Total Government And Personal Debt In The U.S. Has Hit 41 Trillion Dollars ($329,961.34 Per Household)
Authored by Michael Snyder via The Economic Collapse blog, We are living in the greatest debt bubble in the history of the world. In 1980, total government and personal debt in the United States was just over the 3 trillion dollar mark, but today it has surpassed 41 trillion dollars. That means that it has increased by almost 14 times since Ronald Reagan was first elected president. I am searching for words to describe how completely and utterly insane this is, but I am coming up empty. We are slowly but surely committing national suicide, and yet most Americans don’t even understand what is happening. According to 720 Global, total government debt plus total personal debt in the United States was just over 3 trillion dollars in 1980. That broke down to $38,552 per household, and that figure represented 79 percent of median household income at the time. Today, total government debt plus total personal debt in the United States has blown past the 41 trillion dollar mark. When you break that down, it comes to $329,961.34 per household, and that figure represents 584 percent of median household income. If anyone can make a good argument that we are not in very serious debt trouble, I would love to hear it. And remember, the figures above don’t even include corporate debt. They only include government debt on the federal, state and local levels, and all forms of personal debt. So do you have $329,961.34 ready to pay your share of the debt that we have accumulated? Nobody that I know could write that kind of a check. The truth is that as a nation we are flat broke. The only way that the game can keep going is for all of us to borrow increasingly larger sums of money, but of course that is not sustainable by any definition. Eventually we are going to slam into a wall and the game will be over. One of my pet peeves is the national debt. Our politicians spend money in some of the most ridiculous ways imaginable, and yet no matter how much we complain about it nothing ever seems to change. For example, the U.S. military actually spends 42 million dollars a year on Viagra. Yes, you read that correctly. 42 million of your tax dollars are being spent on Viagra every year. And overall spending on “erectile dysfunction medicines” each year comes to a grand total of 84 million dollars… According to data from the Defense Health Agency, DoD actually spent $41.6 million on Viagra — and $84.24 million total on erectile dysfunction prescriptions — last year. And since 2011, the tab for drugs like Viagra, Cialis and Levitra totals $294 million — the equivalent of nearly four U.S. Air Force F-35 Joint Strike Fighters. Is this really where our spending on “national defense” should be going? We are nearly 20 trillion dollars in debt, and yet we continue to spend money like there is no tomorrow. For much more on the exploding size of our national debt and the very serious implications that this has for our future, please see my previous article entitled “Would You Like To Steal 128 Million Dollars?” I didn’t think that our debt bubble could ever possibly get this big, but I didn’t think that our stock market bubble could ever possibly get quite get this large either. For a few moments, I would like for you to consider a list of facts about this stock market bubble that was recently published by Zero Hedge… The S&P 500 Cyclically Adjusted Price to Earnings (CAPE) valuation has only been greater on one occasion, the late 1990s. It is currently on par with levels preceding the Great Depression. CAPE valuation, when adjusted for the prevailing economic growth trend, is more overvalued than during the late 1920’s and the late 1990’s. (LINK) S&P 500 Price to Sales Ratio is at an all-time high Total domestic corporate profits (w/o IVA/CCAdj) have grown at an annualized rate of .097% over the last five years. Prior to this period and since 2000, five year annualized profit growth was 7.95%. (note- period included two recessions) (LINK) Over the last ten years, S&P 500 corporations have returned more money to shareholders via share buybacks and dividends than they have earned. The top 200 S&P 500 companies have pension shortfalls totaling $382 billion and corporations like GE spent more on share buybacks ($45b) than the size of their entire pension shortfall ($31b) which ranks as the largest in the S&P 500. (LINK) Using data back to 1987, the yield to maturity on high-yield (non-investment grade) debt is in the 3rd percentile. Per Prudential as cited in the Wall Street Journal, yields on high-yield debt, adjusted for defaults, are now lower than those of investment grade bonds. Currently, the yield on the Barclays High Yield Index is below the expected default rate. Implied equity and U.S. Treasury volatility has been trading at the lowest levels in over 30 years, highlighting historic investor complacency. (LINK) Our financial markets are far more primed for a crash than they were in 2008. The only times in our entire history that are even comparable are the late 1920s just before the infamous crash of 1929 and the late 1990s just before the dotcom bubble burst. A whole lot of people out there seem to be entirely convinced that things will somehow be different this time. They seem to believe that the laws of economics no longer apply and that we will never pay a significant price for decades of exceedingly foolish decisions. Overall, the world is now 217 trillion dollars in debt. Earlier this year, Bill Gross raised eyebrows when he said that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”, and I very much agree with him. There is no way that this is going to end well. Yes, central bank manipulation may be enough to keep the party going for a little while longer, but eventually the whole thing is going to come crashing down in a disaster of unprecedented magnitude.
