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What do you think this chart means?

Screen Shot 2016-03-22 at 5.55.11 PM

(The post-recession economy is worse than we thought, Fortune)

It means the U.S. economy is in the throes of the lousiest recovery since World War 2.

“But how can that be”, you ask? “After all, hasn’t the Fed kept interest rates at zero for seven years while hosing down the entire financial system with more than $4 trillion?

Yep, they sure have, but their so called monetary stimulus has failed to lift the economy out of the doldrums or produce the robust recovery that they promised. Instead, US gross domestic product, (GDP) has been plodding-along at an abysmal 2.2% since 2009, which is far below the 3.6% average of the prior 60 years. Bottom line: There’s no chance the economy is going to break out of its long-term stagnation unless policymakers dramatically change their approach. Here’s a snapshot of the Fed’s handiwork from an article at Fortune Magazine. Take a look:

Screen Shot 2016-03-22 at 5.55.58 PM


“As you can see, the revisions generally show a more anemic record of post-recession growth than we thought. From 2011 through last year, the U.S. economy, on average, grew just 2% per year, well below its post-war average of roughly 3% growth.” (The post-recession economy is worse than we thought, Fortune)

It’s hard to believe, isn’t it? It’s hard to believe the Fed can dump more than $4 trillion into the financial system and not even hit their 2% inflation target? How is that possible? I thought more money meant more inflation? Was I wrong?

Yes and no. You see, the Fed’s policies HAVE created inflation, just not the kind of inflation that revs up activity. What the Fed has created is asset inflation, soaring stock and bond prices that eventually lead to financial instability and painful periods of adjustment. The S&P has more than doubled since 2009, while the Dow Jones has actually tripled. Stock prices have skyrocketed while Wall Street speculators have made an absolute killing. It’s only working slobs who haven’t benefited from the Fed’s policies because none of the money has trickled down to the real economy where it could do some good. Instead, it’s all locked up in the financial system where its inflated one gigantic bubble after another.

Here’s what the Fed’s money pumping operation looks like on paper:

Screen Shot 2016-03-22 at 5.56.40 PM


See how the black line lurches skyward with every new round of QE? That’s how the policy works. The rich get richer while working people try to muddle by on fewer hours, shittier wages, pricier health care, and zero retirement savings. Is it any wonder why Bernie Sanders has caught fire?

Now if you look closely at the chart, you’ll see that the Fed stopped pumping money into the system in October 2014, about a year and a half ago. Since that time, stocks have gradually edged higher which suggests that current prices accurately reflect strong underlying fundamentals. But does anyone really believe that?

No, not really. Everyone thinks stocks are in a bubble. In fact, the Fed can’t even mention “tightening” without sending the markets off a cliff. For example, in December–after months of telegraphing its intention to lift rates by a measly 25 basis points– the Fed raised rates to half a percent, a full percentage point below the current rate of inflation. (which means the Fed is actually subsidizing lending.) Even so, the markets had a major coronary which sent stocks tumbling for the worst beginning of a year in history.


Because everyone knows the prices are fake. It’s all just froth from zero rates and QE, every bit of it. And there’s no bottom either, that’s why the Fed is so worried, because if the market does a sudden about-face and stocks start to nosedive, there’s no telling where they’ll wind up. We could see the Crash of the Century in matter of weeks. Nobody really knows for sure.

There was an excellent article on this topic a few weeks ago at Yahoo called “The Fed caused 93% of the entire stock market’s move since 2008”.

According to economist-analyst Brian Barnier, stocks have climbed to stratospheric levels because, “the Federal Reserve took to flooding the financial market with dollars by buying up bonds.”

Okay, but if the Fed is responsible for 93 percent of the rally, then how far will stocks have to drop before prices reflect fundamentals?

A very long way indeed, longer than anyone even cares to imagine. This is why the Fed’s HAS NOT and probably WILL NOT sell any of the $4.5 trillion assets currently on its balance sheet. They’re too afraid that investors will see it as a sign that the Fed is ending its support for the markets, which will trigger a vicious round of panic selling. In other words, the Fed’s going to be stuck with a bloated balance sheet until Judgment Day if not longer.

But let’s get back to our original question: Why have stocks continued to edge higher when the Fed stopped its money-pumping operations back in 2014?

Answer: Stock buybacks.

Check out this chart I found at David Stockman’s Contra Corner. It helps to illustrate how stocks are rising, not because of strong fundamentals, but because bigshot CEOs have borrowed heavily from the bond market to buyback their own shares. That’s right, corporate bosses have been piling on the debt to goose their stock prices so they can cream hefty profits in the form of executive compensation. It’s blatant manipulation, but it’s all perfectly legal. Check it out:

Screen Shot 2016-03-22 at 5.57.57 PM

(Chart Of The Day: The Perfect Correlation——Stock Buybacks And The S&P 500 Since 2010, Contra Corner)

This is what’s driving the market higher. Not the fake jobs numbers, not the phony housing rebound, and certainly not confidence in Yellen’s lousy recovery. It’s all based on cheap money, financial engineering, and fraud. That’s today’s stock market in a nutshell.

