While we suffer through the current pain of the trade war, the Fed interest rate manipulations, ever earlier campaign hysterics, threats of recession, and all other maddening modern phenomenon, there is seemingly an odd confidence that the American economy is still doing just fine because there is no apparent bubble like there was in 2008.
There has been some news regarding the irrational behavior of the world’s central banks with $16T of sovereign debt trading with negative interest rates, and the equally irrational behavior regarding the federal debt and deficit situation; but we hear little about the same issue in the private sector. Why is that? Let’s look at some simple statistics published by the Federal Reserve:
- Corporate High Yield Bonds, also known as Junk Bonds for their high risk, have been increasing in defaults, somewhere around $35B this year alone. That means that there are companies out there that are considered Zombies, i.e. with earnings less than their debt service, who have simply found they are now incapable of continuing to pay their debts.
- Earlier this year, defaults on auto loans were up nearly 5% year-over-year; this is about the same it was in 2009.
- Mortgage debt exceeded $9T last quarter, more than the record breaker in 2009.
- Student loan defaults are skyrocketing.
So why does the Fed and politicians tell us that there are no bubbles to indicate concerns that we would have a crash. One hypothesis is that governments are not prone to call a debt crisis a bubble, such as the Dot.Com bubble of 2000 or Housing Bubble of 2008, because to do so would make it apparent that it can be directly tracked to artificially depressed interest rates.
We are told that we need to be more accommodating to maintain a healthy economy, as has the ECB done in Europe. Well if that were so, why then are they in recession given that interest rates are so “accommodating” that they went negative? The fact the Germany could only sell less than half its recent bond offering, and that in the US the Fed’s quarter point reduction caused an inversion and bond panic should be a warning that debt markets are in crisis.
If we have a healthy economy as we are being told, why the need for stimulus, or why do we have a record deficit when historically deficits decline in a healthy economy? Why are these policies focused on getting the consumer to spend when it is known that consumption is not actually growth?
If the Federal Reserve and the Federal government were interested in true and long term growth, it would do whatever it can to increase savings which creates capital needed for investing. This is such an obvious concept to grasp that you have to wonder why the Fed does not promote it as a policy. A society that emphasizes differed consumption in order to secure a more financially secure state for future generations creates long term sustainability. Clearly, this is no longer the case in America and is not a sustainable economic condition as savings are at a record low. The absence of yield created by a policy to manipulatimg interest rates lower is meant to encourage consumption over savings, and is unsustainable. wObj�V=��*