Removal of Prudential Financial account hampers asset manager’s US growth efforts
Removal of Prudential Financial account hampers asset manager’s US growth efforts
Country still reeling from failed bailout that saw two banks default; fund stresses the need for prudential regulatory compliance and praises three-pronged approach
Country should widen its outlook to include asset managers and other risky areas, a peer review finds; report recommends action to boost communication and disclosure
Let's put Prudential Financial, Inc. (PRU) stock into this equation and find out if it is a good choice for value-oriented investors right now.
People: Malta appoints new deputy governor; Netherlands picks Else Bos as new board member for prudential supervision; and more
Prudential Financial (PRU) continues to impress with its solid product and service portfolio, inorganic growth as well as robust capital and liquidity position.
“Bigger Systemic Risk” Now Than 2008 - Bank of England - Bank of England warn that "bigger systemic risk" now than in 2008- BOE, Prudential Regulation Authority (PRA) concerns re financial system- Banks accused of "balance sheet trickery" -undermining spirit of post-08 rules- EU & UK corporate bond markets may be bigger source of instability than '08- Credit card debt and car loan surge could cause another financial crisis- PRA warn banks returning to similar practices to those that sparked 08 crisis- ‘Conscious that corporate memories can be shed surprisingly fast’ warns PRA Chair Bank of England sees bigger financial risks than in 2008 Editor Mark O'Byrne Stark warnings have been issued by the Bank of England and its regulatory arm, the Prudential Regulation Authority (PRA). In less than one week the two bodies issued papers and speeches to warn industry members that many banks are showing signs of making the same mistakes that led to the 2008 financial crisis - the outcomes of which are predicted to be worse than those seen just nine years ago. Increased risks have been noted at different ends of the financial system, from the European corporate bond markets right through to retail lenders. The Bank of England’s ‘Stimulating Stress Across the Financial System’ was released last week. It looks at how it will assess risk in future studies on the European corporate bond market. It concludes that the corporate bond market could create more instability during the next financial shock than it did in the crisis of 2008. Just two days before this stark warning, the PRA’s chief-executive Sam Woods told lenders that they were on thin ice with their innovations designed to reduce their capital requirements and buoy earnings. Woods said that whilst their innovations “might meet the letter of the regulation” they must not be “designed to circumvent the spirit” of banking rules. Bank of England's Woods accused banks of engaging balance sheet trickery to “circumvent the spirit” of post-financial crisis rules. Both warnings over both sets of practices is yet another reminder of the stark difference of interests between taxpayers, regulators and the banking industry. News of institutions circumventing regulations and non-bank corporate lenders creating more risk in the system begs the question if the financial system as we know it will ever be fit for purpose in terms of looking after the needs of borrowers and savers. It also rises concerns about how safe the banks are for depositors and whether banks are 'safe for savers?' Balance sheet shenanigans One of the ‘innovations’ being used by banks is the very same that was used in the run-up to and exacerbated the 2008 financial crisis. It is the use of special purpose vehicles which are used to hold riskier assets in order to free up capital. Woods told the news conference: “We have noticed that some institutions are now moving on-balance-sheet financing to off-balance-sheet formats using special purpose vehicles, derivatives, agency structures or collateral swaps.” Practices such as these are being done in order to reduce the burden of new rules which have come or are coming into play. The Bank of England and the regulatory authorities are close to completing and implementing the reforms that were agreed to following the 2008 crisis. However the changes designed to make banks less risky have meant margins are being squeezed from two directions, both by new regulations and record low interest rates. The regulators’ concerns over these practices are that they circumvent a regulation designed to protect taxpayers from yet another bank bailout. These are the ring fencing rules much lauded about following the financial crisis. They require that those banks and building societies with more require financial institutions with more than £25bn