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The Reason the Fed Is Raising Rates, and Why It Won’t Work
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Why is the Fed creating incentives for US corporations to destroy themselves? Why is the Fed pushing insurance companies and retirement funds into bankruptcy? Why is the Fed raising interest rates when inflation is still well below its 2 percent target?

Things are not always what they seem. In theory, the Fed’s low interest rates are supposed to have a positive impact on the economy by spurring a credit expansion. But it hasn’t worked out that way. Bank lending has remained stubbornly subdued throughout the post-crisis period. But what hasn’t remained subdued is corporate borrowing (via the bond market) which has exceeded all previous records increasing the probability of massive corporate defaults sometime in the next two years. Here’s a good summary of what’s going on from an article in Fortune titled “Corporate America is Drowning in Debt”:

“A good portion of Corporate America may have a serious debt problem. According to a report released Friday from S&P Global Ratings, the bottom 99% of corporations, when it comes to the amount of cash they have, are increasingly showing worrying levels of debt.

Studying S&P’s universe of more than 2,000 nonfinancial corporations, S&P’s researchers found that corporate issuers of debt had on hand a record $1.84 trillion in cash. But that statistic doesn’t tell us very much about the health of individual companies, because it appears cash is more concentrated at the top than ever. The top 1% of corporate cash holders…have slightly more than half of the total cash pile of Corporate America….

If you remove the top 25 cash holders, you’ll find that for most of Corporate America, cash on hand is declining even as these companies rack up more and more debt at historic rates. The bottom 99% of corporate borrowers have just $900 billion in cash on hand to back up $6 trillion in debt. “This resulted in a cash-to-debt ratio of 12%—the lowest recorded over the past decade, including the years preceding the Great Recession,” the report reads.” …

One obvious reason for Corporate America’s debt binge is low interest rates. With investors willing to lend companies money for so little in return, it makes sense that firms would turn to debt to finance things like share repurchases rather than, for instance, bringing cash earned from overseas, which would then be taxed at a high rate.

….”Given the record levels of speculative-grade debt issuance in recent years,” the report reads, “we believe corporate default rates could increase over the next few years.” (“Corporate America Is Drowning in Debt“, Fortune)

Repeat: The vast majority of US corporations are worse off now than they were in “the years preceding the Great Recession.” And the reason they’re worse off now is because of low interest rates. The Fed’s low rates create lethal incentives for CEO’s to pile on the debt which puts their companies at greater risk of default. Corporations are borrowing tons of money from investors in the bond market, which they are distributing to their shareholders rather than using to improve productivity or increase employment. They are also recycling two-thirds of earnings into stock buybacks which is going to dramatically impact their future competitiveness. Here’s a blurb from an article in USA Today that sums it all up:

“Capital spending fell 6.2% at an annual rate in the first quarter following a 2.1% drop late last year, its worst such stretch since 2009 and a big reason the economy nearly stalled in that period, Commerce Department data shows.

Business outlays were sluggish throughout 2015, rising 2.8% compared to an average 4.5% clip during the seven-year-old recovery. …Business spending typically makes up 12.5% of economic activity but has an outsized impact on the economy and stock market. Purchases of equipment and software, and the construction and renovation of buildings, create thousands of jobs for manufacturers. And such investment makes up nearly 30% of the sales of Standard & Poor’s 500 companies, says David Bianco, Deutsche Bank’s chief U.S. equity strategist….

Instead, public companies are plowing their large cash reserves into stock buybacks and dividends despite low borrowing costs.” (“Business investment is in a slump and its hurting the economy”, USA Today)

Stock buybacks– which were illegal before the Reagan administration — are a deceptive form of financial circlejerk that distort prices, create bubbles and lead to crisis. The reason the Fed ignores these issues because it sees profitmaking as a higher priority than ensuring the safety of the system. Go figure?

Since Donald Trump has been elected, the buyback frenzy has gained momentum mainly because he’s promised a one-time “repatriation holiday” for tax dodging US corporations who will be allowed to bring upwards of $1 trillion back to the US at a meager 10% corporate tax rate. Market analysts do not expect the money to go into production, hiring or infrastructure development, but into more buybacks that will send stocks higher into the stratosphere. Here’s the story from the WSJ:

“Corporate stock repurchases are on the upswing once again, wrong-footing skeptics who predicted 2016 would mark the beginning of the end of a postcrisis spending spree. Through Dec. 16, companies this month have stepped up their buybacks by nearly two-thirds over the same period last year, according to Goldman Sachs Group Inc….

The outlook for buybacks, like so much else in financial markets, has been upended by the Nov. 8 election of Donald Trump as president. After repurchases hit a record in 2015, they had slowed this year. Many analysts predict they will decline next year, reflecting soft corporate-earnings growth and stretched stock valuations. But the election surprise has raised the prospect that tax cuts will put large sums in corporate coffers, which in turn will be deployed largely in repurchases. That money potentially could include the profits that U.S. companies stand to bring back from overseas under a widely expected repatriation-tax holiday.

ORDER IT NOW

Goldman Sachs forecast that S&P 500 companies will repatriate $200 billion of their $1 trillion in cash held overseas in 2017 and that $150 billion of those funds will be spent on share repurchases. That could provide further support for major U.S. stock indexes that have hit fresh highs this month.”

(“Surging Buybacks Say Stock Boom Isn’t Over“, Wall Street Journal)

So according to G-Sax, 75% of all the dough returning from overseas is going go into buybacks that will pump up the equities bubble (that Trump criticized before he was elected) into the biggest colossus of all time. Is that the change that Trump backers were hoping for?

Here’s more from the same article:

“Repurchases have been a major contributor to the nearly eight-year stock rally. From the start of 2009 to the end of September 2016, companies in the S&P 500 spent more than $3.24 trillion repurchasing shares, according to S&P Dow Jones Indices.

Both companies and investors often applaud share repurchases because the practice drives up earnings per share and often boosts stock prices.” (WSJ)

Ultimately, the buck stops with the Fed, that’s where the real blame lies. The Fed created the incentives for this destructive behavior and they are the primary regulator of the entire financial system. They could stop this nonsense with just one appearance before Congress, but they choose not to. They’d rather keep the real economy in a permanent coma and blow up the financial system than lift a finger to stop Wall Street’s reckless and relentless looting spree.

We know that the low rates have been disastrous for pension funds, insurance companies and Mom and Pop’s retirement savings which have shriveled to nothing since the recession ended in 2009. We also know that–during that same period– “97% of all GDP-income gains went to the wealthiest 1% households” which has widened inequality to levels not seen since the Gilded Age. The question is: Why would the Fed change its policy now that all the money is flowing exactly where the Fed wants it to flow, upwards?

Is the Fed really worried about inflation, is that it?

Not at all. All the talk about inflation is pure bunkum and the Fed knows it. According to the Wall Street Journal:

“The central bank’s preferred gauge of inflation, the personal-consumption expenditures price index, was up 1.4% in November from a year earlier, data showed Thursday. Another measure, the consumer-price index, was up 1.7% from a year earlier in November….

Fed Chairwoman Janet Yellen said this month that there are signs wage inflation is picking up. Yet the nonfarm jobs report this month showed average hourly earnings for private-sector workers declined 0.1% in November….

One other factor that may contain the risk of inflation is the U.S. dollar, which rose to a 14-year high against a basket of its main rivals earlier this week. A higher dollar reduces the cost of imported goods that may keep a lid on inflation, potentially delaying the Fed’s goal to push up inflation to its 2% target.” (“The Markets Say Inflation Is Coming. The Data Show It Isn’t True“, Wall Street Journal)

Get the picture? Even using the Fed’s own methodology (“preferred gauge”) inflation is still below the 2% target. It’s just not a problem nor will it be as long as the Fed keeps the economy in this Central Bank-induced Depression. Because during a depression, the demand for credit stays weak, and when the demand for credit stays weak, the price of money remains low. It’s just supply and demand.

So the question we should be asking ourselves is this: Is the economy still in the crapper or has activity really started to pick up like Fed Chairman Janet Yellen keeps saying? Here’s how the Wall Street Journal answers that question:

“Stock prices may have soared since the November election, but the U.S. economy is ending 2016 on an anemic note. Measures of economic vitality including income growth, consumer spending and inflation weakened last month following a short-lived spurt.

Household spending rose just 0.2% in November from the month before, a slowdown in growth from the previous two months, while incomes flatlined, the Commerce Department said Thursday. Inflation readings, which had perked up, didn’t budge last month, and demand for factory-made goods remained soft. For now, that leaves the U.S. economy in the middling trajectory that has marked the seven-year expansion.

“Underlying support for the consumer sector remains fragile at best,” said Lindsey Piegza, economist at Stifel Nicolaus & Co. “The reality the consumer is facing at this point is still modest wage gains and a continued loss of momentum in income growth.”

