Rudy Havenstein Tweeted an interesting chart earlier today on real negative interest rates.
I recreated the chart below and also share a chart from Doug Short on real median incomes to help put this financial repression by the Fed in proper perspective.
Decade of Negative Real Interest Rates
The above chart was created by taking the short-term treasury bill rate and subtracting the year-over-year rate of inflation as measured by the CPI.
A massive housing bubble formed in the first period real interest rates were negative. In the current prolonged period of negative rates, bubbles formed in the stock market and bond markets globally.
Outside the US, nearly three quarters of the world’s bond traded at negative interest rates.
Doug Short at Advisor Perspectives updated his series of charts on Median Household Income earlier today.
Median Household Income, Nominal and Real
Median Household Income Growth
Doug Short notes: The reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century. Real incomes (the blue line) hit an interim peak at a fractional 0.7% in early 2008, far below the nominal illusionary interim peak (as in money illusion) of 27.2% six months later and the latest at 42%, a record high. The real median household income is now at -0.6% from its turn-of-the-century level. In essence, the real recovery from the trough has been frustratingly slow.”
Who Benefited?
- Bailed out banks
- Government bodies via property tax hikes, income tax hikes, sales tax hikes and collection
- Asset holders – The wealthy
The median guy lost. Those at the bottom end got clobbered much harder. Only the top 10% or so fared well.
The primary beneficiary of QE, negative real rates, and inflation was the top 1%.
The Election
Writers still struggle to explain the election of Trump. The above charts explain clearly.
The median guy on the street is fed up by financial repression. Thanks to mainstream media, the “deplorables” are upset at corporations, at globalization, and at the failure of government to hike minimum wages.
Placing Blame Where It Belongs
Thanks to mainsteam media, which parrots the idea that inflation is good, the “deplorables” fail to blame the institution most responsible: the Fed.
Globalization is a good thing. Falling prices are a good thing.
The average guy on the street understands the latter, but not the former. The average economist, brainwashed by years of Keynesian economic training fails to understand anything.
Academia and mainstream media parrot patently false theories on the benefits of inflation and tariffs. Instead of picketing the Fed, the “deplorables” voted for Trump.
Economist Paul Krugman need only look in a mirror to see one of the reasons the “deplorables” voted the way they day. Krugman still fails to understand what happened.
Shortly after the election, Krugman made a confession: Krugman Admits He Is Clueless. That Progress will be Short-Lived
Explaining Trump
Here is a the key chart from Explaining Social Anger, Brexit, Donald Trump in One Chart.
Shrinking Middle Class
The above chart from the Wall Street Journal article IMF’s Grim Long-Term U.S. Outlook in Six Charts.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
For a synopsis, please see Deflation Bonanza! (And the Fool’s Mission to Stop It).
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The Fed’s fight against deflation is amazingly counterproductive and the above charts provide ample evidence.
Routine Deflation Harmless
Routine CPI deflation is harmless. The Bank of International Settlements (BIS), did a detailed study and agrees. For details, please see Historical Perspective on CPI Deflations: How Damaging are They?
In their attempts to fight routine consumer price deflation, central bankers create extremely destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflation.
The final irony in this sad saga is Paul Krugman, Who Proposed Fight with Fake Outer Space Aliens to Stimulate the Economy, Now Worried About Quality of Trump’s Spending.
Mike “Mish” Shedlock
interest rates not going anywhere … lest you want this collapse (in mass defaults)
https://fred.stlouisfed.org/series/TCMDO
Yep, because if they ever do go “back to normal” the end of our consumer lifestyle is over.
It’s not. The consumption just ends up more spread out, instead of concentrated in the (top 10%) chattering classes.
The only really big change of rates are allowed to be set by the market, is that lots of wealthy beneficiaries of financialization, will go bankrupt. So that “their” wealth will be put on the market at fire sale prices. Allowing those who didn’t benefit, to pick some of them up.
But for some stupid reason, even many/most Trump voters, are stuck in the silly superstition that banks and governments and companies going bankrupt is somehow a bad thing. And that a “housing crash” is also a bad thing. If that’s not indoctrination at work, I don’t know what is.
