The Market Ticker
Commentary on The Capital Markets- Category [Federal Reserve]

Central banks have made uneconomic decisions look wise -- for a while.  There are those who call this "mis-allocation of capital", but that's a false statement in its premise as what central banks (and all banks, really) do is not allocate "capital" at all.  They instead sell debt, a thing that is at its heart destructive to capital.  Debt cannot be other than destructive to capital because debt always comes with interest; a parasitic leech upon the capital at its base (if there is any at all.)

Emerging market borrowers have been issuing dollar bonds at an average real rate of just 1pc. The great worry is what will happen as increasingly large blocs of bonds or loans - typically on five-year maturities - come due for refinancing in a far less friendly world. The dollar has almost doubled against the Brazilian real and the Russian rouble since mid-2012.

Got it yet folks?  An increase in real rates of just a couple of percent is enough to destroy the cash flow of these economies and markets.

This is the 2006 housing market on a global scale.  Remember that what set off the firestorm in the United States housing market was not an increase in rates but rather the disappearance of "covenant non-existent" loans otherwise known as "liar loans" and similar.  That in turn was triggered by a cessation of the mathematically-impossible claim that houses will always go up in price; when this revealed to be a bald lie those who had bought paper predicated on these uneconomic "loans" discovered they were holding worthless "securities."

There was fraud in the inducement across the board but there was also plenty of pie-in-the-sky dreaming by the buyers too.  Arithmetic makes indefinite exponential series of any sort impossible.

Blowing a bigger bubble to try to rescue the prior one is the legacy of the last 30 years.  Trying to spread it thinner and further so as to make it "better" is also part of that legacy.  The problem is that it may be spread further, but it is never thinner; as such the destruction when the subsequent bubble bursts is always larger!

In this case the spreading is global and the damage will be cataclysmic.

The only debate we have left is exactly when it hits, and whether you will have achieved minimum safe distance before it does -- and whether that's possible.

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From the you ought to be arrested file we have this:

When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings … But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again.

Uh huh.

Economics 101 -- when there is more of something (supply) compared against demand the price (interest) goes down.  When there is less the price goes up.

So what happens when the Federal Government emits a lot of "moneyness" (credit) into the economy by running deficits?  The equilibrium interest rate goes down.

And what happens when that same government and The Fed enable this behavior through the Primary Dealer system along with ignoring the fraudulent lending that is going on in the private sector?  The equilibrium interest rate goes down further!

This is, of course, ignored -- that is, the cause of the problem.  Bernanke refuses to discuss this (although he knows damn well that it's true) because to do so he must take responsibility for his willful and intentional refusal to deal with either of these factors in the run-up to 2008, and what's worse he then doubled down on that bad behavior by rescuing those who engaged in it during the crash!

The result has been a literal orgy of said bad behavior -- government credit alone has more than doubled in the interim and all of that "moneyness" has gone chasing "things" -- with much of it winding up in stock prices.

The problem is that the devaluation of the monetary system created in the halls of both Congress and Wall Street winds up doing severe damage to everyone other than those who own most of those financial assets -- that is, the common American.  Only the top 1% have seen a "net benefit"; everyone else has gotten screwed in the ass.

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