Forecasting firm Macroeconomic Advisers estimates the economy is growing at a 1.7% rate in the final three months of 2016. Federal Reserve policy makers expect the economy to grow 1.9% this year and 2.1% next year, a forecast the central bank has barely changed since the election of Donald Trump.

About two-thirds of total U.S. output goes toward domestic consumer spending. Solid household outlays during the summer helped propel economic growth to a 3.5% annual pace in the third quarter, the best quarterly increase in two years, according to revised data released Thursday. But income growth has softened: Wage and salary income rose 3.5% in November from a year earlier, the slowest year-over-year gain since December 2013.

Without stronger support from consumers and more investment by businesses, third-quarter growth momentum could wane.” (“U.S. Economy Approaches Year’s End on Lackluster Note“, Wall Street Journal)

Yellen points to employment, consumer spending and “firming” inflation as signs that the recovery is strengthening, but as the article points out, it’s all baloney. There’s no recovery. Sure, there’s been a slight uptick in optimism because of Trump’s promise to spend a lot of money to fire up GDP, but most of those promises will never materialize, which means that growth will remain in the 2% doldrums for the foreseeable future.

But if the Fed is not raising rates to curb rising inflation or to prevent the economy from overheating, then what the heck is it doing?

Ahh, that’s where it gets interesting.

The Fed is raising rates because there is now widespread agreement that keeping rates low for a long period of time does serious damage to the financial infrastructure. That’s one reason, but it doesn’t fully explain what’s really going on. On a more practical level, the Fed is raising rates because of the banks. That’s right, it’s another handout to the big Wall Street behemoths. This is from the Wall Street Journal:

“Big U.S. banks have rallied in recent months amid rising interest rates but, if the Fed carries out its plans, there is room for them to keep rallying….

For American banks, a pie-in-the-sky scenario has just moved closer to reality. While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward….Bank of America also says a 1-percentage-point rise in short-term rates would add $3.29 billion….a back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank’s expected 2016 pretax profit…

With shares up 45% since the end of September, Bank of America is no longer cheap. But it isn’t expensive either… Especially if the Fed moves forward with more rate increases, there is room to go higher.” (“Banks’ Interest-Rate Dreams Coming True“, Wall Street Journal)

So higher rates and a steeper yield-curve mean heftier profits and higher stock prices, which is why the financials have been the hottest sector for the last six weeks.

Bottom line: The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks.

And that’s why the plan is doomed from the get-go, because raising rates during a Depression doesn’t help to end the slump. It just makes matters worse.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

(Republished from Counterpunch by permission of author or representative)
 
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  1. Okay, so what’s your counter-proposal: low interest rates which, as the first half of your column notes, skews all the gains upstream.

    The fundamental fact is nobody, not you, not me, not the Ph.D. economists at the Fed, knows what interest rates–the price of credit–should be. Only the supply-demand curve for credit can determine its market-clearing price.

    Get rid of the Fed’s ballyhooed dual mandate, and tell them to go back to being a bankers’ bank. Of course, that means the government no longer gets to have the Fed to cover its debt.

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    • Agree: jtgw
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  2. Bottom line: The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks.

    The Fed has been all about the banks for decades now; that’s nothing new. What has changed is that Trump is about to take office, and a nicely timed ‘recession’ could damage his reputation. After all, the only thing a rate-hike could lead to under the present circumstances is an even bigger contraction of consumer spending along with a stock market crash. I can just imagine the headlines now: ‘Trump-induced recession! Consumer confidence hits all-time lows under Trump!’

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    • Agree: CK
    • Replies: @Diversity Heretic
    That's kind of my layman's read too. The Fed has had Obama's back for about eight years, but now that the Magic Negro is leaving Washington, it's time to screw the incoming Administration.
    , @MBlanc46
    The one bright side to the Clinton victory that I expected was that she was going to be hit by a business-cycle recession early on. Now that's the dark side of the Trump victory that I rejoice in. Janet Yellen is doing her bit to torpedo his presidency, certainly, but it was likely going to happen regardless.
    , @Theopholus
    !
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  3. @Seamus Padraig

    Bottom line: The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks.
     
    The Fed has been all about the banks for decades now; that's nothing new. What has changed is that Trump is about to take office, and a nicely timed 'recession' could damage his reputation. After all, the only thing a rate-hike could lead to under the present circumstances is an even bigger contraction of consumer spending along with a stock market crash. I can just imagine the headlines now: 'Trump-induced recession! Consumer confidence hits all-time lows under Trump!'

    That’s kind of my layman’s read too. The Fed has had Obama’s back for about eight years, but now that the Magic Negro is leaving Washington, it’s time to screw the incoming Administration.

    Read More
    • Replies: @E. A. Costa
    The Magic Negro followed by the Magic White Man.

    The puppeteers of the Punch and Judy show are quite skilled at entertaining their imbecilic audience with the idea that some real changes are taking place or about to take place, jeje.

    They are probably already revving up for the Magic White Woman (Warren )next installment of the puppet show, if things last that long.
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  4. “The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks.”

    Clear, succinct, correct. Kudos.

    Now add the stock market to that and you have the general picture.

    Realize also that most of the figures on employment, income, real estate and so forth are either faked or deceptively manipulated.

    The Super-Recession begun in 2008 continues and worsens and in its fundamentals is much worse than the Great Depresssion. A few of the financiers may even believe their own lies.

    What has been in progress since 2008 is what one calls a “virtual recovery”, designed to persuade the 99 percent that some sort of recovery has happened and thus engender a real recovery, which is nothing more than an attempt to return to status quo ante.

    It is a form of incantatory magic, it almost goes without saying.

    Señor Trump will continue on the same course, making it look as if he is actually doing something.

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    • Replies: @Wally
    "Realize also that most of the figures on employment, income, real estate and so forth are either faked or deceptively manipulated."
    Bingo!

    And "2% inflation"? Really?

    https://dailyreckoning.com/revealing-real-rate-inflation-crash-system/

    http://schiffgold.com/key-gold-news/the-lie-of-the-cpi-real-inflation-is-everywhere/
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  5. Well, the business of America is business. Low rates or high rates, the big business is going to do what’s good for the big business, and in this financialized global economy, chances are it’s not going to be good for anyone else.

    …reminds me of the quip by Russian politician Chernomyrdin back in the 1990s: ‘whatever new party we try to create, it always ends up looking like the CPSU’. Same here: whatever they may try, the big business will find a way to take advantage of it, at the expense of the rest of us.

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  6. @Diversity Heretic
    That's kind of my layman's read too. The Fed has had Obama's back for about eight years, but now that the Magic Negro is leaving Washington, it's time to screw the incoming Administration.

    The Magic Negro followed by the Magic White Man.

    The puppeteers of the Punch and Judy show are quite skilled at entertaining their imbecilic audience with the idea that some real changes are taking place or about to take place, jeje.

    They are probably already revving up for the Magic White Woman (Warren )next installment of the puppet show, if things last that long.

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  7. Diogenes says:

    “Let’s cut to the chase!” It’s clear that most Unz commentator’s are anti-Jewish and I suspect Anti-capitalist, so let’s see.

    The problems with the American economy are that they are due to the control capitalists have on government and money flows.
    They own and control the country and economy and run it for their own benefit.
    They don’t care a whit about the economic well being of the country’s workers and citizens.
    They are motivated by greed, power and prestige.
    They are a parasitic and predatory class who have a sociopathic obsession with monetary profits devoid of any ethical and social constraints.
    The “Fed” is a cartel of bankers ostensibly created to maintain the integrity of the “Dollar”, because it was claimed politicians are incapable of doing so, but as Mike says, it operates in favor of bankers and against the interest of the people.
    It should be abolished.
    American capitalism will ultimately crash because it is out of control and is unconcerned about the economic welfare of American citizens,thus generating class conflict between the rich and deteriorating conditions of the “less fortunate” ,”less enterprising” declining middle class. [ Nobody gives a shit about the poor.]
    When the fed confidence game finally collapses and world capitalists refuse to back the Dollar, the whole socially and economically unsound foundation of American capitalism will also crash as it should.
    Trump can not stop it from happening; he is just a capitalist caretaker and a cheer leader for American capitalism!