In reality, cheaper is always better than more expensive. Without a single exception whatsoever, in all of past and all of future history. And the way things get cheaper, is by resources being directed at enabling more efficient production of those things most people care the most about. Which is another way of saying “Invisible Hand.” All any meddling aimed at propping up prices accomplish, is steal from those who have little, in order to hand to those who are wealthy enough to already own the stuff that is being propped up.
You are not thinking this through.
A rise in interest rates will take an ever greater share of disposable income (or budget) to service … leading to subdued consumption (and if rates high enough – recession) … either option will keep rates low as overcapacity that low rates has wrought ensures deflationary pressure.
Only AFTER debt mountain has been shrunk (via payback or default) compared to GDP will interest (can) rise.
Druckenmiller’s call for 10 yr yield to hit 6% soon is nonsense.
“Only AFTER debt mountain has been shrunk (via payback or default) compared to GDP will interest (can) rise.”
And that’s exactly what will happen, absent overt manipulation by those who still seem to think 5 year plans are a good way of “managing” “the economy.”
It will happen anyway, but in much slower motion, allowing for even further misallocations, unless freedom is allowed to prevail. The “managed” alternative, is no different than allowing the guy who robbed you at gunpoint to hang on to the stolen loot just a bit longer, to prevent returning it back to you interfering with his shopping spree at Tiffany’s that looks so good in GDP statistics.
“absent overt manipulation”
I don’t see “overt manipulation” ending … EVER … absent a revolution of sorts.
The next recession will see more QE/NIRP (and other means of financial repression) … the only plays in their playbook.
As the masses (er, 401Kers) scream DO SOMETHING as stock market folds.
You’re unfortunately but highly probably right. The manipulation will continue, until misallocations become so detrimental, that even those famed practitioners of medievalonomics, the Taliban, have no trouble walking all over the once-was-something-but-by-now-who-even-cares? West.
Those guys are at least capable of producing something of value: Children. “We” can’t even do that anymore, since “our” economy requires every woman to be “liberated” enough to spend her every hour of every day, picking cotton to pay back the banksters, for loans she became somehow responsible for, before even being born.
Malinvestment had a BLAST! Instead of growing their companies with hard work, capital expenditures companies borrowed record amounts of money for stock buybacks to get earnings up the easy way, stock goes up. Look what they made with their stock options!!! Atta way to boys!!!
Why would anyone equity finance, pay dividends, and work for shareholders, when you can buy back your own company for 0 and reward yourself for your own labor. Seemed like the prudent/logical thing to do, if you ask me.
In reality, we all benefited — because look at the alternative.
Mal investment and fake gov jobs is the only thing holding this Titanic above the waves. If rates go back up or budgets are balanced, how many 10’s of millions of jobs vaporize?
Then every pension goes broke. Mish will finally get his deflation dream-come-true because the US would be like Greece. A few lucky people with the right asset mix will do okay, but for the rest — dumpster diving dinners.
Obviously, this won’t be allowed to happen. Rates will stay low, probably for decades. The dollar will be strong as long as Japan, China and European countries are in even worse shape. Just suck it up and deal the best you can.
“look at the alternative”….indeed. In 50 years we went from the best educated country on the planet to the 26th best educated. We managed to go from the biggest creditor nation on the planet to the biggest debtor nation on the planet. Technically, we went from the only country on the planet capable of building rocket motors for our space program to the only country on the planet buying them from other countries. We have lived so far beyond our means for so many years that I would propose that “dumpster diving dinners” is where the bulk of the country really belongs. “Underwater basket weaving degrees” from college aren’t going to cut it anymore. Our collective standard of living NEEDS to fall precipitously. And not necessarily evenly across the board.
You don’t explain why that is a better alternative. So, I guess you’re saying bad kids should be punished?