Now take a look at this shocker from Bloomberg:

“Standard and Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007.” (There’s Only One Buyer Keeping S&P 500’s Bull Market Alive, Bloomberg)

$165 billion of stock this quarter, translates into $660 billion per year. That’s a boatload of money and enough to drive the market higher unless retail investors call it a day and bail out. And retail investors are bailing out. According to a recent report by Bank of America (featured on Zero Hedge):

“BofAML clients were net sellers of US stocks for the seventh consecutive week… Hedge funds and private clients were also net sellers…

BofA’s summary: “clients don’t believe the rally, continue to sell US stocks” and they were selling specifically to corporations whose repurchasing activity is near all time highs: “buybacks by corporate clients accelerated for the third consecutive week to their highest level in six months, which is also above levels at this time last year.” (Buyback Blackout Period Starts Monday: Is This The Catalyst That Ends The S&P Rally?, Zero Hedge)

SELL. SELL. SELL. It seems like the only one that isn’t headed for the exits is the big corporate honchos who want one-last big payoff before the market goes Sayonara. Here’s more from Bloomberg:

“Corporate buybacks are the sole demand for corporate equities in this market,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in a Feb. 23 Bloomberg Television interview.” (Bloomberg)

“The sole demand”? You mean the only one buying these crappy stocks is the companies issuing the shares?

That’s right, and you can blame it all on the friendly folks at the Fed. If it wasn’t for the Fed’s zero rates and $4 trillion in QE, this latest suicidal-wave of speculation never would have happened. Let’s face it, if rates were normal, CEOs wouldn’t be able to borrow money to buy their own shares. It would just be too expensive, so the problem wouldn’t even exist. Cheap money creates bubbles, and the Number 1 producer of cheap money in the world today is, you-guessed-it, Janet Freaking Yellen.

So what’s the ultimate objective here, what is the Fed really trying to achieve? Surely, after seven years of doing the same thing over and over again, the Fed isn’t expecting a different result, is it?

No, of course not. After all, the Fed isn’t insane, far from it. The Fed knows exactly what it’s doing. They know that their monetary policy is “pushing on a string” and will have no impact on jobs, business investment or growth, just like they know that QE won’t boost inflation as long as wages are kept in check. They know this, because they’ve seen the same outcome in every country where they’ve used this combo of easy money and austerity. Keep in mind, the Central Bank cabal has implemented this same program in the UK, the EU, Japan and the US. In every case, the political class has put a damper on growth (by cutting government spending) while the CBs have pumped trillions into the financial system. And the result has been exactly what you’d expect; the investor class has raked in billions while the economy languishes on life support. What more proof do you need?

Like we said, this phenomenon is not limited to America either. It’s a global restructuring of the dominant western economies away from a democratic model where representative governments set policy. The new order represents basic changes in the political economy, an economy that now serves the exclusive interests of the top one percent. Welcome to the Fed’s Brave New World.

The key here for the deep-state elites– who control the whole apparatus behind the central bank smokescreen– is inflation. As long as inflation stays low, central banks can continue to conveyor-belt more wealth to the tycoons on top. This is why the economy cannot be allowed to grow, because if the economy grows too fast and more people find work, then wage pressures continues to build which forces the CBs to raise rates.

Elites can’t allow that, because higher rates threaten to sabotage their easy money gravy train. So the economy has to be strangled with austerity so the uber-rich can rake off more lucre for themselves. That’s why the economy is going to remain mired in the doldrums for the foreseeable future. It’s the policy.

This is the hidden motive behind austerity. It has nothing to do with the nagging concern about federal debt or bulging deficits. That’s baloney. It’s about curbing inflation so the oligarchs get a bigger piece of the pie. End of story.

Like we said earlier, the Fed knows exactly what it’s doing, just like all the CBs know what they’re doing. This isn’t hard to understand. It’s a fairly straightforward, but devious plan to restructure the economy so handful of obscenely-wealthy plutocrats end up controlling everything. That’s the main objective. They want it all.

So how do we turn this thing around?

Unfortunately, that’s where I’m stuck.

Join the debate on Facebook

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 [email protected].

(Republished from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Federal Reserve, Great Recession 
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  1. Exudd1 says:

    Excellent article, Mike! Thanks.
    You have cogently explained the real reasons for: 1. Escalating stock prices without any apparent improvements in the real, productive economy. 2. The slow but net rise in the stock market in the last 18 months despite the Fed turning off the QE spigot. 3. The twin burden of low wages and official fiscal austerity on the working and poor people for the persistence of low inflation in the last several years.
    It might well be that there is some inflation in the very high end of the economy – high end luxury goods, yachts, high end condos and mansions, expensive artwork, exclusive resorts, etc. But that would not add significantly to the overall rate, perhaps.
    Another reason, perhaps also not a significant one, might be that most of the gains of the tycoons are ploughed back into speculative financial activities and do not enter the real economy and/or likely held in gold, in foreign banks or foreign currency/investments.