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  8. FKA Max says:

    I would like to play devil’s advocate here for a moment…

    I believe raising interest rates is a positive for the United States, because it will encourage Americans to save more. The U.S. has one of the lower household savings rates (4.9%) among the high GDP per capita countries at the moment:

    Savings Rate By Country – Countries with the Highest Savings Rates

    Switzerland: 17.82%

    Luxembourg: 17.34%

    Sweden: 15.83%

    Germany: 9.55%

    Hungary: 9.02%

    http://www.valuewalk.com/2016/04/savings-rate-by-country/

    Here some additional figures: http://www.oecd-ilibrary.org/economics/household-saving-rates-forecasts_2074384x-table7 and http://www.tradingeconomics.com/country-list/personal-savings

    Americans have fallen out of the saving habit. According to the Bureau of Economic Analysis, the household saving rate, which topped 13% in the early 1970s, is just 3.8% today,1 and over 75% of Americans do not have enough saved to cover six months’
    expenses,2 whether the need arises because of job loss or other unexpected life event.
    Projecting the current rate forward, and adjusting only for the aging of the population,
    we found that the saving rate will fall to an extremely low 3% in the 2030s.
    Unless they can boost their saving during their working years, as they approach
    retirement age many US households will have to choose between working much
    longer, accepting a lower standard of living in old age—or running out of money
    altogether. And inadequate household saving is also a critical issue for the nation
    as a whole: with businesses expected to spend down their existing cash hoards,
    and government unlikely to run a fiscal surplus for years to come—if ever—a larger
    portion of national saving to finance business investment will need to come from
    households. Otherwise, undersaving will place the economy and government on
    a slow growth path as domestic investment in productive assets slows to match
    domestic saving, or the nation may be cast onto an unsustainable path as current
    investment levels persist but are financed with ever-increasing external debt with
    potentially adverse consequences for economic stability and the value of the dollar.

    https://www.uschamber.com/sites/default/files/documents/files/Another%20Penny%20Saved%20-%20Executive%20Summary.pdf

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    • Replies: @CK
    If the US Dollar were a store of wealth maybe savings would be higher. It is not a store of wealth. While American students may be innumerate, folks earning money ( not students )
    quickly realize that saving a dollar today gives you 95 cents next year in buying power ( or conversely that dollar next year buys you a bag of chips that is only 90% as large as this year's bag ).
    As soon as the Fed's interest rate goes up, so also goes up the monthly mortgage payments of all those "stupid people" who took out variable rate mortgages over the last 7 years. As soon as the Fed pushes up the interest rates, credit card minimums will rise. That huge debt financed on your Uranium Master Card gets a teenager's growth spurt without you enjoying even one new thing.
    If Hillary had won, the Fed would have played King Log for at least 2 years. Trump is not a friend of the banks and not a friend of the Fed. Developers and builders do not like bankers; they need bankers but they do not like them.
    , @Mao Cheng Ji
    Why do you think savings is a good thing? 'Saving' is nothing but reducing consumption. It might be good in some circumstances and bad in others.
    , @MarkinLA
    Going from a bank account paying 0.1% to one paying 0.3% isn't going to induce any saving.
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  9. CK says:
    @FKA Max
    I would like to play devil's advocate here for a moment...

    I believe raising interest rates is a positive for the United States, because it will encourage Americans to save more. The U.S. has one of the lower household savings rates (4.9%) among the high GDP per capita countries at the moment:

    Savings Rate By Country – Countries with the Highest Savings Rates

    Switzerland: 17.82%

    Luxembourg: 17.34%

    Sweden: 15.83%

    Germany: 9.55%

    Hungary: 9.02%
     
    - http://www.valuewalk.com/2016/04/savings-rate-by-country/

    Here some additional figures: http://www.oecd-ilibrary.org/economics/household-saving-rates-forecasts_2074384x-table7 and http://www.tradingeconomics.com/country-list/personal-savings

    Americans have fallen out of the saving habit. According to the Bureau of Economic Analysis, the household saving rate, which topped 13% in the early 1970s, is just 3.8% today,1 and over 75% of Americans do not have enough saved to cover six months’
    expenses,2 whether the need arises because of job loss or other unexpected life event.
    Projecting the current rate forward, and adjusting only for the aging of the population,
    we found that the saving rate will fall to an extremely low 3% in the 2030s.
    Unless they can boost their saving during their working years, as they approach
    retirement age many US households will have to choose between working much
    longer, accepting a lower standard of living in old age—or running out of money
    altogether. And inadequate household saving is also a critical issue for the nation
    as a whole: with businesses expected to spend down their existing cash hoards,
    and government unlikely to run a fiscal surplus for years to come—if ever—a larger
    portion of national saving to finance business investment will need to come from
    households. Otherwise, undersaving will place the economy and government on
    a slow growth path as domestic investment in productive assets slows to match
    domestic saving, or the nation may be cast onto an unsustainable path as current
    investment levels persist but are financed with ever-increasing external debt with
    potentially adverse consequences for economic stability and the value of the dollar.

     
    - https://www.uschamber.com/sites/default/files/documents/files/Another%20Penny%20Saved%20-%20Executive%20Summary.pdf

    If the US Dollar were a store of wealth maybe savings would be higher. It is not a store of wealth. While American students may be innumerate, folks earning money ( not students )
    quickly realize that saving a dollar today gives you 95 cents next year in buying power ( or conversely that dollar next year buys you a bag of chips that is only 90% as large as this year’s bag ).
    As soon as the Fed’s interest rate goes up, so also goes up the monthly mortgage payments of all those “stupid people” who took out variable rate mortgages over the last 7 years. As soon as the Fed pushes up the interest rates, credit card minimums will rise. That huge debt financed on your Uranium Master Card gets a teenager’s growth spurt without you enjoying even one new thing.
    If Hillary had won, the Fed would have played King Log for at least 2 years. Trump is not a friend of the banks and not a friend of the Fed. Developers and builders do not like bankers; they need bankers but they do not like them.

    Read More
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  10. Between August 2008 and the present USD lost about a fifth of its value–that is at the very least.

    It is fairly easy to prove but has been well hidden.

    Read More
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  11. @FKA Max
    I would like to play devil's advocate here for a moment...

    I believe raising interest rates is a positive for the United States, because it will encourage Americans to save more. The U.S. has one of the lower household savings rates (4.9%) among the high GDP per capita countries at the moment:

    Savings Rate By Country – Countries with the Highest Savings Rates

    Switzerland: 17.82%

    Luxembourg: 17.34%

    Sweden: 15.83%

    Germany: 9.55%

    Hungary: 9.02%
     
    - http://www.valuewalk.com/2016/04/savings-rate-by-country/

    Here some additional figures: http://www.oecd-ilibrary.org/economics/household-saving-rates-forecasts_2074384x-table7 and http://www.tradingeconomics.com/country-list/personal-savings

    Americans have fallen out of the saving habit. According to the Bureau of Economic Analysis, the household saving rate, which topped 13% in the early 1970s, is just 3.8% today,1 and over 75% of Americans do not have enough saved to cover six months’
    expenses,2 whether the need arises because of job loss or other unexpected life event.
    Projecting the current rate forward, and adjusting only for the aging of the population,
    we found that the saving rate will fall to an extremely low 3% in the 2030s.
    Unless they can boost their saving during their working years, as they approach
    retirement age many US households will have to choose between working much
    longer, accepting a lower standard of living in old age—or running out of money
    altogether. And inadequate household saving is also a critical issue for the nation
    as a whole: with businesses expected to spend down their existing cash hoards,
    and government unlikely to run a fiscal surplus for years to come—if ever—a larger
    portion of national saving to finance business investment will need to come from
    households. Otherwise, undersaving will place the economy and government on
    a slow growth path as domestic investment in productive assets slows to match
    domestic saving, or the nation may be cast onto an unsustainable path as current
    investment levels persist but are financed with ever-increasing external debt with
    potentially adverse consequences for economic stability and the value of the dollar.

     
    - https://www.uschamber.com/sites/default/files/documents/files/Another%20Penny%20Saved%20-%20Executive%20Summary.pdf

    Why do you think savings is a good thing? ‘Saving’ is nothing but reducing consumption. It might be good in some circumstances and bad in others.

    Read More
    • Replies: @The Anti-Gnostic
    Savings are deferred consumption. They are also salutary in that dollars "saved" increases the purchasing power of dollars in circulation.

    Keynes was wrong.
    , @FKA Max

    It might be good in some circumstances and bad in others.
     
    Exactly!

    Americans are not saving enough at the moment, in my opinion.

    It's all about balance. A 10% to 15% personal savings rate is healthy. Anything above or below that range is unsustainable, i.e., either bubble- or stagnation-inducing, in my opinion.

    From 1950 to 2000, the American personal saving rate averaged about 9.8%. It peaked in May 1975, hitting a high of 17% before beginning to slide.

    Savings bottomed out during the financial crisis of the mid-2000s, dipping to a low of 1.9% in July 2005.
     
    - https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

    This is the ``Protestant Ethic'' at work:

    Max Weber and the Protestant Ethic

    https://www.youtube.com/watch?v=j-0sIHDzsU4

    It is also the reason, in my opinion, why the United States was so industrious and rich, and is now in decline:

    The United States is also the home for 20% of the world's Protestants, or some 150 million people, making it the country with the largest number of Protestants.
     
    - https://en.wikipedia.org/wiki/Protestantism_in_the_United_States

    For the first time since researchers began tracking the religious identity of Americans, fewer than half said they were Protestants, a steep decline from 40 years ago when Protestant churches claimed the loyalty of more than two-thirds of the population.
     
    - http://www.nytimes.com/2012/10/10/us/study-finds-that-percentage-of-protestant-americans-is-declining.html

    The less Protestant/Northern European and more Catholic, Jewish, Muslim, Atheist, etc. the U.S. becomes, the less industrious and rich it will be...