I think it was baked in after 1999, as banks entered uncharted territory of control over more money in the betting system via Glass Steagall and the new commodities market plays under that new legislation. When it became apparent that they had painted themselves in a corner, they called their old friend Alan Greenspan, “Hey ol’ buddy, ol’ pal, do us a favor…”, and it all came together. Meanwhile, Trump is meeting with Goldman Sachs today, probably looking for more favors with the install Mitt “Ain’t Shit” Romney program:
Goldman Sachs Group Inc. President Gary Cohn and former Massachusetts Governor Mitt Romney were meeting Tuesday with Donald Trump as the president-elect and his team consider candidates to fill out key roles in the administration”.
http://www.bloomberg.com/politics/articles/2016-11-29/goldman-s-cohn-to-meet-with-trump-amid-transition-consultations
Where do you think he should hire from? Find someone from the comment section of Zerohedge?
Craiglist?
Bravo!
Here’s a potential hire sure to give the 1% a boner:
Trump considers ASSET STRIPPER Wilbur Ross for Commerce Secretary
“Dubbed the ‘king of bankruptcy,’ Ross is a corporate raider who built his fortune, estimated at nearly $3 BILLION, through the takeover of struggling companies, the wiping out of the jobs, wages and pensions of hundreds of thousands of workers and then ‘flipping’ entire industries, whether in steel, coal, auto parts or textiles—like a real estate speculator does houses.”
“All told, Ross claims to have removed $15 billion in retiree pension and health obligations from the books of ISG. $6.4 billion of these obligations were transferred to the PBGC, which is now projected to be insolvent by 2025.”
http://www.wsws.org/en/articles/2016/11/29/ross-n29.html
“Deplorables” should assume the position.
What exactly is it that aren’t money does at Bain Capital? They are extreme vulture capitalists to the core.
Trump is being swallowed up by the swamp.
Trump needs to put Romney in charge of repealing and replacing Obamacare.
Globalization is a good thing- until human greed steps into the picture. Then it becomes just another means of expoitation for more money.
But oh, yes, end central banking. One of the greatest scams of humankind.
The problem with the “income” measurement is that it doesn’t include the value of benefits, primarily health insurance, which is also income. That amount of income has risen by about $5,000 in nominal dollars over that time period.
“The problem with the “income” measurement is that it doesn’t include the value of benefits, primarily health insurance, which is also income”
Many of the supposed health insurance “benefits” are pure crap beyond a false peace of mind, and should be counted as negative income for all but those with catastrophic illnesses. Income includes money that never makes it into your pocket: Payroll taxes (Social Security, a supposed future benefit), federal taxes (lots of benefits there, like regulations to protect you) and state taxes. Real nominal income should subtract out all these supposed benefits, which are not spendable income. If you subtract out payroll taxes, federal taxes, state taxes, sales taxes, etc., real nominal income (spendable income) in many states would be a third or 40% less than in the graphs. I would like to see graphs correct for that “phantom income.” Government expansion is a major reason that non-government workers are suffering.
That reduction in income for some become income for others: government workers and contractors.
In my remarks up above I said easy, when I meant Sleasy!
Why doesn’t that guy recommend some short selling? That is a good way to lock in some gains when the market is as overbought as he suggests it is.
The market is way up because rates are ridiculously low. THAT’S the part that is unsustainable, although Bernanke “sustained” ZIRP for upwards of seven years.
If governments intended to force savers to spend more money the joke is on them.
I have become more frugal and spent less since interest rates were intentionally tanked… including not buying that new car and new house I had previously planned to have by now.
Sounds a bit like …”You’re not gonna make a canoe out of me!”
Does Trump keep the game going? I’m 60% No, 40% Yes. Good puzzle. How about y’all.
He’s bringing in a Goldman alumni for treasury.
http://www.reuters.com/article/us-usa-trump-mnuchin-idUSKBN13O2W4
Meet the new boss, same as the old boss.
Wow… how synchronistic.
Immediately after I posted my “oligarch” comment at link below… I read your emailed comment.
https://mishtalk.com/2016/11/30/white-anger/#comment-62773
In Russia, Steven Mnuchin, would be one of many of the ALIEN oligarch elite.
https://en.wikipedia.org/wiki/Steven_Mnuchin
Puts a whole new spin to Krugman’s war with aliens.
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The CPI bull***t is a problem, but a small one compared to raging housing bubble: if you can’t afford even modest house that you planned for, who cares that the toothpicks are still affordable.