of deposits to tie off their retail divisions from the riskier investment banking units by 2019. This is the most costly of the reforms being put into place, rumoured to have a price tag of billions of pounds. Widespread illiquidity leads to panic Meanwhile, on the other side of the market (but still as entwined and as risky as banks’ circumvention tactics) the Bank of England study has shown that they have some significant concerns about the effects of non-bank lenders in a stressed market, particularly on corporate funding rates and their impact on the real economy. The central bank is primarily concerned that those dealers making markets in bonds will not be able to cope with panic-selling levels by investors. The study found that 2008 levels of weekly mutual fund redemptions (1 percent of assets under management) could increase corporate bond interest rates for companies with high credit ratings by about 40 basis points. Dealers might struggle to absorb these sales if redemptions are only a third higher, an event which the study described as "an unlikely, but not impossible, event”. Whilst the study states that this was an incomplete exercise in assessing the risk in the system, it was clear that it had raised cause for concern namely due to such risks creating a feedback loop between individually safe parts of the market that amplified the shock. "Nevertheless, it has allowed a scenario to be explored in which large-scale redemptions from open-ended investment funds trigger sales by those funds, with resulting spillover effects to dealers and hedge funds." Concerns over how widespread illiquidity can lead to panic amongst investors is fresh in regulators’ and institutions’ minds following the episode post-Brexit vote when there was a run on real estate funds and a temporary ban was placed on withdrawals following the surge in redemption requests. There is little reason why, given the right set of economic circumstances, such an event wouldn’t happen in the corporate bond market. Currently there are two events in the near future which could prompt a sell-off in corporate bonds. The first is a potential reduction in the monthly €60 billion of securities the ECB currently buys. Should they decide to reduce these then investors may dump bonds in favour of equities, cash or gold. The second potential problem is of course Italy. The general election is due to happen before next May and should Eurosceptic party, the Five Star Movement, win then we are likely to see panicked bond selling. Worries about corporate bond markets or balance sheet shenanigans by banks do not seem to be causing much concern amongst the UK electorate and savers. But a quick snapshot of how finances look at a household level should be provide a much needed wakeup call. A decade on, what damage can be done Woods’s speech about the state of banks’ clever balance sheets was ultimately about their desires to return ‘to the punchbowl’ as they try to boost credit and risk. The chief executive said that his organisation had seen"a shift in credit risk appetite as lenders compete with each other to find ways of widening the pool of available borrowers, increasing the size of loans available to them, or reducing the credit premium charged for inherently more risky loans.” The state of the things at a retail level is somewhat terrifying. Household lending is growing at 10.3% a year – outpacing the 2.3% rise in household income. The total credit owed by UK consumers at the end of April 2017 was £198 billion, with credit card borrowing at a record £67.7 billion. The BOE is so concerned that it has told lenders to set aside £11.4 billion to protect against defaults. More concerning about the state of household debt is that Bank of England data shows 15.75pc of all new mortgages taken out in the first quarter of 2017 were for terms of 35 years or more. But, the latest growing area of debt is car financing. £58 billion of car dealership finance. Just £24 billion of this comes from banks. The rest is from other lenders, such as dedicated motor finance firms. They do not have to follow the strict lending rules on having capital buffers to cover losses like banks do – a development the Bank of England is concerned about. It has been ten years since the last interest rate hike. A decade is a long-time, enough time for the market to welcome in a new generation of borrowers who are unfamiliar with higher interest rates and the dangers of borrowing. Most concerning is it seems no matter who they borrow from, they are disinterested in the state of regulatory demands. It has been more than a decade since 60+ banks and building societies were issued a similar warning in 2004. Many failed to listen to the warnings given. "As