    Prussian virtues

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism. It has also significantly influenced wider German culture, such as the contemporary German stereotypes of efficiency, austerity and discipline. [...]
    Austerity or Thrift (German: Sparsamkeit)
     
    - https://en.wikipedia.org/wiki/Prussian_virtues
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  12. @Mao Cheng Ji
    Why do you think savings is a good thing? 'Saving' is nothing but reducing consumption. It might be good in some circumstances and bad in others.

    Savings are deferred consumption. They are also salutary in that dollars “saved” increases the purchasing power of dollars in circulation.

    Keynes was wrong.

    Read More
    • Replies: @Mao Cheng Ji
    I don't think savings are deferred consumption, necessarily: for the time being it's just reduced consumption, and what happens in the future we don't know. Inflation, economic collapse, a change of regime (revolution) - anything is possible. For you to consume something in the future, it'll have to be produced by someone in the future, and then those future people will have to honor your savings (pieces of paper or bits and bytes in a database) as a legitimate claim to what they produce. And that's not guaranteed, not at all. Ask people who lived in Serbia in the 1990s...
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  13. @The Anti-Gnostic
    Savings are deferred consumption. They are also salutary in that dollars "saved" increases the purchasing power of dollars in circulation.

    Keynes was wrong.

    I don’t think savings are deferred consumption, necessarily: for the time being it’s just reduced consumption, and what happens in the future we don’t know. Inflation, economic collapse, a change of regime (revolution) – anything is possible. For you to consume something in the future, it’ll have to be produced by someone in the future, and then those future people will have to honor your savings (pieces of paper or bits and bytes in a database) as a legitimate claim to what they produce. And that’s not guaranteed, not at all. Ask people who lived in Serbia in the 1990s…

    Read More
    • Replies: @The Anti-Gnostic
    Or an asteroid could strike the Earth. Or Cthulhu could emerge from the depths.

    You're also making a good argument for precious metals as money, i.e., the commodity in ultimate demand. And in that event, a penny saved truly is a penny earned.

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  14. nsa says:

    The obvious fallacy is the author’s acceptance of government inflation numbers…..which involve fraudulent constructs like hedonics, rent equivalents, etc. Take hedonics which in theory factors out quality differences. Last year you bought a flat screen with 1 million pixels. This year for the same price you bought a flat screen with 2 million pixels. Yup…….that’s 50% deflation.
    The gargantuan debts will simply be inflated away slowly like the melting of a glacier. The calculation is easy: run say 5% inflation and claim it is 1.7%…….by the rule of 72, the purchasing power of money halves every 22 years. Slowly, debt just magically evaporates. And as Keynes pointed out, not one human in a thousand can see it in real time because it happens so slowly.

    Read More
    • Agree: Seamus Padraig
    • Replies: @Seamus Padraig
    Good point. Government inflation figures should not be accepted at face value, any more than government unemployment figures. They have consistently monkeyed with the CPI, for example, in order to screw over Social Security recipients. There is good reason to believe that official government measures of inflation understate it.
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  15. @Mao Cheng Ji
    I don't think savings are deferred consumption, necessarily: for the time being it's just reduced consumption, and what happens in the future we don't know. Inflation, economic collapse, a change of regime (revolution) - anything is possible. For you to consume something in the future, it'll have to be produced by someone in the future, and then those future people will have to honor your savings (pieces of paper or bits and bytes in a database) as a legitimate claim to what they produce. And that's not guaranteed, not at all. Ask people who lived in Serbia in the 1990s...

    Or an asteroid could strike the Earth. Or Cthulhu could emerge from the depths.

    You’re also making a good argument for precious metals as money, i.e., the commodity in ultimate demand. And in that event, a penny saved truly is a penny earned.

    Read More
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  16. FKA Max says: • Website
    @Mao Cheng Ji
    Why do you think savings is a good thing? 'Saving' is nothing but reducing consumption. It might be good in some circumstances and bad in others.

    It might be good in some circumstances and bad in others.

    Exactly!

    Americans are not saving enough at the moment, in my opinion.

    It’s all about balance. A 10% to 15% personal savings rate is healthy. Anything above or below that range is unsustainable, i.e., either bubble- or stagnation-inducing, in my opinion.

    From 1950 to 2000, the American personal saving rate averaged about 9.8%. It peaked in May 1975, hitting a high of 17% before beginning to slide.

    Savings bottomed out during the financial crisis of the mid-2000s, dipping to a low of 1.9% in July 2005.

    https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

    This is the “Protestant Ethic” at work:

    Max Weber and the Protestant Ethic

    It is also the reason, in my opinion, why the United States was so industrious and rich, and is now in decline:

    The United States is also the home for 20% of the world’s Protestants, or some 150 million people, making it the country with the largest number of Protestants.

    https://en.wikipedia.org/wiki/Protestantism_in_the_United_States

    For the first time since researchers began tracking the religious identity of Americans, fewer than half said they were Protestants, a steep decline from 40 years ago when Protestant churches claimed the loyalty of more than two-thirds of the population.

    http://www.nytimes.com/2012/10/10/us/study-finds-that-percentage-of-protestant-americans-is-declining.html

    The less Protestant/Northern European and more Catholic, Jewish, Muslim, Atheist, etc. the U.S. becomes, the less industrious and rich it will be…

    Prussian virtues

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism. It has also significantly influenced wider German culture, such as the contemporary German stereotypes of efficiency, austerity and discipline. [...]
    Austerity or Thrift (German: Sparsamkeit)

    https://en.wikipedia.org/wiki/Prussian_virtues

    Read More
    • Replies: @Mao Cheng Ji

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism.
     
    Don't know about Calvinism, but militarism appears to be blossoming. So, don't despair.
    , @ThreeCranes
    The notion of deferred gratification may have been over-stretched a bit. There is another fault line along which we can cleave this rough stone that may provide a better insight to Western-European, Protestantism.

    Consider the availability of drinkable tap water in the USA, Mexico and Liberia; white, red, black. Liberians drink mud. Mexicans drink rainwater collected on their roofs in cisterns with bugs floating about in them. Both methods create disease and engender inefficiency.

    The Protestant way is to look at a problem from a larger perspective and say to oneself, "Well, I can either deal with this correctly and solve it once and for all and then forget about it or I can just let it bounce along the bottom and never deal with it and suffer the consequences for all eternity. The first way, I can set the problem aside, it becomes a matter of maintenance of the system I put in place. The second way, I am never free from the adverse effects of my having neglected to address the issue head on and adopt a broader, long-term approach".

    The second way is inefficient because one is forever putting out brushfires and that prevents one from moving forward and solving new problems. The Prussian way frees one up, enabling one to move on and develop new technologies.

    So Protestantism entails both deferred gratification and forward thinking, which, as race realists remind us, separate white from red and black. But it's not just that little colored boys eat the candy bar now rather than later, rather it's the whole mental approach to a problem.

    Paradoxically, whites create long-term solutions to problems because they are "lazy" in the Taoist sense of accomplishing the most with the least effort. Easier to solve it once than cope with the knock-on effects forever. Of course, liberals, blacks and others who dwell in the Land of the Lotus Eaters condemn Protestants for this quality, labeling it "anal" or too "white" while they offer up a more live-in-the-moment lifestyle that leaves them forever just getting by--or not.

    , @Alden
    You sure don't know much about the economies of S. Germany and NE. Germany over the last 1,000 years do you?

    And you certainly don't know anything about modern Germany at all. You post about Prussia and Germany is nothing more than a fantasy.
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  17. MarkinLA says:
    @FKA Max
    I would like to play devil's advocate here for a moment...

    I believe raising interest rates is a positive for the United States, because it will encourage Americans to save more. The U.S. has one of the lower household savings rates (4.9%) among the high GDP per capita countries at the moment:

    Savings Rate By Country – Countries with the Highest Savings Rates

    Switzerland: 17.82%

    Luxembourg: 17.34%

    Sweden: 15.83%

    Germany: 9.55%

    Hungary: 9.02%
     
    - http://www.valuewalk.com/2016/04/savings-rate-by-country/

    Here some additional figures: http://www.oecd-ilibrary.org/economics/household-saving-rates-forecasts_2074384x-table7 and http://www.tradingeconomics.com/country-list/personal-savings

    Americans have fallen out of the saving habit. According to the Bureau of Economic Analysis, the household saving rate, which topped 13% in the early 1970s, is just 3.8% today,1 and over 75% of Americans do not have enough saved to cover six months’
    expenses,2 whether the need arises because of job loss or other unexpected life event.
    Projecting the current rate forward, and adjusting only for the aging of the population,
    we found that the saving rate will fall to an extremely low 3% in the 2030s.
    Unless they can boost their saving during their working years, as they approach
    retirement age many US households will have to choose between working much
    longer, accepting a lower standard of living in old age—or running out of money
    altogether. And inadequate household saving is also a critical issue for the nation
    as a whole: with businesses expected to spend down their existing cash hoards,
    and government unlikely to run a fiscal surplus for years to come—if ever—a larger
    portion of national saving to finance business investment will need to come from
    households. Otherwise, undersaving will place the economy and government on
    a slow growth path as domestic investment in productive assets slows to match
    domestic saving, or the nation may be cast onto an unsustainable path as current
    investment levels persist but are financed with ever-increasing external debt with
    potentially adverse consequences for economic stability and the value of the dollar.