Meanwhile Schumer is trying to scare the old people. But maybe a vote for Trump was a vote for Paul Ryan. Tom Price is a close ally of Ryan.
“Schumer vows to fight the GOP war on seniors, Medicare privatization”
https://www.schumer.senate.gov/newsroom/press-releases/schumer-vows-to-fight-gop-war-on-seniors-medicare-privatization
,
Schumer’s mindset is fighting the old battles of yesteryear, and of course propaganda for the Marxist and socialist base to gobble up. The old “rise up ye of the oppressed classes” clarion call.
Price’s closeness to Ryan makes him a brilliant Trump hire, as whatever they decide will likely get Ryan’s support and pass Congress; let’s just hope it is good. Price knows health care and budget issues better than anybody, and we just have to hope that common sense prevails over wonkishness. No matter what, Schumer will find it a threat to the Democrat elitist ideals of racial, gender and class equality; ideals which of course Senators are personally exempted from. Hiring Romney now would be bad, but better talking to him than having him as an enemy. Trump has good instincts, in contrast to Hillary, which is why he is poised to beat Hillary in the electoral college and officially be elected president.
Trump was supposed to drain the DC swamp… not drown in it or use it as his hiring pool.
But hey, whatever lies were told to the “oppressed classes” are easily excused.
.
In about a year, there will be lots of people with their hands over their ears screaming “Don’t tell me that!”. Suckers.
Trump appears to be working overtime to aggravate his supporters.
Trump has repeatedly crawfished on deporting illegal aliens, the ONE issue that prompted me to vote for him. I knew it was pie in the sky… but hope springs eternal.
Now this…
Border hawks riled after Trump meeting with border dove for secretary of homeland security.
” Donald Trump’s interview Tuesday with Rep. Michael T. McCaul for secretary of homeland security set off alarms for illegal immigration opponents who view the congressman as weak on border security and latently pro-amnesty.
Mr. McCaul, Texas Republican and chairman of the House Homeland Security Committee, has repeatedly riled conservatives with what they describe as ineffective posturing against President Obama’s lax enforcement of immigration laws. ”
http://www.washingtontimes.com/news/2016/nov/29/donald-trumps-candidate-for-homeland-security-mich/
Uneducated Joe, i see you are a sucker.
Keep your friends close and your enemies closer. (Sun Tzu, Machiavelli, or Michael Corleone?) 🙂
No one can honestly judge until he is actually president; only time will tell.
Then again, my credibility was blown a while ago. 🙂
“Oppressed classes” as it applies to the USA is so retro, 1930s to be exact. The USA is the Land of the Free, just ask any Central American, those guys the Border Wall on Mexico’s Southern Border was built to keep out.
Adjust your chronometer to the present day. Obama is still USA president. Trump will get better outcomes than Obama, almost guaranteed; and Hillary would have been a gargantuan disaster, which is probably why those rigging the no-paper-trail Pennsylvania voting machines gave up on the idea. Perfection and Utopia, only in our dreams, and therefore by that metric disappointment guaranteed. I feel sorry for all those expecting too much, as that mindset means a needlessly miserable four years of self-induced disappointment. Joining the Million Women protest march for the inauguration to express your disgust with the new boss man might ease the pain.
Hiring “local” is always a good idea, especially if you are an outsider like Trump. If you have to navigate a swamp, best to hire some guides who know the terrain, like Lewis and Clark hiring natives to guide them. Trump was a hotel man, and they know this stuff. Trump is boss man, Price a hired hand. Which is why it will work. I had a long talk in Florida just before the election with a guy who worked on Trump’s TV show and hated him for all the reasons he would make a good president. Trump will run government, not vice-versa. Which is why the MSM and Beltway elites are apoplectic, as there has been nothing like that in their memory. Nothing like this has happened since Andrew Jackson occupied the White House in 1828, after the stolen election of 1824.
Ryan’s Medicare plan is to essentially replace Medicare with … Obamacare! The irony is delicious.
Great post.
Mish, could you do a post or reply on a question I haven’t found a straightforward answer to yet?