  2. So how do we turn this thing around?

    Unfortunately, that’s where I’m stuck.


  3. tbraton says:

    When I went to college in the 60’s and majored in economics, I was startled to discover a study by one Edward Denison which said the long-range historic economic growth rate of the U.S. was around 2.4%. (In light of the number below, that must have been based on a shorter time frame or the rate of growth after 1962 was considerably lower than before.) You must keep in mind that this was after JFK had become President and had started governing on a pledge to get the “economy going again.” His first chairman of CEA was Walter Heller of the University of Minnesota, who sold Kennedy on a program of kicking the economy up to an annual growth rate of 5% a year. Since I no longer have my copy of Dennison’s 1962 book “Sources of Economic Growth in the United States,” I had to Google him and found this Chapter 6 of a later work in which it appears that the historic economic growth rate of the U.S. from 1870 to 1996 was a mere 1.7%. The link contains the following Table 6.1:

    Table 6.1
    Economic Growth in Eight Major Countries, 1870–1996

    Levels of Real GDP per Capita Annual Growth Rate

    Country 1870 1913 1950 1996 1870–1996

    Australia 3,123 4,523 5,931 15,076 1.3%
    Canada 1,347 3,560 6,113 17,453 2.1%
    France 1,571 2,734 4,149 14,631 1.8%
    Germany 1,300 2,606 3,339 15,313 2.0%
    Japan ,618 1,114 1,563 17,346 2.7%
    Sweden 1,316 2,450 5,331 14,912 1.9%
    United Kingdom 2,610 4,024 5,651 14,440 1.4%
    United States 2,247 4,854 8,611 19,638 1.7%

    Note: Figures are in U.S. dollars at 1985 prices, adjusted for differences in the purchasing power of the various national currencies.

    Sources: Data from 1870, 1913, 1950 from Angus Maddison, Dynamic Forces in Capitalist
    Development: A Long-Run Comparative View, New York: Oxford University Press, 1991, Table 1.1. Data for 1996 computed by authors using growth rates of real GDP per capita from 1989 to 1996 reported in OECD National Accounts, Main Aggregates, 1960–1996, Volume 1, Part Four, Growth Triangles and 1989 levels of GDP per capita from Maddison. (The 1996 data for Germany apply the growth rate for unified Germany to the 1989 GDP per capita for West Germany and thus overstate GDP per capita for unified Germany in 1996 because income per capita was higher in West Germany than in East Germany in 1989.)

    BTW, for those not familiar with Mr. Denison, here is how Wikipedia describes him: “He was a pioneer in the measurement of the United States gross national product[1] and one of the founders of growth accounting.[3]”

    Incidentally, as several people have pointed out previously on other threads, the experience of the U.S. immediately after WWII up to the late 60’s was rather unique, due to the fact that the U.S. was the only major economy in the world not damaged or destroyed by the war. Thus, for many years after WWII, the U.S. experienced unusual growth due to the fact we were supplying the rest of the world with many manufactured goods because the U.S. alone had the capacity to build those items until the rest of the world, such as Germany and Japan, was able to reconstruct their capacity.

    • Replies: @Wizard of Oz
    , @tbraton
  4. Forbes says:

    You seem to be attributing cleverness to monetary policy and its effects, rather than incompetence.

    As to fiscal austerity–there doesn’t seem to be any–except in the same manner that politicians and the lapdog media refer to “spending cuts” that are merely cuts in the rate of increased spending–not actual spending reductions.

  5. attonn says:

    Mike, the “turnaround” will take a place in a completely different geopolitical and demographic environment, hundreds of years from now. Don’t obsess about it.
    Simply buy guns and ammo, and learn to enjoy the decline.

  6. utu says:

    “Let’s face it, if rates were normal, CEOs wouldn’t be able to borrow money to buy their own shares. ”

    (1) What are normal rates?

    (2) How CEO’s are paying back the debt? What are the conditions for the loans they get?

  7. TG says:

    Well and clearly argued. Indeed.

    One comment though: the economy CAN grow with low wage inflation, as long as the labor force is increased fast enough. Witness: India, which has had recently had periods of sustained double-digit economic growth and yet, with over a billion people and rising, half the population is chronically malnourished and the physical standard of living is inferior to late medieval England – but the rich build entire skyscrapers with 1000 servants as personal residences. So, there shall be open borders, anyone?

    No wonder the elites are so dead-set on massive immigration. Cheap labor uber alles!

  8. anon • Disclaimer says:

    The banking mafia’s looting of the industrial base over time has gradually shrunk the *engine* of the economy.

    • Replies: @Olorin
  9. @utu

    I don’t think he means that the CEOs are personally borrowing money but that they are adding to the money owed by their corporations so that the number of shares on issue can be reduced by buy back.

    MW completely fails to deal with the very important issue of how far these buybacks with borrowed money is threatening the solvency of the corporations which do it. If you are a shareholder in a strong company which buys back its shares with only a manageable amount of borrowing at very low interest rates for at least ten years you ought to be happy. That it might be done to boost remuneration geared to share prices is another – potentially worrying – issue.