     
    - https://www.uschamber.com/sites/default/files/documents/files/Another%20Penny%20Saved%20-%20Executive%20Summary.pdf

    Going from a bank account paying 0.1% to one paying 0.3% isn’t going to induce any saving.

    Read More
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  18. MarkinLA says:

    But what hasn’t remained subdued is corporate borrowing (via the bond market) which has exceeded all previous records increasing the probability of massive corporate defaults sometime in the next two years.

    Anybody with some common sense would know the answer to this. It is the same reason why when brokerages went from partnerships to publicly traded stock companies they started doing every risky and crazy thing imaginable to get short term gains to goose the stock up – the gains were going to the old partners who sold their stock and the eventual losses were going to be suffered by the new stockholders. The management were still going be employed at their same huge salaries and bonuses.

    If a corporation takes on a large amount of debt (today it is cheap) they can gamble on it or use it for buy-backs to goose the stock up. The executives with the stock options win. If the gambit fails it will be the shareholders and bondholders who lose. Don’t worry about the CEO, he has probably been cashing out all along the way. Of course all the executives will still have their jobs through the Chapter 11 reorganization.

    Read More
    • Replies: @Bill
    Not only that, the executives will likely be awarded a percentage of the company as it emerges from Chapter 11. Plus new stock options.
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  19. Stan says:

    Mr. Whitney has not mentioned the biggest reason executives engage in stock buy backs to boost artificially the stock price. Executive compensation is often paid through stock options which are paid to executives when the stock price reaches targets set in their employent contract.

    Read More
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  20. @FKA Max

    It might be good in some circumstances and bad in others.
     
    Exactly!

    Americans are not saving enough at the moment, in my opinion.

    It's all about balance. A 10% to 15% personal savings rate is healthy. Anything above or below that range is unsustainable, i.e., either bubble- or stagnation-inducing, in my opinion.

    From 1950 to 2000, the American personal saving rate averaged about 9.8%. It peaked in May 1975, hitting a high of 17% before beginning to slide.

    Savings bottomed out during the financial crisis of the mid-2000s, dipping to a low of 1.9% in July 2005.
     
    - https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

    This is the ``Protestant Ethic'' at work:

    Max Weber and the Protestant Ethic

    https://www.youtube.com/watch?v=j-0sIHDzsU4

    It is also the reason, in my opinion, why the United States was so industrious and rich, and is now in decline:

    The United States is also the home for 20% of the world's Protestants, or some 150 million people, making it the country with the largest number of Protestants.
     
    - https://en.wikipedia.org/wiki/Protestantism_in_the_United_States

    For the first time since researchers began tracking the religious identity of Americans, fewer than half said they were Protestants, a steep decline from 40 years ago when Protestant churches claimed the loyalty of more than two-thirds of the population.
     
    - http://www.nytimes.com/2012/10/10/us/study-finds-that-percentage-of-protestant-americans-is-declining.html

    The less Protestant/Northern European and more Catholic, Jewish, Muslim, Atheist, etc. the U.S. becomes, the less industrious and rich it will be...

    Prussian virtues

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism. It has also significantly influenced wider German culture, such as the contemporary German stereotypes of efficiency, austerity and discipline. [...]
    Austerity or Thrift (German: Sparsamkeit)
     
    - https://en.wikipedia.org/wiki/Prussian_virtues

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism.

    Don’t know about Calvinism, but militarism appears to be blossoming. So, don’t despair.

    Read More
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  21. MBlanc46 says:
    @Seamus Padraig

    Bottom line: The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks.
     
    The Fed has been all about the banks for decades now; that's nothing new. What has changed is that Trump is about to take office, and a nicely timed 'recession' could damage his reputation. After all, the only thing a rate-hike could lead to under the present circumstances is an even bigger contraction of consumer spending along with a stock market crash. I can just imagine the headlines now: 'Trump-induced recession! Consumer confidence hits all-time lows under Trump!'

    The one bright side to the Clinton victory that I expected was that she was going to be hit by a business-cycle recession early on. Now that’s the dark side of the Trump victory that I rejoice in. Janet Yellen is doing her bit to torpedo his presidency, certainly, but it was likely going to happen regardless.

    Read More
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  22. CanSpeccy says: • Website

    The idea that the Fed controls the economy by setting interest rates, or that the Fed has ultimate control of interest rates is absurd. If the new administration collapses the black economy by enforcing immigration laws, wages will rise. An across-the-board tariff will cause a further increase in wages, and hence aggregate demand, prices, and investment. Then the Fed will have no choice but to raise rates, with various interesting consequences.

    Read More
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  23. Miro23 says:

    A very good article. In so many words Whitney seems to be saying that the US (apart from the 0,1%) would have been better off without the FED.

    Interest rates could find their own level in a free market, and an office in the Treasury could relatively easily match the money supply to economic activity.

    There’s not so much magic and mystery but also not so much free money for Wall St.

    Read More
    • Replies: @CanSpeccy

    Interest rates could find their own level in a free market
     
    Within limits, they find their own level now.

    When immigration, trade, and fiscal policies plus past monetary policy lead to deflation, stagnation and mass un- or under-employment, interest rates are bound to be low. By announcing rate increases in advance, the Fed is merely signalling its belief that a Trump administration will not be so devastatingly bad for ordinary working people in America as the last administration.

    But three piddling 25-point increases won't cut it if Trump does what he's promised to do. Then we'll see rates back over 5% without the Fed having any choice in the matter, and Whitney and all the marvelously uninteresting people over at Fortune and the WSJ that he quotes will really have something to worry about.

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  24. Greg Bacon says: • Website

    Whitney forgot to mention that US savers have been forced to ‘bail-in’ the TBTF banks with the FED’s obscene interest rate which is about the same as the FED charges banks to borrow money.

    Whitney also forgot to mention that the FED is the biggest counterfeiting outfit on the planet, issuing the phony debt-based currency that can never be repaid, we just keep going deeper into debt, paying astronomical sums of money each year to private bankers.
    Whitney should of said the FED needs to be abolished and that Congress should assume its Constitutional duty of issuing DEBT-FREE currency, which would turn our economy into a powerful one, instead of one that gets bleed, slowly, to death so a select group of con artists can live like Kings.

    Read More
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  25. @FKA Max

    It might be good in some circumstances and bad in others.
     
    Exactly!

    Americans are not saving enough at the moment, in my opinion.

    It's all about balance. A 10% to 15% personal savings rate is healthy. Anything above or below that range is unsustainable, i.e., either bubble- or stagnation-inducing, in my opinion.

    From 1950 to 2000, the American personal saving rate averaged about 9.8%. It peaked in May 1975, hitting a high of 17% before beginning to slide.

    Savings bottomed out during the financial crisis of the mid-2000s, dipping to a low of 1.9% in July 2005.
     
    - https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

    This is the ``Protestant Ethic'' at work:

    Max Weber and the Protestant Ethic

    https://www.youtube.com/watch?v=j-0sIHDzsU4

    It is also the reason, in my opinion, why the United States was so industrious and rich, and is now in decline:

    The United States is also the home for 20% of the world's Protestants, or some 150 million people, making it the country with the largest number of Protestants.
     
    - https://en.wikipedia.org/wiki/Protestantism_in_the_United_States

    For the first time since researchers began tracking the religious identity of Americans, fewer than half said they were Protestants, a steep decline from 40 years ago when Protestant churches claimed the loyalty of more than two-thirds of the population.
     
    - http://www.nytimes.com/2012/10/10/us/study-finds-that-percentage-of-protestant-americans-is-declining.html

    The less Protestant/Northern European and more Catholic, Jewish, Muslim, Atheist, etc. the U.S. becomes, the less industrious and rich it will be...

    Prussian virtues

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism. It has also significantly influenced wider German culture, such as the contemporary German stereotypes of efficiency, austerity and discipline. [...]
    Austerity or Thrift (German: Sparsamkeit)
     
    - https://en.wikipedia.org/wiki/Prussian_virtues

    The notion of deferred gratification may have been over-stretched a bit. There is another fault line along which we can cleave this rough stone that may provide a better insight to Western-European, Protestantism.

    Consider the availability of drinkable tap water in the USA, Mexico and Liberia; white, red, black. Liberians drink mud. Mexicans drink rainwater collected on their roofs in cisterns with bugs floating about in them. Both methods create disease and engender inefficiency.

