The Wall Street Journal today brings word that a professor Efraim Benmelech of the finance department at Northwestern University thinks the Fed is hurting housing and the consumer too much. Opined he,
…those higher interest rates are making mortgages more expensive and leading to fewer home sales. That leads to less spending on appliances, paint and other home goods, because people commonly buy those items ahead of a sale and after moving.
“The actions of the Fed are leading to lower consumption,” he said.
You don’t say!
Then again, has it occurred to the good professor that the years and years of ultra low mortgage rates engineered by the Fed were totally unnatural, uneconomic and not sustainable?
The evidence for that is in the chart below. It shows that for most of the last three decades, the Fed drove the after-inflation or “real” interest rate on 30-year mortgages steadily lower until it actually turned negative.
That’s right. There was a whole lot of appliances, paint and other building supplies being sold because mortgage investors were getting fleeced by the Fed’s negative real rate regime. But now it’s time to pay the piper.
Stated differently, the unfolding recession is a long overdue and necessary purge of artificial economic activity stimulated and subsidized by the central bank’s own financial repression policies.
The Fed’s belated attempt to “normalize” interest rates, therefore, is not a mean-spirited policy to deliberately cause labor, manufacturing capacity and other economic resources to be idled. To the contrary, it’s a belated attempt to unshackle markets from the excesses, bubbles, malinvestments, inefficiencies and unsustainabilities that were the inherent results of decades of reckless money-printing.
Inflation-Adjusted Interest Rate On 30-Year Fixed Rate Mortgages, 1990 to 2023
One of the many bubbles created by the Fed’s relentless monetary expansion of recent years might be termed the “labor bubble.” By that we are referring to the madcap hiring undertaken by corporate HR departments in the aftermath of the Covid Lockdown disruption.
As it happened, they failed to meet staffing needs in the early days of the re-opening in 2021 owing to the fact that millions of workers had left the active labor force thanks to massive stimmies, early retirements and other welfare state inducements, along with mom and dad’s basements and checkbooks. So HR departments plunged into hiring “just in case” the re-opening boom of 2021 and early 2022 continued. In effect, they began to hoard labor.
Spotify CEO Daniel Ek admitted as much in a recent missive to employees announcing a 6% cut in the company’s work force:
“In hindsight, I was too ambitious in investing ahead of our revenue growth. And for this reason, today, we are reducing our employee base by about 6% across the company. I take full accountability for the moves that got us here today,” the exec said.
Of course, the re-opening and stimmy boom didn’t last—notwithstanding the Fed’s massive money-pumping and monetization of the public debt issued to finance the $6 trillion of COVID bailouts.
Since the spring of 2021 when the stimmies peaked, the U.S. economy has actually been slouching toward idle. In fact, once you strain out of the GDP numbers the one-time inventory rebuilding, which was necessitated by the drastic depletion of merchandise stocks triggered by the stimmy based consumer spend-a-thons, there is hardly any organic growth left.
As shown in the chart below, the combination of Dr. Fauci’s Virus Patrol and the Washington spenders did a real number on the business economy. First, the normal business inventory-to-sales ratio exploded to the upside during the initial lockdowns and spending collapse, and then plunged to unprecedented lows as the stimmy-fueled boom in Amazon orders drained the system of its working inventories.
Since reaching bottom in October 2021 inventories have been rebuilt to nearly normal levels, but that’s just the problem. The GDP gain reflected in the inventory rebuild is just a case of “one and done.” In fact, with the interest cost of carrying inventories now rising rapidly it is likely that the business sector restocking is over.
Nevertheless, the chart below is a testimony to Washington’s madcap interventions of the past three years. From day one in March 2020 there was no reason to believe that the COVID-19 resembled a Black Plague style existential threat in any way, shape or form. The 99.75% survival rate of the elderly-skewed population on the stranded Diamond Princess cruise ship in February 2020 was proof of that.