    • Replies: @MarkinLA
  10. @tbraton

    Interesting. I was surprised by the low Australian figure. I guess it was greatly blighted by a succession of economic disasters for about 10 years from approx 1891. I think the 1900 to 2008 and even 2016 figures would be much better.

  11. 1) Banking oligarchs throwing their corporatists a bone, because they need one another on “the other side” of the wall we are about to hit. Politicos get to free-ride through trading on inside info because they have been useful lap-dogs, and some of them might make it to the other side.
    2) Anyone who talks of low inflation should do the family shopping a few times during the years. Either prices are going up or portion sizes are shrinking, but there is no question that there is more than enough inflation for the masses.
    3) Adjusted for real inflation, even including energy, real per-capita GDP only continues to decline for the masses.

  12. @utu

    (1) What are normal rates?

    An historically normal Federal Funds rate is somewhere in the 4.5%–5.0% range. The rate that matters most to ordinary consumers is the interest on the 10-year Treasury, to which mortgages and various commercial loans are indexed. It might be considered normal (but low-normal) at around 7.0%–8.0%. Obviously, if we were to return to rates like that, we would see a quite severe uptick in inflation, and the flood of money unleashed by QE would flow out of stocks and into bonds, tanking the stock market bubble and curbing borrowing substantially. Our current debt burdens would be unsupportable in the short term, but in the end the debt would be monetized. We would all feel a lot poorer, but we would finally be out of hock and prices would be realistic once again.

    (2) How CEO’s are paying back the debt? What are the conditions for the loans they get?

    They don’t have to pay it back. They can raise the money in the overnight repo markets where the rates are negative (i.e. they actually get paid to borrow). Short-term LIBOR, SHIBOR, EURIBOR, and EONIA rates are all negative right now, and a considerable amount of short-term BOJ paper now also trades at a negative rate of interest.

    • Replies: @utu
    , @Wizard of Oz
  13. DDearborn says:


    What the FED has been doing isn’t rocket science. What their actions amount to is a simple transfer of wealth from the citizens to the ruling elite. One has only to look at who controls the FED, has the largest influence over the government, and who has been by far the largest beneficiary of this criminal activity to determine who is ultimately responsible. In short, just follow the money.

    Once the charade finally does grind to a halt, it will be citizens not the ruling elite who will be handed the bill. History is littered with variations on this theme. And it has demonstrated time and time again, that at this inflection point, revolution and retribution are inevitable. Looked at another way, the current ruling elite’s days are numbered……….

  14. utu says:
    @Intelligent Dasein

    (1) “if we were to return to rates like that, we would see a quite severe uptick in inflation” – rise of prices with increased unemployment. For bankers the term inflation is a code word low unemployment leading to higher wages. High interests rates are used to cut down this type of “inflation”, i.e. by layoffs. Volcker was hired to do just that.

    (2) Negative interest rates? How does it work? Who can borrow money at negative rates? What are the limits? If I could borrow at negative rates I would be a billionaire in no time. Just keep borrowing and repaying with future loans… Compounded negative interest, right? Or just keep giving me the interest w/o the principal every time I apply for the loan.

  15. annamaria says:

    Interesting. In short, the USA exists for the pleasure of a tiny group of the “mega-haves.” Here is a funny paper on the emerging hierarchy of the “haves” re financial services:

  16. @Intelligent Dasein

    Assuming you are right about what constitutes normal American interest rates how do you justify your reasoning that a return to such rates would cause a rise on inflation as you clearly seem to be saying? Don’t you remember the way Volker cured inflation in the early 80s by raising interest rates to unprecedented levels. That is the usual way central banks deal with inflation.

    As to your saying that the CEOs don’t have to pay back the money used for buybacks you are surely wrong in two different ways.

    One is, as I pointed out earlier, that it is not the CEO but the corporation which borrows the money and buys the shares.

    The other is that of course the borrowed money has to be paid back eventually even if the loans can be rolled over and are.

  17. Agent76 says:

    March 9, 2016 Who Controls the Central Banks? Mark Carney, Governor of the … “Bank of Goldman Sachs” By Prof Michel Chossudovsky, who publishes Global Research.

    In the event of a vote in favour of Brexit, The Governor of the Bank of England Dr. Mark Carney reassured the British public: “we will do everything in our power to discharge our responsibility to achieve monetary stability and financial stability…”

  18. Agent76 says:

    March 8, 2016 The Financial System Is A Larger Threat Than Terrorism

    In the 21st century Americans have been distracted by the hyper-expensive “war on terror.” Trillions of dollars have been added to the taxpayers’ burden and many billions of dollars in profits to the military/security complex in order to combat insignificant foreign “threats,” such as the Taliban, that remain undefeated after 15 years. All this time the financial system, working hand-in-hand with policy makers, has done more damage to Americans than terrorists could possibly inflict.