    The Protestant way is to look at a problem from a larger perspective and say to oneself, “Well, I can either deal with this correctly and solve it once and for all and then forget about it or I can just let it bounce along the bottom and never deal with it and suffer the consequences for all eternity. The first way, I can set the problem aside, it becomes a matter of maintenance of the system I put in place. The second way, I am never free from the adverse effects of my having neglected to address the issue head on and adopt a broader, long-term approach”.

    The second way is inefficient because one is forever putting out brushfires and that prevents one from moving forward and solving new problems. The Prussian way frees one up, enabling one to move on and develop new technologies.

    So Protestantism entails both deferred gratification and forward thinking, which, as race realists remind us, separate white from red and black. But it’s not just that little colored boys eat the candy bar now rather than later, rather it’s the whole mental approach to a problem.

    Paradoxically, whites create long-term solutions to problems because they are “lazy” in the Taoist sense of accomplishing the most with the least effort. Easier to solve it once than cope with the knock-on effects forever. Of course, liberals, blacks and others who dwell in the Land of the Lotus Eaters condemn Protestants for this quality, labeling it “anal” or too “white” while they offer up a more live-in-the-moment lifestyle that leaves them forever just getting by–or not.

    Read More
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  26. The much larger point:

    The passage of The 1965 Immigration Reform Act had created a very very nasty nonwhite Legal Immigrant Policy:52 years of flooding US Labor Markets with nonwhite Legal Immigrant Scab Labor+the nonwhite US born scab labor geneline of nonwhite Legal Immigrant Scab Labor.

    Post-1965 nonwhite Legal Immigrant increase policy resulted in the complete destruction of The Historic Native Born White American Working Class and The Native Born White American Working Class Labor Movement which has historically been the populist Labor Movement that stood up to, and challenged Corporate-Private Power. This is the reason why the Fed has been allowed to run wild and unaccountable.

    It is very important to understand the meta-level political economy context-universe of the ongoing racial-economic dispossession of the Historic Native Born White American Majority Working Class which has been stripped of its of power to engage in full-blown Labor Revolts by the passage of the 1965 Nonwhite Legal Immigrant Increase Act.

    Read More
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  27. Art says:

    They’d (the Jew Fed) rather keep the real economy in a permanent coma and blow up the financial system than lift a finger to stop Wall Street’s reckless and relentless looting spree.

    Just like in the home financial bubble – with these buybacks, the Jews are making too much money – they cannot stop what they are doing. The greedy money changers are making a killing, as American productivity falls back.

    All these buybacks make the big holders of stocks richer. This is win-win for the rich – it bumps the price of their less strong stocks up, and it makes their stock holdings in the strongest companies more valuable because there are less outstanding shares (that actually own the productive company).

    Is Trump going to allow the foreign money to be used for get-rich buybacks? Or is he going to insist on actual investment in American productivity?

    As they say “the fat is in the fire” – we will find out what Trump is all about soon enough.

    Read More
    • Replies: @5percenter
    Ding Ding Ding!! We have a winner.... Will Trump stop the buybacks? This is the question
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  28. @nsa
    The obvious fallacy is the author's acceptance of government inflation numbers.....which involve fraudulent constructs like hedonics, rent equivalents, etc. Take hedonics which in theory factors out quality differences. Last year you bought a flat screen with 1 million pixels. This year for the same price you bought a flat screen with 2 million pixels. Yup.......that's 50% deflation.
    The gargantuan debts will simply be inflated away slowly like the melting of a glacier. The calculation is easy: run say 5% inflation and claim it is 1.7%.......by the rule of 72, the purchasing power of money halves every 22 years. Slowly, debt just magically evaporates. And as Keynes pointed out, not one human in a thousand can see it in real time because it happens so slowly.

    Good point. Government inflation figures should not be accepted at face value, any more than government unemployment figures. They have consistently monkeyed with the CPI, for example, in order to screw over Social Security recipients. There is good reason to believe that official government measures of inflation understate it.

    Read More
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  29. CanSpeccy says: • Website
    @Miro23
    A very good article. In so many words Whitney seems to be saying that the US (apart from the 0,1%) would have been better off without the FED.

    Interest rates could find their own level in a free market, and an office in the Treasury could relatively easily match the money supply to economic activity.

    There's not so much magic and mystery but also not so much free money for Wall St.

    Interest rates could find their own level in a free market

    Within limits, they find their own level now.

    When immigration, trade, and fiscal policies plus past monetary policy lead to deflation, stagnation and mass un- or under-employment, interest rates are bound to be low. By announcing rate increases in advance, the Fed is merely signalling its belief that a Trump administration will not be so devastatingly bad for ordinary working people in America as the last administration.

    But three piddling 25-point increases won’t cut it if Trump does what he’s promised to do. Then we’ll see rates back over 5% without the Fed having any choice in the matter, and Whitney and all the marvelously uninteresting people over at Fortune and the WSJ that he quotes will really have something to worry about.

    Read More
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  30. Bill says:
    @MarkinLA
    But what hasn’t remained subdued is corporate borrowing (via the bond market) which has exceeded all previous records increasing the probability of massive corporate defaults sometime in the next two years.

    Anybody with some common sense would know the answer to this. It is the same reason why when brokerages went from partnerships to publicly traded stock companies they started doing every risky and crazy thing imaginable to get short term gains to goose the stock up - the gains were going to the old partners who sold their stock and the eventual losses were going to be suffered by the new stockholders. The management were still going be employed at their same huge salaries and bonuses.

    If a corporation takes on a large amount of debt (today it is cheap) they can gamble on it or use it for buy-backs to goose the stock up. The executives with the stock options win. If the gambit fails it will be the shareholders and bondholders who lose. Don't worry about the CEO, he has probably been cashing out all along the way. Of course all the executives will still have their jobs through the Chapter 11 reorganization.

    Not only that, the executives will likely be awarded a percentage of the company as it emerges from Chapter 11. Plus new stock options.

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  31. Agent76 says:

    Dec 27, 2016 The Stock Market Is About To Make A BIG Move. Here’s Why.

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  32. Alden says:
    @FKA Max

    It might be good in some circumstances and bad in others.
     
    Exactly!

    Americans are not saving enough at the moment, in my opinion.

    It's all about balance. A 10% to 15% personal savings rate is healthy. Anything above or below that range is unsustainable, i.e., either bubble- or stagnation-inducing, in my opinion.

    From 1950 to 2000, the American personal saving rate averaged about 9.8%. It peaked in May 1975, hitting a high of 17% before beginning to slide.

    Savings bottomed out during the financial crisis of the mid-2000s, dipping to a low of 1.9% in July 2005.
     
    - https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

    This is the ``Protestant Ethic'' at work:

    Max Weber and the Protestant Ethic

    https://www.youtube.com/watch?v=j-0sIHDzsU4

    It is also the reason, in my opinion, why the United States was so industrious and rich, and is now in decline:

    The United States is also the home for 20% of the world's Protestants, or some 150 million people, making it the country with the largest number of Protestants.
     
    - https://en.wikipedia.org/wiki/Protestantism_in_the_United_States

    For the first time since researchers began tracking the religious identity of Americans, fewer than half said they were Protestants, a steep decline from 40 years ago when Protestant churches claimed the loyalty of more than two-thirds of the population.
     
    - http://www.nytimes.com/2012/10/10/us/study-finds-that-percentage-of-protestant-americans-is-declining.html

    The less Protestant/Northern European and more Catholic, Jewish, Muslim, Atheist, etc. the U.S. becomes, the less industrious and rich it will be...

    Prussian virtues

    Prussian virtues (German: preußische Tugenden) refers to the virtues associated with the historical kingdom of Prussia, especially its militarism and the ethical code of the Prussian army, but also bourgeois values as influenced by Lutheranism and Calvinism. It has also significantly influenced wider German culture, such as the contemporary German stereotypes of efficiency, austerity and discipline. [...]
    Austerity or Thrift (German: Sparsamkeit)
     
    - https://en.wikipedia.org/wiki/Prussian_virtues

    You sure don’t know much about the economies of S. Germany and NE. Germany over the last 1,000 years do you?

    And you certainly don’t know anything about modern Germany at all. You post about Prussia and Germany is nothing more than a fantasy.

    Read More
    • Replies: @FKA Max
    I am not quite sure where exactly in my above comment I talk about the history of ``the economies of S. Germany and NE. Germany over the last 1,000 years''?

    I am pretty certain my comment was mostly pertaining to the state of the U.S. economy and the possible/probable cause of its decline; namely the shifting and changing religious and ethnic U.S. demographic make-up.

    I merely gave the example of Prussia and Prussians as a state and a people, whose mores were partly or even significantly influenced by Protestant theology, and I believe the same thing can be said and can be observed about Americans.

    And you certainly don’t know anything about modern Germany at all.
     
    If you believe ``Prussian Virtues(/Pride)'' play no role whatsoever in (modern) Germany and in its economic success, etc., you most certainly do not know anything about (modern) Germany:

    What’s the point of rebuilding Germany’s palaces?