survivors, societies here today ought to be well aware of the warning signs, but I’m conscious that corporate memories can be shed surprisingly fast…I would observe that part of the reason why only 44 societies are attending this conference rather than the 60+ that came to its equivalent in 2004 lies in the fact that many of those societies were unaware of, or failed to control, the risks they were taking." - Sam Woods of PRA Similarly aware of this lack of insight, the Bank of England recently asked lenders how these new borrowers affected the banks’ credit-scoring models, as the banks themselves are the first line of defence when it comes to protecting the economy (and taxpayers) against increased risk. Sam Woods’s speech last week suggest that banks and building societies are most likely unconcerned with the risk these new borrowers bring to the system. In May, the British households borrowed £1.7 billion in May, higher than the £1.4 billion that forecasters expected and the £1.438 billion borrowed in April. This rapid growth of consumer credit will pose a risk to banks when the economy falters and borrowers struggle to repay the loans. Conclusion These warnings from the Bank of England and the PRA just serve to remind us that there is little in the financial system which is not exposed to the highly speculative and risky lending practices of those charged with looking after our savings and investments. Even if some banks are listening to the warning cry of the regulators, the level of debt in the financial system in the UK and most western countries is completely unsustainable. Ultimately all of the above means that your personal finances and your savings held in deposit accounts are at risk. The risk is that when authorities move to bailout the next bank who enjoyed the punch a bit too much, your savings may be confiscated in bank deposit bail-ins. Why do we like physical gold and silver? Because when you buy it in the right way, you own it outright. When you own physical gold and silver coins and bars which is allocated, segregated and in your name, it cannot suffer a 'haircut' or be confiscated by bankrupted financial entities. Bullion coins and bars are yours and carry no counter party risk if you take insured delivery or store in the safest vaults in the world. Access Bail-in Guide Sources Credit market a bigger systemic risk than during 2008 crisis: BOE - Reuters Bank tackles lenders balance sheet trickery - FT Adviser Related Content “Financial Crisis” In 2017 Or By End Of 2018 – Prepare Now UK At ‘Edge of Worst House Price Collapse Since 1990s’ UK Inflation is no longer in stealth mode News and Commentary Gold inches up as prospects for slower U.S. rate hikes weigh on dollar (Reuters.com) Gold marks highest settlement of the month, up 1.5% for the week (MarketWatch.com) Asia shares rise on accommodative Fed (Reuters.com) Dollar Bears’ Case Grows Stronger as Wagers on Fed Hikes Fade (Bloomberg.com) ECB Expected to Use July Decision to Quell Investors’ Taper Temper (Bloomberg.com) Gold and Silver Gain Over 1% and 2% on the Week (SilverSeek.com) Speculators Sour On Gold And silver, Which Means The Bottom Is Near (DollarCollapse.com) Hedge Funds Are Losing Faith in Precious Metals (Bloomberg.com) Financial-Crisis-Style Carmageddon Descends on Houston (WolfStreet.com) Chinese Silk Road Advances - Purchases Ports Worth $20B In Year (FT.com) Gold Prices (LBMA AM) 17 Jul: USD 1,229.85, GBP 940.71 & EUR 1,074.03 per ounce14 Jul: USD 1,218.95, GBP 940.54 & EUR 1,067.92 per ounce13 Jul: USD 1,221.40, GBP 944.51 & EUR 1,071.05 per ounce12 Jul: USD 1,219.40, GBP 947.60 & EUR 1,064.29 per ounce11 Jul: USD 1,211.90, GBP 938.98 & EUR 1,063.68 per ounce10 Jul: USD 1,207.55, GBP 938.63 & EUR 1,060.11 per ounce07 Jul: USD 1,220.40, GBP 944.47 & EUR 1,068.95 per ounce Silver Prices (LBMA) 17 Jul: USD 16.07, GBP 12.30 & EUR 14.02 per ounce14 Jul: USD 15.71, GBP 12.11 & EUR 13.76 per ounce13 Jul: USD 15.95, GBP 12.34 & EUR 14.00 per ounce12 Jul: USD 15.83, GBP 12.31 & EUR 13.82 per ounce11 Jul: USD 15.51, GBP 12.02 & EUR 13.61 per ounce10 Jul: USD 15.22, GBP 11.82 & EUR 13.36 per ounce07 Jul: USD 15.84, GBP 12.29 & EUR 13.88 per ounce Recent Market Updates - Video – “Gold Should Probably Be $5000” – CME Chairman Duffy- India Gold Imports Surge To 5 Year High – 220 Tons In May Alone- “Silver’s Plunge Is Nearing Completion”- China, Russia Alliance Deepens Against American Overstretch- Silver Prices Bounce Higher After Futures Manipulated 7% Lower In Minute- Precious Metals Are “Best Defence” Against Bail-ins In Economic Crisis- Buy Gold Near $1,200 “As Insurance” – UBS Wealth- UK House Prices ‘On Brink’ Of Massive 40% Collapse- Gold Up 8% In First Half 2017; Builds On 8.5% Gain In 2016- Pensions Timebomb