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June 14, 2016

The End Game of the PhD Tyranny

By David Stockman

Sad to say, you haven’t seen nothin’ yet. The world is drifting into financial entropy, and it is going to get steadily worse. That’s because the emerging stock market slump isn’t just another cyclical correction; it’s the opening phase of the end-game.

That is, the end game of the PhD Tyranny.

During the last two decades the major central banks of the world have been colonized lock, stock and barrel by Keynesian crackpots. These academic scribblers and power-hungry apparatchiks have now pushed interest rate repression, massive monetization (QE) and relentless rigging of the financial markets to the limits of sanity and beyond. Honest, market-driven price discovery is dead as a doornail.
No more proof is needed than the “matrix” below. The very thing that history proves, above all else, is that governments can’t be trusted to honor their debts. In fact, modern welfare state democracies have a veritable fiscal death wish.

What else can you call Japan’s announcement to defer yet again an increase in the consumption tax? Its public debt is already at 240% of GDP, even as its tax-paying population is rapidly streaming toward it’s national old age home.

At a 135% debt-to-GDP ratio, Italy is not far behind. It’s economy is still smaller than it was in 2007, its banking system has more than $200 billion of bad debt, its public sector squanders more than 50% of GDP and its politically fractured and corruption-ridden government is paralyzed.

Yet these are only advanced cases of the universal fiscal condition of the world’s sovereigns. With $80 trillion of public debt and unfunded entitlement liabilities, the US government is hardly more solvent than the socialist basket cases of Europe.

Once upon a time, the tendency of politicians to bankrupt the state was at least partially held in check by the fear of bond vigilantes, and the prospect of soaring interest costs on the public debt. I happened to be there during one such episode, when the 10-year treasury note required a 15% coupon.
It was enough to cause even Democrats to denounce deficits!

That is, at least until the GOP took a powder on social security and other entitlement reforms. At length, a tax-cut bidding war and DOD war spending spree supplanted most of the old-time fiscal religion, and Greenspan finished the job when he throw in the towel on monetary discipline in 1994.
Once upon a time, too, the interest rate on debt reflected compensation for credit risk and inflation—-and a real return to boot.

At the moment, however, “investors” aren’t getting paid for any of these costs. Instead, thanks to the mad-men running our central banks they are actually being forced to pay governments to borrow.
Moreover, that’s not an aberrant condition in the far recesses of the global bond market. There is now $10 trillion of sovereign debt securities with negative yields—–and that  figure is growing by the week as it cascades across government bond markets and out the maturity spectrum.

There could be nothing more perverse than for the central banking branch of the state to destroy the very government bond market on which modern state finances ultimately depend. But that’s exactly what they are doing, and the end-game could not have been expressed more colorfully than in the recent musings of the once and former bond king, Bill Gross:
Bill Gross, the manager of the $1.4 billion Janus Global Unconstrained Bond Fund, warned central bank policies that pushed trillions of dollars into bonds with negative interest rates will eventually backfire violently.
“Global yields lowest in 500 years of recorded history,” Gross, 72, wrote Thursday on the Janus Capital Group Inc. Twitter site. “$10 trillion of neg. rate bonds. This is a supernova that will explode one day.”
To be sure, a supernova at least has a basis in physics. It an end-of-life star that suddenly increases in brightness owing to a catastrophic explosion that ejects most of its mass.

Not NIRP. There is nothing natural or scientific about it.

It’s an economic mutant confected by arrogant Keynesian economists who inhabit a puzzle palace of fantasy. Not only do they have the nerve to believe that a tiny posse of monetary central planners has the capacity to price money, debt, capital and risk more correctly than the millions of agents that once populated free financial markets, but they do so in the name of invisible measuring sticks and prompts.
Thus, a recent piece in the Wall Street Journal

Chart Source: WSJ 

Courtesy David Stockman at David Stockman's Contra Corner, check out Mr. Stockman's book The Great Deformation on Amazon.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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