    Only time will tell if the façades of the Schloss in Berlin will account for a convincing copy of Schlüter’s work. The palace was of considerable importance – a rare example of non-sacred Protestant baroque architecture on a grand scale, even if its generous architectural vocabulary was closer to the visual languages of Catholicism and absolutism. Frederick’s love of pomp and his eagerness to establish himself and his house on the European political stage certainly trumped any notions of the sobriety that we tend to associate with German Protestantism.
     
    - http://www.apollo-magazine.com/whats-the-point-of-rebuilding-germanys-palaces/

    Survey: How Prussian are the Germans? | People & Politics

    https://www.youtube.com/watch?v=OeJyXQK-5i0

    Uploaded on Jan 20, 2012

    How Prussian are the Germans? Do classic Prussian virtues still play a role?

    P.s.: I thought you had put me on your Grand Inquisitor list of heretics and people to ignore, Alden?

    Why don’t you follow you[r] own advice, and just ignore me, Alden?
     
    - http://www.unz.com/article/the-empire-strikes-back-the-msms-3-point-plan-to-recapture-the-narrative/#comment-1686089
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  33. Sidirst says:

    Mike:

    The con is quite simple:

    1st: Borrow cheap FedRB $ to buy back shares. Earnings per share divided by (newly reduced shares outstanding) fewer shares equals higher earnings per share ! This new EPS was easily share-repurchase-engineered to achieve the CEO’s bonus activation requirement. So, the corporation borrows money so that top executives can benefit financially from fake EPS results via performance incentive agreements. The regulators routinely ignore the fraud and the FED encourages it.

    2nd: The corporation is now heavily indebted and unlikely to survive higher interest rates or a tough competitive environment. The good news is that the CEO knows the horse very well. So, ride the EPS fraud as long as possible and collect a fortune all along the trail. When tough times come, the shareholders and bondholders take the hit. The CEO then simply buys the newly debt-free corporation out of a bankruptcy proceeding with the EPS fraud derived bonus fortune that he has accumulated ! Times are very good in America for the fraud crowd. Prosecutions do not occur.

    We have lost the rule of law. It’s a perverse form of theft, but ironically, just like early communist asset confiscations, the fun runs out rather quickly when there’s little left to steal.

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  34. @Art
    They’d (the Jew Fed) rather keep the real economy in a permanent coma and blow up the financial system than lift a finger to stop Wall Street’s reckless and relentless looting spree.

    Just like in the home financial bubble - with these buybacks, the Jews are making too much money - they cannot stop what they are doing. The greedy money changers are making a killing, as American productivity falls back.

    All these buybacks make the big holders of stocks richer. This is win-win for the rich - it bumps the price of their less strong stocks up, and it makes their stock holdings in the strongest companies more valuable because there are less outstanding shares (that actually own the productive company).

    Is Trump going to allow the foreign money to be used for get-rich buybacks? Or is he going to insist on actual investment in American productivity?

    As they say “the fat is in the fire” – we will find out what Trump is all about soon enough.

    Ding Ding Ding!! We have a winner…. Will Trump stop the buybacks? This is the question

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  35. FKA Max says: • Website
    @Alden
    You sure don't know much about the economies of S. Germany and NE. Germany over the last 1,000 years do you?

    And you certainly don't know anything about modern Germany at all. You post about Prussia and Germany is nothing more than a fantasy.

    I am not quite sure where exactly in my above comment I talk about the history of “the economies of S. Germany and NE. Germany over the last 1,000 years”?

    I am pretty certain my comment was mostly pertaining to the state of the U.S. economy and the possible/probable cause of its decline; namely the shifting and changing religious and ethnic U.S. demographic make-up.

    I merely gave the example of Prussia and Prussians as a state and a people, whose mores were partly or even significantly influenced by Protestant theology, and I believe the same thing can be said and can be observed about Americans.

    And you certainly don’t know anything about modern Germany at all.

    If you believe “Prussian Virtues(/Pride)” play no role whatsoever in (modern) Germany and in its economic success, etc., you most certainly do not know anything about (modern) Germany:

    What’s the point of rebuilding Germany’s palaces?

    Only time will tell if the façades of the Schloss in Berlin will account for a convincing copy of Schlüter’s work. The palace was of considerable importance – a rare example of non-sacred Protestant baroque architecture on a grand scale, even if its generous architectural vocabulary was closer to the visual languages of Catholicism and absolutism. Frederick’s love of pomp and his eagerness to establish himself and his house on the European political stage certainly trumped any notions of the sobriety that we tend to associate with German Protestantism.

    http://www.apollo-magazine.com/whats-the-point-of-rebuilding-germanys-palaces/

    Survey: How Prussian are the Germans? | People & Politics

    Uploaded on Jan 20, 2012

    How Prussian are the Germans? Do classic Prussian virtues still play a role?

    P.s.: I thought you had put me on your Grand Inquisitor list of heretics and people to ignore, Alden?

    Why don’t you follow you[r] own advice, and just ignore me, Alden?

    http://www.unz.com/article/the-empire-strikes-back-the-msms-3-point-plan-to-recapture-the-narrative/#comment-1686089

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  36. anon says: • Disclaimer

    The Fed sets the Fed Fund Rate, but markets have to go along. For example, the $US dollar has increased about 4 or 5% to global currencies since they now believe in the next 75 basis points of increases. Investors want what they want and will control yields. They want US Treasuries — since the other developed economies are unable to raise their interest rates.

    The biggest problem in the US is that it has been doing all the heavy lifting regarding growth — and has been held down by remainder of the developed world. BRIC isn’t helping and the emerging markets are also having problems.

    Higher interest rates are never good for business, but a healthy economy can support 1% to 2% Fed Fund rates.

    Low rates and buybacks are a symptom rather than a cause. The article seems to constantly hint at that, but then revert to populist slogans. There are a limited number of things a corporation can do with profits. They can pay dividends, make capital investments, acquire other companies, buy back stock, or hoard cash (like Apple, Microsoft, &c. There seems to be a clear bias in the article toward capital investment — but what happens to a dividend? It doesn’t die and go to money heaven — it gets spent (good), reinvested (good), or saved (good with caveats). Buybacks return money to shareholders and the sellers have the same choices regarding what they do with the money as the dividend recipient.

    Getting back to causes — over the last 2 years, we have had a collapse in prices of oil, basic materials, and commodities. It was sufficient to hurt the US economy enough to keep growth at an anemic 2% rather than an acceptable 3%.

    As far as banks, the problem is that they have been beaten like a rented mule. Capital ratios are at record levels — much higher than in 2008. And the haters just want to jail a CEO. Instead of telling them to LEND MONEY. The obsession with 2008 has created an environment where regulators and politicians can only think of building a Maginot Line against ‘reckless lending’. When the real crime is this. Non Performing Assets are at record lows. Which means way too many people who want to borrow can’t qualify. The same problems were ‘fixed’ over and over until anyone without perfect credit can’t borrow. And with current capital ratios, banks have no incentive to take any risk. Any additional dollar of lending requires more capital.

    Whitney is one of the few people talking about deflationary pressures — which is part of the current economic environment. I’m fine with the modest Fed increases — if they can actually pull them off. But it is going to be lower for longer.

    Corporations would love to expand — but they have to see the demand. The primary reason the US is doing better than the rest of the world is the several trillion of new money invested in Tight Oil since 2008. American investors are more than willing to take a risk for a reasonable return. In addition, our economy simply isn’t as capital intensive as it has been in the past. Growth is in the service sectors and a lot of tech companies are simply not big users of capital.

    Read More
    • Replies: @dc.sunsets

    The Fed sets the Fed Fund Rate, but markets have to go along.
     
    This is a fallacy. A cursory look at a graph of 13-week T-bill rates shows that the rates move first, then the Fed follows. I think anyone who posits that the market is simply front-running the Fed is guilty of the most obvious kind of data-fitting.

    We are treated to many, obviously erroneous assumptions across all discussions of finance. My favorite is "sideline money is bullish." We hear "experts" repeat this endlessly on CNBC and in other financial media.

    It is absurd. Stupid. Embarrassingly so, too.

    Every dollar moving into a market with a buyer leaves with the seller. There can be no net movement of "money" in market transactions.

    The other assumption is that as one market rises, money comes out of a different market to fuel it, as though wealth flows from stocks to bonds, bonds to commodities, commodities to real estate, or any other combination.

    Really? If Al owns a share of AAPL, Bud wants to buy it, and Bud pays Al $0.10/share more than the last sale price, not only does NO MONEY actually move into or out of AAPL shares, that $0.10/share value increase multiplies across every share in existence, raising AAPL's market capitalization by $533,000,000.00 (recall, the transaction that "yielded" half a trillion dollars in market cap was for a single share and ten f-ing cents.)

    So, from where does the vast value of wealth sitting in stocks (or bonds, for that matter) come?
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  37. @Seamus Padraig

    Bottom line: The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks.
     