In America – “National Crisis” Cometh- London Property Bubble Bursting? UK In Unchartered Territory On Brexit and Election Mess- Shrinkflation – Real Inflation Much Higher Than Reported- Goldman, Citi Turn Positive On Gold – Despite “Mysterious” Flash Crash Important Guides For your perusal, below are our most popular guides in 2017: Essential Guide To Storing Gold In Switzerland Essential Guide To Storing Gold In Singapore Essential Guide to Tax Free Gold Sovereigns (UK) Please share our research with family, friends and colleagues who you think would benefit from being informed by it. Special Offer - Gold Sovereigns at 3% Premium - London Storage We have a very special offer on Sovereigns for London Storage today. Own one of the most popular and liquid of all bullion coins - Gold Sovereigns - at the lowest rates in the market for storage. 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Consumers in the UK have been on a credit binge since the Bank of England cut its benchmark interest rate to an all-time low as investors braced for the widely anticipated economic shock of Brexit – a shock that, unsurprisingly, has yet to arrive, despite warnings from the academic establishment that a "leave" vote would trigger an imminent economic catastrophe. And now, with total credit growth rising at 10% a year, the BOE is warning that the increase in unsecured lending is becoming increasingly unsustainable. While the central bank is less concerned with mortgage debt than credit-card debt and other types of consumer credit, some at the bank are beginning to worry that the growing demand for long-term mortgages will shackle borrowers with a lifetime of debt, according to the Telegraph. “British families are signing up for a lifetime of debt with almost one in seven borrowers now taking out mortgages of 35 years or more, official figures show. Rapid house price growth has encouraged borrowers to sign longer mortgage deals as a way of reducing monthly payments and easing affordability pressures. Bank of England data shows 15.75pc of all new mortgages taken out in the first quarter of 2017 were for terms of 35 years or more. While this is slightly down from the record high of 16.36pc at the end of 2016, it has climbed from just 2.7pc when records began in 2005.” The steady rise has triggered alarm bells at the BOE, prompting regulators to warn that the trend risks storing up “problem[s] for the future” if lenders ignore the growing share of households prepared to borrow into retirement. Indeed, bank figures show one in five mortgages today are between 30 and 35 years, up from below 8% in 2005, as the traditional 25-year mortgage becomes less popular. There’s also the unaffordability question. That borrowers are opting for longer mortgage terms means they’re finding rent and mortgages are growing increasingly unaffordable, a worrying sign as credit expands. David Hollingworth, a director at mortgage broker London & Country, said the trend showed that an increasing share of borrowers were “struggling with affordability pressures, and deciding that lengthening the term will offer leeway” as house price growth continues to outpace pay rises. Sam Woods, the chief executive of the Prudential Regulation Authority, has said policymakers are watching developments closely. “If lenders become too narrowly preoccupied with the profile of the loan in the first five years” and not look at the entire profile of the loan when assessing affordability “this could store up a problem for the future,” he said in a speech. While interest rates are expected to stay low, the pound’s 15% drop against the dollar since the last year is driving up the price of consumer goods, adding to the pressure on borrowers. Prices of consumer staples are growing at an annualized rate of 3%, far more than interest rates on savings accounts.
**Should-Read: Helene Rey**: The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles: "Financial cycles strongly determine real short-term interest rates... >...Wealth increases rapidly during financial booms, faster than consumption itself. As a consequence, the consumption to wealth ratio declines, as happened in the “Roaring 20s” and the “Exuberant 2000s”. In the subsequent busts, savings increase and keep real interest rates low. The related global financial cycle constrains monetary policy independence, even for countries with flexible exchange rates, transforming the Mundellian trilemma into a dilemma. Tackling these issues calls for combinations of monetary and fiscal policy coordination, macro-prudential policies, and possibly capital controls. It also means considering the role of the US as a provider of safe assets, and asking whether a multipolar system would be advantageous...