    • Replies: @annamaria
    , @tbraton
  19. tbraton says:

    “When I went to college in the 60′s and majored in economics, I was startled to discover a study by one Edward Denison which said the long-range historic economic growth rate of the U.S. was around 2.4%. (In light of the number below, that must have been based on a shorter time frame or the rate of growth after 1962 was considerably lower than before.) ”

    It just occurred to me that one possible explanation for the discrepancy between the growth rate I remembered from college in the 60’s (2.4%) and the growth rate shown in the later book by Denison from 1870-1996 (1.7%) is that the latter is actually “per capita” growth while the higher number I remember was probably overall growth. Of course, if a country’s population increases, as the population of the U.S. obviously did between 1870 and 1996, that country’s economy would surely grow even if the per capita growth remained zero.

    Whenever I hear a politician toss out the magic numbers re economic growth rates, I snigger because I can recall the actual historical record, which shows an actual growth rate far lower than most people think is possible. Back in the 2012 campaign cycle, I posted the following comment on TAC following a debate involving Rep. Ron Paul:

    “tbraton says:
    June 15, 2011 at 10:57 am
    Maybe, if Ron Paul is elected President in 2012, we will see the economy grow, not at the niggardly 5% per year for 10 years promised by Tim Pawlenty, but at the 10% to 15% a year envisioned by Dr. Paul. Hell, why not ramp it up to 25% per year? That will solve all our debt and deficit problems in a hurry. While I agree with Ron Paul about all the unnecessary wars and foreign commitments we have and about the need to seriously pare back the role of government, I have major differences when it comes to economic matters, and that includes reverting back to the gold standard. Sorry, Jack.

    P.S.– “For the United States, the long-term growth of real GDP per-capita over the
    last 125 years has revealed remarkable steadiness, advancing decade after decade
    with only modest and temporary variation from a trend annual average rate of growth of 1.8%.” (“Long Term Growth of the U.S. Economy: Significance, Determinants and Policy,” Congressional Research Service of the Library of Congress, updated May 6, 2006.”

    When another poster questioned my quote of Ron Paul at the debate of 10-15% growth rate, I posted as follows:

    “tbraton says:
    June 15, 2011 at 3:31 pm
    To be fair, Dr. Paul rarely quotes specific growth rate targets (I missed the 10-15% value; can you direct me to that source?). ”

    I watched the whole debate the other night. During the debate, Paul delivered that whopper (and I’m not referring to BK’s tasty treat). From the Economist’s live blog of the debate (with the time indicated):

    “8:16: Wow. Now Ron Paul says free markets will give us 10-15% rates of growth. That’s just nuts.”

    For him to be casually tossing out such outrageous numbers indicated to me that his grasp of economic matters is extremely shaky. But then I thought that even before the debate.”

    BTW Edward Denison, who basically invented the study of economic growth, stated, after years of study, that he wasn’t sure what explained the different rates of growth. I came across this passage in a eulogy delivered by a colleague after his death: “In examining policy options to accelerate growth, Ed introduced needed realism into the discussion by noting how little
    many of the options would contribute to growth and how expensive it would be
    to achieve any significant increase in growth rates. His analysis was published
    in the landmark 1962 CED report, The Sources of Economic Growth in the United
    States and the Alternatives Before Us.”

    Also I came across this brief review of Denison’s 1962 book from a 1963 edition of The Journal of Economic History (note the price, which gives you an idea of how far we’ve come since those benighted years and which explains how I was able to buy a copy of Denison’s book), which I tried to copy but was unable to do so: (scroll down; it’s a the bottom of the page).

  20. annamaria says:

    “All this time the financial system, working hand-in-hand with policy makers, has done more damage to Americans than terrorists could possibly inflict.”
    “Erik Prince, founder of the now-defunct mercenary firm Blackwater and current chairman of Frontier Services Group, is under investigation by the U.S. Department of Justice and other federal agencies for attempting to broker military services to foreign governments and possible money laundering, according to multiple sources with knowledge of the case.”
    And what about others – Cheney, Condi, Wolfowitz, Perle, Bush the lesser and such that constitute the corp army of war profiteers?
    “Among the countries where Prince pitched a plan to deploy paramilitary assets is Libya…” – This surely rings the name of Mrs. Clinton, the aspiring contender for POTUS.

  21. guest says:

    Where is this austerity of which you speak?

  22. Sam Shama says:

    On balance this article is quite sound in its analysis. Points to be noted:

    1. Inflation is a rise in the general level of prices [such as Core CPI]. Asset price increases, should not be conflated with inflation.