That is, how do we unwind from QE?
The FEDs balance sheet is over $4 trillion. What would happen if interest rates would rise before or during unwinding? Do we have to unwind at all? What would happen to the stock/bond market as QE is paid back? When would be an opportune time to do it?
Thanks again for your blog.
QE will be unwound eventually by attrition. I said day one the Fed had no exit plan. They still don’t other than hold securities to term. The Fed does not have to take losses or even mark them to market. If the Fed has 25 year securities, it will likely take 25 years. Most are under 10 years in duration, so it “might” mostly be done in 10 years. This of course assumes there is not another round of QE.
Mish
Yet despite record low interest rates, we see that car buyers are record underwater!
========
Record number of car buyers ‘upside down’ on trade-ins
Greg Gardner, Detroit Free Press
November 27, 2016
DETROIT — The wave of easy credit and longer auto loans has left a record percentage of consumers trading in vehicles that are worth less than what they owe on their loans.
In auto finance parlance, these folks are underwater, or upside down. They already are affecting the market as automakers boost incentives and subprime lenders monitor their delinquency rates more closely.
So far this year, a record 32%, or nearly one-third, of all vehicles offered for trade-ins at U.S. dealerships are in this category, according to research by Edmunds.com. When these people go to buy a new vehicle they must add the difference between their loan balance and the vehicle’s value to the price of the one they want to buy.
For perspective, the lowest the underwater percentage has been was 13.9% in 2009, the depths of the Great Recession when credit was tight. The previous high was 29.2% in 2006, about when the housing market was near its frothiest point.
…
http://www.usatoday.com/story/money/cars/2016/11/27/record-number-car-buyers-upside-down-trade-ins/94506786/
My Dead Pool wagers are all failing. Boy, oh boy, has 2016 been a beast!
My brother continues to beat everybody. The thing is, I traded him Queen Elizabeth for Arnold Palmer. That one killed me. I just never saw it coming.
Plus, I had Betty White and gave her up for Florence Henderson. Then, Fidel Castro goes and dies on me! Right now, I’m down to Keith Richards and Boy George, while he has Fifty Cent and that Game of Thrones dude. I think Fifty has already been shot a few times, so my guess is he’s pretty solid, unless a rapper rivalry heats up out of nowhere. Anyways, we can make new picks in Jan 2017.
“Thanks to mainsteam media, which parrots the idea that inflation is good, the “deplorables” fail to blame the institution most responsible: the Fed.”
An implication of the graph “Median Household Income Growth” showing negative “real income growth” and much higher “nominal growth since 2000” is that we have “nominal” income inflation and “real” income deflation at the same time. A strange combo, richer and poorer at the same time. No wonder everyone is confused, and no one seems to know what is going on.
Deflation is always good!
Yes, CPI deflation is a blessing for shoppers. Bring it on.
The average economist is NOT brainwashed by years of Keynesian economics, just you the commenter falls for that lie. It wouldn’t be so bad if Keynes was actually followed, but it’s better when seeking the true picture as to how money, macroeconomics works. The accurate description is described by MMT[which is not a theory in the hypothesis sense].
The brainwashing is done by the mainstream academic economists with their complicated modelling that has a 100% failure rate. Impressive?! They are believers in their pseudoscience as if it were theology. Paul Samuelson said it was “an old fashioned religion”. They do enormous damage to the economy and by extension to society. One commentator calls them murderers. Yet nothing changes. Ignorance is wilful and difficult to change. Politicians jump on the chance they offer to portray federal government economics as household economics, totally false.
https://www.youtube.com/watch?v=YIPjN_HDmCw
“The brainwashing is done by the mainstream academic economists with their complicated modelling that has a 100% failure rate. Impressive?!”
Impressive? no. Everything with a cycle has a 100% failure rate.
100% of booms end in a bust. 100% of bubbles burst. They are cycles.
Not in this case! It’s absurd to say economic models are cyclical. They fail because the parameters are wrong.
Thanks everyone for the comments. I love reading them to find possible variables or Mack trucks I have not realized and were right in front on me the whole time. Great reading and great group of commenters.