This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH

Part 3 of 3

And it is the prospective end to fiscal stimulus that makes the Fed’s abject coddling of Wall Street so feckless. The fact is, what has mainly been going up since last spring, besides the public debt, is various measures of sentiment. The rising PMIs are an example of sentiment trends that are measured on purpose while the soaring S&P 500 index appears to be mainly a sentiment survey by default. In any event, what is not going up much is real measures of Main Street business activity.

The March personal income and spending report shows that private incomes are still stuck deep in recession territory. On the same basis, as I previously reported in Did Washington Save the Economy?, March private-sector incomes (wages, interest, rents, and proprietors earnings) are still $500 billion, or 5.7%, below the pre-Lehman level. Once again, social transfer payments and public sector wages accounted for nearly all the income gain, growing by $27 billion in March compared to a miniscule uptick of $8 billion in private-sector incomes. Indeed, at March’s niggardly rate of gain, private-sector incomes won’t return to third-quarter 2008 levels for another 60 months — March 2015. On the other hand, after another month or so, the governmental transfer payment “make whole” will come to an abrupt halt, meaning that the markets will soon see that the Fed has been pushing on a string all along.

Then the hissy fit will come with a vengeance. Already the recovery “evidence” recently headlined on bubble vision has taken on a thread-bare aspect. Last week, for example, the Fed’s embedded spokesman at CNBC pointed to the “strong” core capex orders for March, which he determined (within five seconds of the release) were up 4%, and then opined that this was surely an omen that new jobs are on the way, too. Had Steve Liesman taken an additional five seconds, however, he might have noted that January orders had been down by 4.4 % from the December level, and that February orders were also lower than the year-end figure by 2.5%.

So what happened in the real world, then, is that first-quarter orders for capital goods excluding defense and aircraft were up a slight 1.1% from the prior quarter. In the realm of second derivatives, however, this figure wasn’t even directionally correct because the fourth-quarter gain had been 3.3% and the third-quarter pickup was 3.4%. More fundamentally, core capex orders during the first quarter were still 17% below peak levels — as well they should be with capacity utilization rates still at the lowest levels since the 1950s. … Continue reading Fed Policy Stealing From Our Future Part 3

This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH

Part 2 of 3 parts

Not surprisingly, the Fed’s first foray into bubble economics between 1923 and 1929 endowed the speculative classes with an immense windfall that self-evidently could not be ascribed to pure market forces. During that six-year period, fully 70% of national income growth went to the top 1% of the population while the bottom 90% got only 15% of the gain.

After the New Deal soaked the rich with taxes and the Fed retreated to a more conservative posture in the immediate post-war period, Mr. Market generated far less egregious distributions of the growth. In the 1960s, for example, the national income pie was whacked up in nearly the opposite fashion, with the bottom 90% getting two-thirds of the decade’s income growth while the top 1% garnered only 10%. Even during the Reagan decade of the 1980s, and notwithstanding the so-called “trickle-down” tax cuts, the top 1% obtained just 40% of the national income growth while a somewhat lesser share went to the bottom 90%.

During the Greenspan/Bernanke bubble of 2002-2007, however, the 1920s windfall to the speculative classes came roaring back: Nearly two-thirds of national income growth accrued to the top 1% while the bottom 90% ended up with comparative crumbs, obtaining just 12% of the gain. And when the figures for 2008-2010 eventually come in, they will undoubtedly best even the Roaring Twenties result: It’s likely that more than 100% of the income gains since 2007 have gone to the speculative classes since the population as a whole will have gone backward.

… Continue reading Fed Policy Stealing From Our Future Part 2

This is a guest post by David Stockman who originally wrote this piece for Minyanville. Mr. Stockman was OMB Director during the Reagan Administration, was a founding partner of The Blackstone Group, and left Blackstone to form his own private equity fund, Heartland Industrial Partners, L.P. Mr. Stockman is a regular reader of The Daily Capitalist. — JH

Part 1 of 3 parts

The zero interest rate policy has disguised the ugly truth our economy faces

We are now well into the second year of green shoots, but in word and deed the Fed remains entombed in the zero interest rate policy (ZIRP). Ultra-low money market rates were allegedly needed 18 months ago to insure that the American people wouldn’t be deprived of the munificent services of Goldie and the Fab Five. Since then, these pillars of prosperity – Goldman Sachs (GS), JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS), and Citigroup (C) — have together posted $62 billion in after-tax profits.

So why are Fed Chairman Ben Bernanke and his red-helmeted lieutenants still scrambling about with water hoses and fire axes? There’s only one answer that satisfies normal standards: The Fed is terrified that the boys and girls on Wall Street will stage a hissy fit if it doesn’t continue to read them the “extended period” fairy tale at the end of each meeting.

By contrast, there’s certainly no sane macroeconomic reason for a zero-cost federal funds rate. Indeed, given its dangerously over-leveraged condition, no element of the American economy should be incentivized to borrow more money (at 370%, the total debt-to-GDP ratio is already off the historic charts).

The deeply indebted household sector, for example, needs to be squirreling away funds for the day (which is coming soon) when its taxes go up and social security benefits get cut, not relapsing toward a zero savings rate as was evidenced by the March personal income report. Likewise, small business shouldn’t be borrowing (on net) because it’s not done shrinking. The national economy is still vastly over-populated by redundant contractors, strip mall retailers, sports barkeeps, and home-canned pickle entrepreneurs — even though the housing ATM from which this legion of boom-time enterprises briefly suckled is long gone.

Big business isn’t borrowing either (except to term-out existing debt) and for good reason: At a subterranean capacity utilization rate of 70%, it doesn’t need external funding for the tepid level of capex needed to replace asset wear and tear or to fund targeted productivity initiatives. In short, the private economy won’t be “stimulated” by cheap interest rates because credit wasn’t previously rationed by high-priced money. Instead, credit is being liquidated, owing to the heavy burden of existing debt on income-challenged households and businesses.

At the same time, what the national economy does need is far less financial speculation and far more real savings. These objectives, in turn, are prerequisites to sustainable full employment and price stability — the Fed’s ostensible dual mandate. Accordingly, higher short-term interest rates — say in the 3%-4% range — would be far more compatible with the Fed’s mission than its current destructive embrace of ZIRP. And the fact is, ZIRP is incredibly destructive because it gives precisely the wrong signal to key economic constituencies, including speculators, savers, and politicians. … Continue reading Fed Policy Stealing From Our Future