    2. One might argue that an asset is richly valued, and if so, under low general inflation, benefits the owners of those assets. There are about 100 million Americans who participate in 401(k) and other retirement plans that have risen in value, though not quite enough on account of low median participatory amounts [~$30,000], to kindle broad-based increases in consumption demand – precisely the hope behind the “wealth effect” objective of the Fed, an elusive, and, as elaborated by its officers on numerous occasions, the only tool available in an environment where Congress remains cynically obsessed over fiscal austerity [even as the country’s infrastructure investments crumble and receive a D+ from the Society of Engineers]

    3. Nominal yields on treasury bonds can be broken into a long term “natural rate” and the compensation for inflation and illiquidity. Increases in expected inflation will cause yields to rise as opposed to reverse causality: rising yields causing inflation [a patently absurd and unintelligent assertion made by someone up the thread]

    4. The Fed’s balance sheet stands at $4.48tr at present and is primarily comprised of Treasuries and MBS that it purchased in its QE operations. With core CPI running at 2.3% and the nominal duration weighted treasury yield at around 1.65%, the U.S. Treasury is a net receiver of 65 basis points of defeasance benefit, and the Fed, along with other bondholders [China, Japan, domestic accounts] are essentially subsidising the US Treasury. This remains a key benefit that needs to be internalised. Of course the Fed in addition to the foregoing, also participates in seignorage, where it returns some bond coupon payments back to the UST, thus reducing its primary deficit.

    5. 10yr bond yields cannot reach the 7%-8% level with the short end at 3-4% for that would need a 4%+ growth economy [something which tbraton quite correctly wrote about earlier, chanelling Denison and Angus Maddison] . The U.S. economy is a developed economy, and, a 4% growth while possible, is extremely difficult unless we engage in large-scale, multi-year plans to invest in infrastructure and also remedy to some extent, income inequality that blights this economy.

    6. Regarding corporate share repurchases, one must recognise the meaning, cause and effects. Whenever a corporation buys back its own shares, it is in effect returning capital to its shareholders, exactly equivalent to a dividend payment. That happens when a business corporation finds itself staring at low future demand for its products and no brilliant ideas to plough back its profits. Once again, this is just another reflection of an economy plagued by uncertain employment, low demand and widespread, diminished, marginal propensity to spend [smaller number of households cornering greater slices of the pie will spend diminishing proportions of the extra dollar, as opposed to income being spread around more evenly]. While we are on this point [and as alluded by Wiz earlier], corporate CEOs, acting on behalf of shareholders have better information about their medium term profits, and when global surplus of savings are deluging the capital markets, the choice is between locking-in long term favourable financing with share buybacks or facing the prospect of anaemic earning per share, naturally they choose the first. Once again, the key is the faltering economy, which is why Donald Trump’s insistence on infrastructure investments should be eagerly embraced by all.

    • Replies: @MarkinLA
  23. MarkinLA says:
    @Wizard of Oz

    I believe that one of the major changes in tax law was in the 80s that favored interest payments by corporations so that the interest they pay on the bonds they float to buy back shares are tax deductible. By borrowing money to buy back shares they are also reducing their tax liability. But as happens with many junk rated companies, the business cannot generate enough profit to even pay off the interest. Another problem with this scheme is that in many cases the companies are really only doing it to hide the huge stock option grants they are giving their executives. The executive exercises his grant for 5 million shares and the corporation borrows money to buy 5 million shares on the open market to keep the float the same.

    • Replies: @utu
  24. tbraton says:

    Along the lines of what you are suggesting, I would point out the following from a journal article published by the Kansas City Federal Reserve Bank in 1979 alluding to Edward Denison:

    “The majority of the increase in productivity
    from 1948 to 1973, however, is classified as the
    result of “advances in knowledge and not
    elsewhere classified.” While this is a residual
    term, it is believed to measure the effects on
    output resulting “from the incorporation into
    production of new knowledge of any kind,
    regardless of its source; from the way
    knowledge is transmitted to those who can use
    it; or from the way it is incorporated into
    production.”~ In 1973-76, though, the effect of
    this index on productivity turned sharply
    negative. It is this shift in the contribution of
    advances in knowledge that Denison finds
    responsible for 2.1 points of the 3.3-point
    decline in productivity growth from the 1948-69
    period to the 1973-76 period. Also contributing
    importantly to this decline, says Denison, is the
    large increase in resources necessary to satisfy
    environmental and health requirements and to
    combat crime and dishonesty.
    ” (Bold added.)

    Nobody seems to pay attention to the waste involved in spending on things which are generally useless expenditures, which include needless wars against countries which haven’t attacked us and which pose no threat to us. BTW Donald Trump seems to get it. I remember at one of the debates in December (?) he went off and talked about what an utter waste it was to spend $4 trillion on the useless wars in the ME and how much better spent that money would have been had it been directed to improving our roads and other infrastructure.

    Since 1979, I would note that we have substantially increased spending on “education,” one of the factors singled out by Denison as an important contributor to economic growth, but I seriously doubt that any of the money funneled into the Afro-American studies or “gender studies” has contributed anything to economic growth. This is just another way the Washington elite and the Democratic Party have taken traditional forms and perverted them to justify more spending. I still remember the late Barbara Jordan orating at the Democratic National Convention in 1992, the one that nominated Bill Clinton, and stressing that the emphasis henceforth would be on “investment” rather than “spending,” to avoid the taint of the latter word and justify its practice by use of another, more respectable term. Sort of like the great shift from “man-made global warming” to “man-made climate change.” Another example of putting lipstick on a pig and trying to convince everyone it is Marilyn Monroe.