    The Fed has been all about the banks for decades now; that's nothing new. What has changed is that Trump is about to take office, and a nicely timed 'recession' could damage his reputation. After all, the only thing a rate-hike could lead to under the present circumstances is an even bigger contraction of consumer spending along with a stock market crash. I can just imagine the headlines now: 'Trump-induced recession! Consumer confidence hits all-time lows under Trump!'

    !

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  38. Karl says:

    how come everybody wants to exclude farm wages from the picture?

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  39. Wally says:
    @E. A. Costa
    "The Fed’s rate hike has nothing to do with employment, growth, productivity, the state of the economy or inflation. It’s all about the banks."

    Clear, succinct, correct. Kudos.

    Now add the stock market to that and you have the general picture.

    Realize also that most of the figures on employment, income, real estate and so forth are either faked or deceptively manipulated.

    The Super-Recession begun in 2008 continues and worsens and in its fundamentals is much worse than the Great Depresssion. A few of the financiers may even believe their own lies.

    What has been in progress since 2008 is what one calls a "virtual recovery", designed to persuade the 99 percent that some sort of recovery has happened and thus engender a real recovery, which is nothing more than an attempt to return to status quo ante.

    It is a form of incantatory magic, it almost goes without saying.

    Señor Trump will continue on the same course, making it look as if he is actually doing something.

    “Realize also that most of the figures on employment, income, real estate and so forth are either faked or deceptively manipulated.”
    Bingo!

    And “2% inflation“? Really?

    https://dailyreckoning.com/revealing-real-rate-inflation-crash-system/

    http://schiffgold.com/key-gold-news/the-lie-of-the-cpi-real-inflation-is-everywhere/

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  40. […] We know that the low rates have been disastrous for pension funds, insurance companies and Mom and Pop’s retirement savings which have shriveled to nothing since the recession ended in 2009. We also know that–during that same period– “97% of all GDP-income gains went to the wealthiest 1% households” which has widened inequality to levels not seen since the Gilded Age. The question is: Why would the Fed change its policy now that all the money is flowing exactly where the Fed wants it to flow, upwards?…More Here […]

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  41. The FOMC is following T-bill rates on the way up, just as they did on the way down.

    Seriously, how on Earth can the direction of causality be clearer?

    Rates went down for 35 years after topping in 1981. During that time, a fiat monetary system meant there was no consistent measure of “money” and as rates fell, holding debt was like planting a money tree in the back yard.

    Banks created credit from nowhere, lent it and profited on basically infinite leverage (zero investment, positive return on “capital.”) Have we forgotten about the “bond vigilantes?” They all died (or pulled a Rip Van Winkle and are comatose) for the last three and a half decades.

    There was no brake on borrowing, so Congress (and its uncountable piglet-dependents) figured out it was no longer necessary to tax before they could spend. The result was an economy wholly dependent on borrowing-to-spend, which created a political patronage army whose members reliably reelected the most profligate spenders.

    All of this rests (rested) on rising social mood (look up “socionomics” and Robert Prechter, Jr. for more on that.) The last social mood mania anywhere near this large was England’s South Sea Bubble almost 300 years ago. We’re living in very historic times, sad to say.

    Rates are rising now because…cycles haven’t been repealed and trees don’t grow to the sky. What goes up eventually does come down. Every bull and bear market of the last 30 years has been fueled by rising “wealth” filling the Bond Ocean. That Bond Ocean tide rose with new borrowing, and with every decline in interest rates. Stocks, real estate and commodities all experienced one or more bull/bear cycles as liquidity from the bond market sloshed from market to market. All this was no more than waves of mass psychology, no money actually changes hands in the aggregate, but the results were on display for all to see.

    Now that an unprecedented amount of IOU’s (Bonds) exists, each tiny increase in interest rates causes an incredibly leveraged amount of “wealth” sitting in existing bonds to simply evaporate.

    Back in the 1980′s, the Bond Ocean was a small pond by comparison, so as rates dropped the amount of capital gain was commensurately small. Now that there are tens, if not hundreds of trillions of dollars in IOU’s of one kind or another in existence, every small increase in rates ripples through all that debt, decreasing its present value by (in the aggregate) astronomical amounts.

    This is the future. Social mood topped 16 years ago, and the “rally” since the early 1980′s was nowhere near as robust (internally) as was the rally of 1947 to 1964.

    The future promises higher interest rates as trust drains out of this mania. Higher rates reflect lower capital values of existing debt, which is wealth destruction on a massive scale. This psychology will eventually lead to catastrophic bear markets in all asset classes, a deflationary collapse exceeding every one chronicled in Charles MacKay’s 1841 tome Extraordinary Popular Delusions and the Madness of Crowds.

    This will eventually collapse the banking industry. Deposits will evaporate. What it should look like (absent some truly insane “stupid government tricks”) is a tremendous shortage of money.

    If history is any guide, by the time the “government” acts to “fix” things, the crisis will actually already be past. In all likelihood Congress will seize the FED and turn on the printing presses quite literally in an attempt to reflate the economy with banknotes.

    If that’s how it plays out, the real cataclysm won’t be the deflationary financial collapse, it will be the Zimbabwe-style political catastrophe that ensues.

    Of course, I could be wrong. I believed apogee was at hand in 1995, yet here we are. No one knows the future.

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  42. @anon
    The Fed sets the Fed Fund Rate, but markets have to go along. For example, the $US dollar has increased about 4 or 5% to global currencies since they now believe in the next 75 basis points of increases. Investors want what they want and will control yields. They want US Treasuries -- since the other developed economies are unable to raise their interest rates.

    The biggest problem in the US is that it has been doing all the heavy lifting regarding growth -- and has been held down by remainder of the developed world. BRIC isn't helping and the emerging markets are also having problems.

    Higher interest rates are never good for business, but a healthy economy can support 1% to 2% Fed Fund rates.

    Low rates and buybacks are a symptom rather than a cause. The article seems to constantly hint at that, but then revert to populist slogans. There are a limited number of things a corporation can do with profits. They can pay dividends, make capital investments, acquire other companies, buy back stock, or hoard cash (like Apple, Microsoft, &c. There seems to be a clear bias in the article toward capital investment -- but what happens to a dividend? It doesn't die and go to money heaven -- it gets spent (good), reinvested (good), or saved (good with caveats). Buybacks return money to shareholders and the sellers have the same choices regarding what they do with the money as the dividend recipient.

    Getting back to causes -- over the last 2 years, we have had a collapse in prices of oil, basic materials, and commodities. It was sufficient to hurt the US economy enough to keep growth at an anemic 2% rather than an acceptable 3%.

    As far as banks, the problem is that they have been beaten like a rented mule. Capital ratios are at record levels -- much higher than in 2008. And the haters just want to jail a CEO. Instead of telling them to LEND MONEY. The obsession with 2008 has created an environment where regulators and politicians can only think of building a Maginot Line against 'reckless lending'. When the real crime is this. Non Performing Assets are at record lows. Which means way too many people who want to borrow can't qualify. The same problems were 'fixed' over and over until anyone without perfect credit can't borrow. And with current capital ratios, banks have no incentive to take any risk. Any additional dollar of lending requires more capital.

    Whitney is one of the few people talking about deflationary pressures -- which is part of the current economic environment. I'm fine with the modest Fed increases -- if they can actually pull them off. But it is going to be lower for longer.

    Corporations would love to expand -- but they have to see the demand. The primary reason the US is doing better than the rest of the world is the several trillion of new money invested in Tight Oil since 2008. American investors are more than willing to take a risk for a reasonable return. In addition, our economy simply isn't as capital intensive as it has been in the past. Growth is in the service sectors and a lot of tech companies are simply not big users of capital.

    The Fed sets the Fed Fund Rate, but markets have to go along.

    This is a fallacy. A cursory look at a graph of 13-week T-bill rates shows that the rates move first, then the Fed follows. I think anyone who posits that the market is simply front-running the Fed is guilty of the most obvious kind of data-fitting.

    We are treated to many, obviously erroneous assumptions across all discussions of finance. My favorite is “sideline money is bullish.” We hear “experts” repeat this endlessly on CNBC and in other financial media.

    It is absurd. Stupid. Embarrassingly so, too.

    Every dollar moving into a market with a buyer leaves with the seller. There can be no net movement of “money” in market transactions.

    The other assumption is that as one market rises, money comes out of a different market to fuel it, as though wealth flows from stocks to bonds, bonds to commodities, commodities to real estate, or any other combination.

    Really? If Al owns a share of AAPL, Bud wants to buy it, and Bud pays Al $0.10/share more than the last sale price, not only does NO MONEY actually move into or out of AAPL shares, that $0.10/share value increase multiplies across every share in existence, raising AAPL’s market capitalization by $533,000,000.00 (recall, the transaction that “yielded” half a trillion dollars in market cap was for a single share and ten f-ing cents.)

    So, from where does the vast value of wealth sitting in stocks (or bonds, for that matter) come?

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