BoE assesses contingency plans in event of worst-case scenarios on leaving EU
BoE assesses contingency plans in event of worst-case scenarios on leaving EU
Fed Chair Yellen will be testifying to the House Financial Services committee at 1000EDT, followed by testimony tomorrow before the Senate Banking Committee (the testimony for both events is likely to be identical, as it has on previous occasions), however her prepared remarks will be released 90 minutes earlier, at 8:30am. Courtesy of RanSquawk, here are the main things to look for in her prepared testimony as well the subsequent Q&A. Attention will be on the Q&A part of Yellen's testimony. The Fed's Monetary Policy Report, released Friday, provided little new information, reiterating gradual hikes, and gradual reduction of the balance sheet when it begins later this year. Indeed, the report largely echoed recent comments from Fed policymakers, as well as the FOMC's June meeting. Yellen is expected to toe the line, but her Q&A may be more revealing (although we wouldn't hold our breath: the Fed chair has become increasingly talented at saying a lot without telling us anything new of consequence). Nevertheless, the balance sheet plans, and inflation are the two areas the market would like to hear about. On inflation, the June meeting minutes indicated that most policymakers saw the recent softness in inflation as having little impact on the trend on inflation, though several were concerned that it might persist, indicating the divide on the FOMC. "The Minutes showed a Fed hiking on realised activity but forecasted inflation," UBS says, "taken together, strong activity, tight labour markets, supportive financial conditions, decreased risks from abroad, and a belief in their inflation forecasts were enough reason for them to hike." (NOTE: US June CPI data is released on Friday, which will be crucial in judging how transitory the recent softness is). On balance sheet reduction, the key question is around the sequencing of rate hikes and balance sheet normalisation. There seems to be a consensus building that the Fed will begin to normalise its balance sheet in September, with the next hike coming in December, after the minutes revealed several believed normalisation would be appropriate in the next "couple of months". Additionally, some insight into the logic behind the cap system would be welcomed, UBS says, arguing that the cap system put forward is anything but straightforward: "The asymmetric treatment of Treasury securities and MBS and the fact that the caps become largely irrelevant after a year make for a bit of a head-scratcher. Sadly, there was no further insight into how they came up with their plan." At the close of business on Friday, the market was pricing in a 69% chance that rates would be held between 100- 125bps in the July, September and November meetings, with the chance of a hike in December is slightly better than a coin flip. It is also worth keeping an ear out for comments about the FOMC's projection for the long-term Fed Funds Rate, currently 3%; the market clearly does not buy into that hike trajectory, pricing in just three more hikes between now and the end of 2019, compared with the FOMC forecast (made in June) that looks for another seven. * * * Finally, courtesy of Pedro da Costa, here are 5 questions that Yellen may be asked today: 1. Why are you raising interest rates if inflation is falling? Fed officials are having increasing trouble justifying their outlook for continued interest rate increases this year and next in the face of inflation data that is slipping despite a historically low unemployment rate. Nor is Wall Street all that convinced, with many traders barely pricing in another rate hike this year. "A further retreat from the Committee's longer-run objective will prove increasingly difficult to disregard, particularly with both the annual rate in headline and core consumer inflation at near two-year lows,” says Lindsey Piegza, chief economist at Stifel Nicolaus. Given the room afforded by low inflation, why not leave interest rates steady and wait to see solid wage increases before tightening monetary conditions further? Realistically, these are not questions Yellen will answer head on. "Given the disagreement evident in the minutes of the last FOMC meeting, we don’t expect any definitive steer from Yellen on when the balance sheet run-down will begin or whether to expect a September rate hike," writes Paul Ashworth of Capital Economics in a research note. Still, her tone on the economy will offer insight into how high a bar the Fed currently has to divert from its rate hike path. It appears set pretty high. 2. What do you make of Republican efforts to dilute post-crisis financial rules? As much as Yellen avoids talking politics, financial regulation is certainly part of her mandate, and she’s already had much to say about Trump and the Republican Congress’ efforts to reverse many of the post-crisis reforms intended to prevent another meltdown. "We lived through a devastating financial crisis. Most members of Congress and the public came away from that experience feeling that it was important to take a set of steps that would result in a safer and stronger financial system," she said during her last testimony in February. "I feel that we have done that." Yellen will likely get asked about the issue again, given many Republicans and Wall Street CEOs blame bank regulation for weak economic growth. Trump’s board nominee for financial regulation, Randall Quarles, is a creature of Wall Street, meaning Yellen must redouble her effort to push back against what is effectively an undoing of the work she and her colleagues have spent seven years undertaking. 