Royal Bank of Scotland to investors: 'Sell everything'

So. ... Instead of debt markets deciding the price of lending -- with lenders and borrowers coming up with an interest rate based on the amount of risk, we have devolved into a world in which central banks given monopoly power have complete control over that price of money. ... and they price fix it, similar to how the old Soviet Union priced fixed toilet paper prices. It's not new -- the Federal Reserve has been around since 1913. But the level of their recklessness has been ratcheted up.

The idea behind these banks is that they can somehow "manage" the economy using their monopoly power over the price of money as a tool. When they make it cheaper to borrow, they supposedly can "stimulate" economic growth. On the flip side, when they overheat things with that stimulation, they are theoretically supposed to be smart enough to tighten the conditions -- which slows down the economy.

What we have gotten -- no shock -- is just the "stimulate" part. And it's not really stimulative, because it diverts money to inefficient places. There is political pressure to create permanent booms, because when there is an economic boom, politicians get the credit. Plus, when it is cheap to borrow, politicians can run up huge deficits and spend, spend, spend, spend (and waste, waste, waste) which people love.

That is the backdrop. I will just focus on the U.S.'s central bank, the Federal Reserve. In the 1990s, Alan Greenspan got hailed as a genius for creating loose monetary conditions that supposedly created a new era of permanent prosperity. Unfortunately, there was a price to pay for that. And when you start down that path, unless you want the bust that comes with a phony boom, you need to make it cheaper and cheaper and easier and easier to borrow -- to keep the house of cards from falling. That is what we got through the 2000s (complete with warning signs, including the 2000 stock market collapse), and it is what led to all the misallocation of capital that caused the problems that everyone saw in 2008.

The answer in 2008, should have been to stop the reckless price fixing of our debt markets and allow the market to sort itself out. Instead, they stepped in and loosened the monetary conditions even more -- on steroids this time. Rather than deal with reality. Zero interest rates -- to the extent that Fed can control the price of lending via the overnight lending market that it uses to injected liquidity into our banks. And on top of that, the central bank itself started buying up debt -- our own treasuries and mortgage backed securities. With them as really the only buyer in those markets, it distorted things. It drives up the price of those securities, which in turn drives down yields -- i.e. -- keeps interest rates low, creating more borrowing. They have added more than $4 trillion of those securities to their balance sheet.

In any case, when you are already at 0 percent percent for the overnight rate already (as the ECB in Europe and the BOJ in Japan have been), there is no more room to cut. So backed against that wall, what they did was go to negative rates -- charge their banks to hold their money overnight. Presumably, that encourages the banks to put that money to work i(i.e -- lending, risky speculation, etc.). Which is supposed to be stimulative to the economy -- but of course isn't, because it just brings about severe misallocations of capital. Everyone borrows -- since it is free -- and they gamble with the money. It caused stock markets around the world to go berzerk. It also spills over into the sovereign debt the governments tied to those central banks issue. It means that if you buy a bond and you hold it until maturity, you won't get all of your money back. Which leaves people who want safety scrambling -- it punishes savers at the expense of debtors.

Many banks have been reluctant to pass on the negative rates, because they don't want to lose customers. But banks that service large, institutional clients have -- they have even outright told them they don't want their business, because it is too costly. It largely hasn't affected retail customers (the average person) yet, except that you get little or no interest from putting your money into a savings account or a money market account -- which is one of the things that has fueled more risky speculation than people currently realize. Savers -- people who were counting on a safe yield, for example retirees, have been forced to put their money into risky things to try to get a return. And it is now a disaster waiting to happen.

In some places, such as Denmark, I have read about the perverse situations you asked about that this has created, in which savers are getting charged to deposit money in the bank, and people who take mortgages are getting paid to borrow money. So yeah, their management of the world has gotten so out of control that that is where we are at.

 

Don't have time to look at that right now. But even with just ZIRP (Zero interest rate policy), not negative rates, the actual effect has been for consumers to keep overleveraging themselves -- auto loans, student loans, credit card debt. It's not in home mortgages this time around, but that is only because home ownership rates have dropped off a cliff thanks to how badly people are doing, thanks to the anchor they have put on the economy with their management. One area that is insane are subprime auto loans. More than a trillion dollars out there -- as lenders have been allowing people with shitty credit and no verifiable income to buy $45,000 cars. I read something just before from Phil Lebeau of CNBC about delinquency rates ticking up. And subprime and deep subprime loans now account for more than 20 percent of all the outstanding auto debt! If you care:

Subprime auto loans, delinquencies up: Experian

In any case, the reality is that people don't seem to use the ability to borrow to save (i.e. prepay taxes or pay for things in advance). Human nature is what you'd think. They use it to consume more.

 

What is the labor force participation rate? And where have all of those jobs been created?

Answers:

1) The labor force participation rate is at a 38 year low. The number the BLS reports simply doesn't count a huge number of people who aren't employed -- many who have given up looking and collect food stamps (record numbers). Our unemployment rate may as well come from an Orwell book.

2) Since the blow off in 2009, month after month, they have been releasing reports that show people getting low-paying service-sector jobs. A great many of them part-time. The headlines never actually confront what these reports actually say. We have created an economy filled with bartenders and waiters who can't make ends meet. Manufacturing jobs have fallen off a cliff -- and Wall Street is not decoupled from that. Industrial stocks have been correcting for almost a year and have led this leg down. In any case, a lot of those people are waiting tables with worthless college degrees that they put themselves in debt to get, while they live at home with mom and dad.

The reality is that the typical story for many "regular Americans" is that a lot of people who had one OK job 10 years ago. ... have either given up looking for work, or more likely are scrambling to make ends meet. One ridiculous thing, too: If you are holding down 3 part-time jobs? The BLS counts it as three jobs in the economy, whereas your old better job only counted once. And the labor department comes out with endless bullshit about the millions of jobs THEY have created -- as if they produce anything other than bullshit.

Most people understand this, of course. They don't need the BLS to try to tell them that they are doing well when their reality says something very different.

 

Unfortunately, that is not the reality for a significant number of people -- particularly younger people, as I posted. And even worse for people who once had manufacturing jobs and have suffered the last decade. It's why demagogue politicians are so popular right now.

Either way, I read those jobs reports when they come out the first Friday of each month. It's sad how few people actually look at the BS they release. It's disheartening how this stuff gets reported, relative to what the reports really say. We have bled higher-paying jobs in favor of low-wage part-time jobs -- bartender jobs are way up. Month after month.




And even as the U3 number has come down to essentially full employment (while company after company announces layoffs!), the U6 number (if you count everyone) has remained steady. There are around 95 million Americans NOT working. A large number of them of working age. One sad thing about it is that in some months when we have "created," say +/- 180,000 jobs, the vast majority of them are going to OLDER workers. People can't afford to retire -- things are so bad -- so they are working longer and longer.