the dealers is manufactured out of thin air; therefore it expands total credits and liquidity in the system. The dealers use it to buy other types of securities – stocks, bonds, derivatives positions and so forth.
Historically, the purpose of the Fed’s open-market intervention in this form was to encourage the banking system to extend credit to the business and household sectors, thereby stimulating economic growth, as predicated by the Keynesian model. That was always a one-time parlor trick, however, because with each cycle of easing leverage ratios in the business and household sectors were ratcheted steadily higher. Household debt ratios, for example, went from 80 percent of wage and salary income prior to 1975 to 220 percent by 2007.
The problem today is that we have reached ‘peak debt.’ The household sector has $13.3 trillion of debts1, even after the modest post- crisis deleveraging; the ratio is still sky-high at 180 percent of wage and salary income.

This post was published at David Stockmans Contra Corner on November 24, 2014.