3. What are you doing to boost financial stability and monitor market bubbles? Fed officials have often cautioned against raising interest rates in order to tame asset market bubbles. But with inflation nowhere to be seen in the current economic horizon, it’s hard not to get the feeling that the Fed’s resolve to keep raising borrowing costs after a prolonged period of zero interest rates is in part due to its fears of an ever-rallying stock market. Yet policymakers including Yellen have described such an approach — slowing down the entire economy just to soften a single market — as counterproductive. Instead, they have talked about using "other tools" to monitor and if needed restrain particular corners of finance. These policies are sometimes referred to as "macroprudential," and could include things like loan-to-value restraints or curbs on leverage. But officials have never been specific about what they could do, or how? It’s time for Yellen to provide more clarity on this front. Ethan Harris, economist at Bank of America-Merrill Lynch sheds some light on this internal debate in a note to clients. "This year the Fed appears to have shifted to a 'hawkish bias.' This was evident when the Fed hiked rates and signaled balance shrinkage at its June meeting despite weak growth and inflation data. Why the change of feathers?" Among other factors, he says, "the Fed is worried a bit about financial stability and overheating markets. However, we put a relatively low weight on this argument. Chair Yellen and her allies have repeatedly underscored the idea that macro prudential policy is the first line of defense against asset bubbles and monetary policy is a distant 'Plan B.'" 4. Why are you tweaking the Fed’s balance sheet now and where do you see it headed? The Fed has complicated the outlook for official interest rates by announcing potentially imminent changes to its balance sheet policy, which directly affects the amount of outstanding stimulus in the economy — at least according to standard monetary theory. But it has left a number of unanswered questions about when and and to what extent it will reduce bond buys, by gradually easing up on reinvesting proceeds of maturing bonds in its $4.5 trillion balance sheet back into the market. Fed Governor Lael Brainard said this week she was pretty much ready to announce a start to balance sheet reduction, although she sounded more skeptical about continued interest rate hikes. "I believe it would be appropriate soon to commence the gradual and predictable process of allowing the balance sheet to run off," Brainard said in a speech. Lawmakers should ask Yellen for further clarification as to why the Fed has decided to further muddy the interest rate outlook at a time when the political environment is itself a source of extreme uncertainty. 5. Any comments about your long-time colleague, ex-Richmond Fed President Jeffrey Lacker? Lacker resigned in April after admitting to confirming confidential information to Medley Global Advisors, a consulting firm that then sold those details directly to clients in a private report. Yellen overlapped with Lacker at the Fed for over a decade, and yet she has never made a public statement about his resignation. Before becoming Fed Chair, she was vice chair and before that held a role parallel to Lacker’s, as president of the San Francisco Fed. She and the Fed have also not addressed the main question arising from Lacker’s resignation letter. If he was merely confirming details Medley already had, who was the original leaker? This is especially relevant because the House Financial Services Committee says it still has an open investigation into the matter. At a time of heightened scrutiny over ethical scandals, the Fed would only help itself by boosting transparency on this issue, if only to put it to rest
"Why is the Fed so desperate to raise rates and tighten financial conditions? Why has the Fed shifted from a dovish to a hawkish bias?" That is the question on every trader's, analyst's and economist's mind in the past month. Is it because the Fed is suddenly worried it has inflated another massive equity bubble (major banks now openly warn their clients the market is in frothy territory, if not inside a bubble), or is the Fed just worried that it will fall too far behind the curve and be unable to regain control of the economy once inflation spikes, without creating a recession (in what will soon be the second longest, if weakest, economic expansion of all time). This is also what BofA's chief economist Ethan Harris tried to answer over the weekend, when he recalled that while from 2013 to 2016 the Fed seemed to have a "dovish bias" signaling a slow exit from super easy monetary policy, but pausing at any sign of trouble, this year the Fed appears to have shifted to a "hawkish bias:" signaling a slow exit, but only pausing if the outlook changes significantly. He says that this was most evident when the Fed hiked rates and signaled balance shrinkage at its June meeting despite weak growth and inflation data. Why the change of Fed feathers? In BofA's view, three factors are at play, in increasing order of importance. First, the Fed is worried a bit about financial stability and overheating markets. However, the bank puts a relatively low weight on this argument, as Chair Yellen and her allies have repeatedly underscored the idea that macro prudential policy is the first line of defense against asset bubbles and monetary policy is a distant "Plan B", although to this we can add that macroprudential policy has yet to demonstrate its effectiveness in preventing even one