  25. utu says:

    You seem to be the only one that kind of makes sense here. So you are saying that a company buys (or buys back) shares so when executive exercise their stock option share price in stock market is not affected, right? (Presumably exercising stock option would lower the stock value, right?) How do companies get money to buy the shares? Do they borrow it? If so, how do they pay off the loan? Somebody here wrote something about negative interest loans which I think is nonsense.

    • Replies: @MarkinLA
  26. MarkinLA says:

    It used to be that corporations would have to borrow money from banks but now they mostly just float bonds that are underwritten by Wall Street investment banks. If the company is a superior credit risk like Johnson and Johnson and they can easily service the debt, the bonds will get a high rating – AAA and can be sold with a low interest rate.

    When they are talking about negative interest rates they are usually talking about things like short term notes that have been bid to such a high price that you are in effect paying a negative interest rate. Say one year US Treasury Bills are being put on auction. These are notes that yield 10000 at maturity and are bid on by the big brokerage houses. The highest bid might actually be above par so somebody pays 1000.05 for each 1000.00 offered. This has happened in the US during the Great Depression due to the markup by the brokerages buying the large blocks of Treasury Bills and selling the pieces off to their clients since nobody wanted to put their excess cash in a bank. The brokerage may have paid slightly below par but the retail customers did pay above par.

    I don’t follow the interest markets that ID does so maybe the bonds are actually priced higher than par at offer which would immediately put them at a negative interest rate.

  27. MarkinLA says:
    @Sam Shama

    While we are on this point [and as alluded by Wiz earlier], corporate CEOs, acting on behalf of shareholders have better information about their medium term profits, and when global surplus of savings are deluging the capital markets, the choice is between locking-in long term favourable financing with share buybacks or facing the prospect of anaemic earning per share, naturally they choose the first.

    Yes, and sometimes they see that by the time their contract will run out and their stock options mature they won’t be above the strike price and are thus worthless so in an effort to goose the stock up short term, they resort to gimmicks that leave the company severely wounded after they leave – stock buybacks is one of those techniques, others being things like delaying development on new products (Ford under Nassar) or selling off profitable divisions to get a short term earnings kick (GE under Jack Welch).

    • Replies: @Wade
    , @Sam Shama
  28. Wade says:

    …they resort to gimmicks that leave the company severely wounded after they leave – stock buybacks is one of those techniques, others being things like delaying development on new products (Ford under Nassar) or selling off profitable divisions to get a short term earnings kick (GE under Jack Welch).

    In other words, the “profitability” in some sectors of our economy is due to CEO’s like Nassar and Jack Welch engaging in practices that in effect cause the company to consume, or live off of, it’s own capital stock?

    Stock holders make an implicit assumption that the CEO and board are making decisions that are conducive to the long term interests of the company, such as developing new products that the company will depend on for its profitability in the future? So, a product that could’ve been developed or improved upon isn’t, to increase profits and cash flow in the short term resulting in what is basically a falsified stock price today . Presumably the slower growth rate for the company that results occurs after the CEO exercises their golden parachute. The stockholders were none the wiser all along? The company’s capital stock at this point is now relatively impoverished compared to what it should’ve been under an honest CEO?

    What I’m trying to wrap my head around is why the stockholders would allow this to happen. Are they just in complete ignorance?

    • Replies: @MarkinLA
  29. MarkinLA says:

    You are always looking at things in hindsight when the stock price starts tanking. Nassar delayed development of the replacement for the very successful Explorer and used the money to increase the EPS. The result was a higher share price for Ford. It was only after the economy started to weaken and sales slump that not having an updated Explorer was a problem. Nassar gambled that he could put things off for a few years and pocket the money. The problem is that stock prices go down much faster than they go up, the minute things start to slow all those gains made in those few years are lost in a matter of months.

    As for Welch he was busy using GE Capital to constantly engineer ever increasing EPS then the 2007-8 crash hit and GE Capital was now 40% of the companies earnings and in trouble. They could not roll over their short term debt and didn’t have the cash to retire those notes. Bernanke had to include entities other than banks in his rescue plan to make sure GE didn’t have to declare bankruptcy.

    When the shares and dividends are rising everybody assumes the company is doing well. The average shareholder has no real control anyway. The institutional investors own the overwhelming amount of stock and even they have no real say. It is the board of directors that calls the shots in the short term and the board is usually an incestuous lot of ex-CEOs, government officials, and other members of the club and they usually defer to the CEO until it becomes obvious that the company is in trouble – see Apple.

    A classic example of this was all those Orange County based mortgage companies making subprime loans. Their stock and dividend payouts were sky high in 2006. By 2008 they were all gone. Anybody with brains had to know that a business model built on lending to low quality borrowers couldn’t last. However, the problem with shorting such companies is that you never know when the final top has been reached. Lots of “smart” people get squeezed out of a good short position and be wiped out only to see the stock tank for good a few months after they were squeezed out.

