See other Business/Finance Articles
Title: The “Tyranny of the Ph.D.s”
Source:
[None]
URL Source: [None]
Published: Jun 20, 2016
Author: David Stockman
Post Date: 2016-06-20 18:58:12 by BTP Holdings
Keywords: None
Views: 110
Comments: 1
The “Tyranny of the Ph.D.s” By David Stockman During the last two decades the major central banks of the world have been colonized by Keynesian crackpots. These academic scribblers and power-hungry apparatchiks have now pushed interest rate repression, massive monetization (QE) and relentless rigging of the financial markets to the limits of sanity and beyond. Honest, market-driven price discovery is dead as a doornail. The very thing that financial history proves, above all else, is that governments can’t be trusted to honor their debts. In fact, modern welfare state democracies have a veritable fiscal death wish. What else can you call Japan’s announcement to defer yet again an increase in the consumption tax? Its public debt is already at 240% of GDP, even as its tax-paying population is rapidly streaming toward its national old age home. At a 135% debt-to-GDP ratio, Italy is not far behind. It’s economy is still smaller than it was in 2007, its banking system has more than $200 billion of bad debt, its public sector squanders more than 50% of GDP and its politically fractured and corruption-ridden government is paralyzed. Yet these are only advanced cases of the universal fiscal condition of the world’s sovereigns. With $80 trillion of public debt and unfunded entitlement liabilities, the U.S. government is hardly more solvent than the socialist basket cases of Europe. Once upon a time, the tendency of politicians to bankrupt the state was at least partially held in check by the fear of bond vigilantes, and the prospect of soaring interest costs on the public debt. I happened to be there during one such episode, when the 10-year treasury note required a 15% coupon. It was enough to cause even Democrats to denounce deficits! That is, at least until the GOP took a powder on social security and other entitlement reforms. At length, a tax-cut bidding war and Defense Department war spending spree displaced most of the old-time fiscal religion. And then Greenspan finished the job when he threw in the towel on monetary discipline in 1994. Once upon a time, too, the interest rate on debt reflected compensation for credit risk and inflation — and a real return to boot. At the moment, however, “investors” aren’t getting paid for any of these costs. Instead, thanks to the mad-men running our central banks they are actually being forced to pay governments to borrow. There is now $10 trillion of sovereign debt securities with negative yields — and that figure is growing by the week as it cascades across government bond markets and out the maturity spectrum. Moreover, that’s not an unusual condition in the far recesses of the global bond market. There is now $10 trillion of sovereign debt securities with negative yields — and that figure is growing by the week as it cascades across government bond markets and out the maturity spectrum. There could be nothing more perverse than for the central banking branch of the state to destroy the very government bond market on which modern state finances ultimately depend. But that’s exactly what they are doing. And the end-game could not have been expressed more colorfully than in the recent musings of the once and former bond king, Bill Gross: “Global yields lowest in 500 years of recorded history,” Gross, 72, wrote Thursday on the Janus Capital Group Inc. Twitter site. “$10 trillion of neg. rate bonds. This is a supernova that will explode one day.” To be sure, a supernova at least has a basis in physics. It’s an end-of-life star that suddenly increases in brilliance owing to a catastrophic explosion that ejects most of its mass. Not NIRP. There is nothing natural or scientific about it. And it’s the opposite of brilliant. It’s an economic mutant confected by arrogant Keynesian economists who inhabit a puzzle palace of fantasy. Not only do they have the nerve to believe that a tiny posse of monetary central planners has the capacity to price money, debt, capital and risk more correctly than the millions of agents that once populated free financial markets, but they do so in the name of invisible measuring sticks and prompts. Thus, a recent piece in the Wall Street Journal highlighted a debate inside the Federal Reserve which borders on sorcery. Fed officials disagree about their likely end point, in part because they are struggling to understand why another underlying interest rate — the mysterious natural rate — has fallen in recent years. And for that many are turning to the musings of Knut Wicksell, a Swedish expert on the subject who died 90 years ago. According to the textbooks, this so-called natural rate is the inflation-adjusted rate that’s consistent with the economy operating at its full potential, expanding without overheating. Also known as the equilibrium or neutral rate, it balances savings and investment. The natural rate can’t be observed directly; the Fed knows it has been reached only by how the economy responds. “It’s like discovering Pluto: you can only see the effect of the gravitational pull,” said Eddy Elfenbein, an investor and blogger at the site Crossing Wall Street, comparing it to the dwarf planet whose existence was inferred from the orbits of Uranus and Neptune. Well, no. There is no such thing as the “natural rate of interest”. There are pegged rates confected by central bankers who flood the market with printing press cash, thereby artificially tilting the supply/demand balance of savings and borrowings. And there are market rates discovered by the continuous interaction of savers and borrowers. In an honest free market, savers need a rate high enough to induce them to forgo current consumption from their earnings and profits. Borrowers are constrained by their capacity to service their debts from current income and/or the return on funded assets. The resulting market rate of interest reflects a continuous adjustment of these supply and demand balances. Its level over time can be influenced by a multitude of factors including demographics, technological change, entrepreneurial dynamics, wars, droughts, floods, taxes and the regulatory intrusions of the state, to name a few. One thing is certain, however. When the animal spirits get too rambunctious and the herd of speculators cause the demand for credit to soar, bubbles get shutdown. When no more savings can be coaxed out of current income by rising interest rates, the market clears; the business cycle self-corrects. When no more savings can be coaxed out of current income by rising interest rates, the market clears; the business cycle self-corrects. Modern central banking, by contrast, mutes, overwhelms and eventually cancels out all of the price signals that are processed into shaping the market rate of interest. Instead, monetary central planners attempt to peg the rate based on purely theoretical constructs and standards — benchmarks which are ultimately arbitrary and virtually certain to be wrong. Such academic gobbledygook is the foundation for the tyranny of the PhDs who have destroyed honest price discovery in the capital and money markets. And wrecked state finances around the world. The day of reckoning draws ever closer. Regards, David Stockman for The Daily Reckoning Editor’s note: Jim Rickards is now warning that the collapse of the international monetary system that he sees coming will happen fast — possibly overnight. And there will be a monstrous run on gold. Jim says gold could go up more than $100 an ounce per day, more than $1,000 per ounce per week. The “super spike” he sees coming will happen so fast it has the potential to be a 100-year event… or more. Jim also believes life-changing fortunes await those who prepare now. But there’s a catch: He says it’s essential to prepare properly. And most investors won’t. Click here to learn how, while there’s time. research.agorafinancial.com/research/html/rgs_pennygold_0516/?code=ERGSS649&n=RGS_pennygold_0516
Post Comment Private Reply Ignore Thread
Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: BTP Holdings (#0)
Good find. Bob Whitaker is a longtime buster of the professoriat ------------------------------------------------------------------------------------------ I love humanity -- it's the people I can't stand.
Top • Page Up • Full Thread • Page Down • Bottom/Latest