asset bubble. The second reason for the Fed's hawkish turn is that it is probably encouraged by how easily the markets have absorbed its forecasts. Since the start of the year the Fed has hiked more than expected and has accelerated its balance sheet shrinkage plans and yet, as Goldman has repeatedly noted and all other banks have promptly followed, stocks have rallied while bond yields have been little changed on net. If a steady exit is causing no apparent pain, why not continue? (for one answer, read the latest note from Deutsche Bank on Conundrum 2.0) Here Bank of America is worried that the Fed is being lulled to sleep: the bond market is pricing in only about a 50 bp increase in the funds rate by yearend 2018 compared to the FOMC median forecast of 100 bp. Moreover, despite firming plans for balance sheet shrinkage, bond term premia have actually declined (Chart 5). This suggests the markets don't entirely believe the Fed's hawkish message, and with good reason: every time the Fed has blustered on the hawkish side in the past, it has quickly retreated the moment markets sold off even modestly. Although this time, Harris warns that if the Fed follows through on its plans, he sees the potential for a tightening in financial conditions. Which brings us to what BofA believes is the third, and most important, reason for the Fed's change inoutlook: a shift in the Fed's risk rankings. As BofA explains, for years the focus was getting inflation back to target. They did not want a recession to occur before inflation (and interest rates) had normalized. Now the focus has shifted more to the risk of undershooting on the unemployment rate, which has fallen well below even the Fed's revised estimate of NAIRU. As several Fed officials have pointed out, undershooting full employment can and will be problematic. Dudley recently noted: "if we were not to withdraw accommodation, the risk would be that the economy would crash to a very, very low unemployment rate, and generate inflation." He continued, "then the risk would be that we would have to slam on the brakes and the next stop would be a recession." On a similar vein Boston Fed President Rosengren argued last summer that after hitting a cyclical low, "there are no episodes in which unemployment rose a bit and remained stable at its natural employment rate. Rather, a recession has always followed" as shown in the chart below. Rosengren concluded: "The lesson is that policymakers should avoid significantly overshooting their best estimates of the natural rate of unemployment." Which brings us to what BofA dubs the "nightmare scenario for the Fed": the mid-1960s. US inflation averaged just 1.3% from 1952 to 1964, resulting in a very benign consensus around the inflation outlook. Economists generally assumed that NAIRU was 4% or less and that there was a stable long-term trade-off between unemployment and inflation: if the unemployment rate dropped below NAIRU only a small move higher in inflation was expected. The next 15 years offered a rude awakening. Core inflation started to surge in 1965. Digging into the data, the acceleration was broad-based, with rising prices of both goods and services. Harris is convinced that "the Fed must be concerned-in the back of its mind-about such a "rusty gate" scenario." As Harris concludes, while it is unclear whether core inflation will move back to target or not, a further drop in the unemployment rate seems likely, shifting the risks around Fed policy. Fed officials believe the economy already has pierced or inevitably will pierce NAIRU. However, they are feeling their way forward: they can only be sure they have breached NAIRU if core inflation has moved decisively higher. The danger for the Fed is that it learns, with a lag, that the economy is say a percentage point below NAIRU. At this stage it would face a very difficult juggling act: stopping the rise in inflation will require raising the unemployment rate by at least a percentage point, but that means a high risk of recession. Clearly that is a challenge they want to avoid. BofA's advice to advice to investors: "keep a close eye on the labor market." Meanwhile, our advice to investors is keep an even closer look at the stock market, because the real test for Yellen and company is if and when the market does take the Fed seriously, if a correction of 10% does not lead to an immediate jawboning of rate cuts or more QE, then the BTFDers, quants and algos may finally be truly on their own for the first time in nearly a decade.
The Shifting Drivers of Global Liquidity -- by Stefan Avdjiev, Leonardo Gambacorta, Linda S. Goldberg, Stefano Schiaffi
The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flow to US monetary policy rose substantially in the immediate aftermath of the Global Financial Crisis, peaked around the time of the 2013 Fed "taper tantrum", and then partially reverted towards pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably post-crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to US monetary policy has been driven mainly by post-crisis changes in the behaviour of national lending banking systems, especially those that ex ante had less well capitalized banks. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly due to a compositional effect, driven by increases in the lending market shares of better-capitalized national banking systems. The post-2013 reversal in the sensitivities to US monetary policy partially reflects the expected divergence of the monetary policy of the US and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks' capitalization and stable funding levels reduced the volatility of international lending flows.