– None Dare Call It Fraud—–Its Just A “Savings Glut” (David Stockman’s Contra Corner, April 10, 2015):
They were jawing again this morning about the low “natural rate” of interest on bubble vision, implying that the workers of the world have succumbed to an atavistic fit of wild-eyed thrift. Gosh, the world is so inundated in a savings glut, averred Wall Street economist Ed McKeon, that the interest rate would be near zero—–even without the concerted action of the central banks.
Hogwash! Since the turn of the century the major central banks have purchased upwards of $15 trillion worth of government bonds and other fixed income assets. Yes, these reckless money printers have suspended common sense, but they have not repealed the law of supply and demand, nor even suspended its relentless operation for a nanosecond.
So in adding massively to “demand” for something that sells at a price (the interest rate), the big fat bid of the central banks has caused fixed income markets to clear at much higher prices (lower yields) than would otherwise be the case. That’s just economics 101.
By contrast, were the market dependent solely upon the savings of America’s hand-to-mouth middle class, Europe’s legions of socialist pensioners, Japan’s mushrooming retirement colony or the millions of former peasant girls who labor for comparatively meager in Foxcon’s sweatshops, one thing would be certain: There would not be trillions of government bonds trading at negative nominal interest rates this very moment, or tens of trillions trading close to the zero bound and therefore at negative rates after inflation and taxes.
In a word, there is a $100 trillion bond market out there that has been priced by a handful of central bankers, not a planet teeming with exhuberant savers. The mad descent of the former into the whacky world of QE and ZIRP has caused a double whammy distortion in the bond markets of the world.
In the first instance, the major central banks swaped $15 trillion of zero-cost fiat credit issued by their digital printing presses for a like amount of govenrment bonds, thereby driving up the price of the latter without causing a ripple of financial offet anywhere in the known universe. Stated differently, the extra $15 trillion of demand for fixed income debt did not arrise from real economic resources—–that is, income set-aside from the fruits of current production and allocated to the purchase of government bonds. It was just conjured from pure financial nothingness.
Secondly, by driving the front-end of the yield curve to zero and pegging it there for upwards of 80 months now, the central banks conjured a second wave of bond demand from financial nothingness. To wit, zero cost repo credit and related forms of carry trade funding.
When the fast money speculators decide to buy today what the central banks promise they will be buying for months or years to come under QE, they don’t exactly dig into their idle cash balances to fund the purchases. Actually, they buy the bonds first and then post them as collateral for a 95 cents on the dollar advance at less than 10bps of interest.
In other words, ZIRP in the front-end money markets generates new credit-financed demand at the middle and back-end of the bond curve, thereby further goosing the price of these securities. And where did the repo lender get the cash to advance to the bond speculator? Well, more often than not by re-hypothecating the stocks and bonds in their customers trading accounts, which securities had undoubtedly been purchased on prime broker margin in the first place.