    I once got involved with a guy who claimed to be a shorting specialist. He would hound me endlessly to short stocks. Many of his pick were not very good but I was a novice. I let him talk me into shorting Southwest Air when all the other airlines were going bankrupt in the early 90s. I can tell you this is very stressful and painful. Eventually the stock stopped going up and pulled back and I told him to get me out even though he said to stay in. That was the best decision I made with him. I realized I had better shorts than he did – Clearly Canadian and First Team Sports. I got rid of him and seldom short unless it is for a dollar trade on opening morning pops that run out of steam.

    I haven’t been in the market since 2008, I have other things to do than watch the market all morning.

  30. anonymous • Disclaimer says:

    Inflated stock prices produce increased tax revenues, especially in a situation in which more and more retirees are drawing out savings that are fully taxed at time of distribution.

    Even though the value of those distributions is artificially inflated, the dollar amounts are taxed as if they were real.

  31. I just got the full-court governance spiel from a fund-manager corporate governance “specialist” about the need to have more diversity on corporate boards (in addition to the rote climate change BS), so I asked her “What about opposing share buy-backs as yet another way to line exec pockets by piling debt onto the company.” Her response was to sputter something about the gaming of EPS, and I had to bluntly remind her that the impact to EPS is secondary order and that the real threat is that companies are being levered up and pillaged for the benefit of the crony class. Doesn’t matter if there is more diversity or not. BTW, this governance expert was advocating boards have at least 20% women in the mix, and she almost went into meltdown when I asked her “Why not 50% to keep it in line with the actual population.”

  32. Cheap energy is figuring in at the grass roots. Gasoline @1.59/gallon went to 1.79/gallon in a week’s time in the Boston region and people were bitching a blue streak in the news and pumps two weeks back. People are starting to depend on the cheap gasoline and the lower prices that brings in everything from .69/lb chicken to 2.99/lb chuck roast and steaks. Just the lowering of transport does that for you.

    If the Trumpening is real, the Keystone and coal get a green light and least if the masses are allowed affordable energy and can afford their steak and cable TV, those bastards at the top can keep a lid on things. But they better keep prices of gasoline, diesel and heating oil cheap in the United States and also start jacking up the toll paid to the Dindu (EBT, Section 8, various other welfare) because the natives are getting restless. It wouldn’t hurt to stop encouraging and enabling their violence. The media can help some of THAT, stronger policing would do the rest. Face facts; the Blacks need either suppression or they need mollification. Welfare wasn’t the good heart of LBJ and the Kennedy factions at work, welfare was ghetto pacification. And we have gotten to where we need more of it, like it or not.

    Absent actual jobs and a living wage, consider cheap energy and food for the lowers and welfare for the lower-lowers as a form of “protection money”. This is of course, the tax paid to keep your businesses, homes and families “safe from fire”, either actual flames from the Blackes, or from the Whites, incoming. The rich need a relatively peaceful grass roots day-to-day if only to get from gated community to the country club and airports for vacations. They also need for THEIR people to be able to move about safely. If the lowers and the lower-lowers are allowed to starve to Zombie status, it’s game over, they will come looking for the Upper-Uppers and most are armed these days. What were the Uppers THINKING allowing THAT? Ha!

  33. Sam Shama says:

    Yes this quite true. CEOs are no saints to be sure and the gearing effect on eps is the byproduct that benefits stock option grants at the cost of reduced capex on R&D etc.

  34. Olorin says:


    Instead of reinvesting inherited capital–solid infrastructure, industrial base, skilled and orderly workforce, rapidly evolving intelligences–into further slow but systematic growth, Dr. Bankenstein did what he has done in all ages:

    Snipped off whatever portions to sew it together into a massive transnational bolt-necked Golem jolted into forward lurches by periodic, engineered bubbles and busts.

    In my estimation it is the greatest crime against humanity and evolution in the history of humanity and evolution. We could have been to the stars by now. Instead, potential has been liquidated to serve the demigod of money worshipped by people who’d rather remain in the mud and wave ancient stories in everyone’s faces. Better to reign in hell….

  35. olde reb says:

    Certainly the easy money of zero interest rate by the Fed supplies money for Fortune 500 entities to buy back their stock, but isn’t there more to the story?

    Wall Street banks have humongous holding of 500 stocks in trusts and have interlocking directors on virtually all of the 500. WS also has organized the Council on Foreign Relations (CFR) that assimilate most of the 500 firms to avoid competition from outsiders and maximize profits.

    Should we avoid concluding the Board of Governors of the Federal Reserve is an incorporated entity owned by Wall Street ? All of the funds from the auctions of deficit spending [approximately $5 billion daily] must go to some destination other than the U.S. government. Ref. Those funds are exclusively handled by the FRBNY and have never been audited; they are client accounts, not operating accounts. Ref. 31 CFR 375.3. No viable alternate destination of the funds has been found.

    Conclusion: The Wall Street bankers are using their ownership of the Fed to supply free money to the 500 to protect their holdings of the 500.

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