But Washington plowed ahead with the one-size-fits-all lockdowns anyway, which at the peak caused a 26 million rise in unemployment and GDP to shrink at a staggering 33% annual rate.
Needless to say, the resulting economic contraction had nothing to do with the “demand deficiency” mumblings of the late professor JM Keynes. It was a supply-side shock ordered by Dr. Fauci and his minions.
Accordingly, there was no need whatsoever for the resulting $6 trillion of demand stimulus. Households quarantined in their homes were already involuntarily building up cash because the normal spending venues were closed, and those who became laid-off had access to unemployment insurance benefits from the existing federal-state system.
The solution all along, therefore, was to remove the supply-side barriers to commerce caused by the Virus Patrol. There was literally no need or excuse for the multiple rounds of demand-side stimmy checks from Uncle Sam to nearly 100 million households or the $600 per week unemployment benefit toppers; and, most especially, not the $800 billion of no questions asked PPP payments to anyone who claimed to be a small business.
The only effect of all this unhinged spending madness was to create new demand without additional supply; add trillions to the already bloated public debt; and pull forward in time household spending that would have occurred in the normal course, anyway.
In this misguided process, of course, the U.S. economy was whip-sawed like never before.
Whipsaw Of Business Inventory-To-Sales Ratio, 2018 to 2022
As we indicated, once you peel back the effect of inventory restocking, the stagnation of the U.S. economy is starkly apparent. For instance, in the case of the industrial production index, which covers all of manufacturing, energy, mining and utility output, the level in March 2022 stood at 103.5.
As it happened, the index posted at a nearly identical 103.4 in December. Call it nine months of “growth” to nowhere!
Industrial Production Index, March to December 2022
Needless to say, none of this madness would have happened without the enabling hand of the Federal Reserve.
Had the Fed not exploded its balance sheet from $3.8 trillion on the eve of the COVID Lockdowns to a recent peak of $9 trillion, thereby monetizing massive amounts of public debt, the $6 trillion of congressionally enacted COVID bailouts in hardly 12 months time wouldn’t have happened. That’s because even an attempt to borrow that much money would have sent interest rates soaring and local business and mortgage borrowers to the political barricades.
Back in the day we called this “crowding out.” That is to say, the re-allocation of the available savings supply to Uncle Sam, which occurs when honest financing of the public debt is done in the bond pits.
But when massive Federal debt emissions are indirectly financed at the Fed’s printing press, the political system loses it bearings. Interest rates remain artificially low, causing the natural anti-deficit constituencies to be silenced and elected politicians to be transformed into the equivalent of kids in the candy store.
This political inoculation effect is dramatically evident in the chart below. Between Q1 2000 and Q3 2020, the public debt (black line) increased by 400%, but actual interest payments (purple line) rose by only 62%. Moreover, the figures in the chart below are for gross interest without the conventionally booked offsets for the $100 billion of Federal Reserve profits on its holdings of the public debt which were being repatriated to the U.S. Treasury annually.
Of course, all free lunches come to an end. With interest rates now rising rapidly, debt service costs have nearly doubled in recent quarters and the catch-up is just beginning.
Interest Payments Versus The Public Debt, 2000-2022
Still, the runaway public debt is not the only ill that results from rampant money-printing at the Fed. Another untoward effect was the financialization of the economy—a process which inherently pushed financial assets to the top of the economic ladder.
One dramatic measure of this is found in the Fed’s own data on the distribution of time deposits and other liquid investments among households by economic status. This is shown in the chart below, where it is evident that after the Fed began money-printing in earnest in response to the dotcom crash, the aggregate level of these assets went skyward.
In Q1 2000, for example, total time deposits and other short-term investments amounted to $2.76 trillion, a figure which soared to $11.06 trillion by Q1 2022. That represented a growth rate of 6.50% per annum, far above the 4.75% per annum growth of nominal GDP during the same period.
But it was the distribution of this mounting pile of financial assets that tells the more important story. Namely, it went to the top of the economic ladder in vast disproportion.
For instance, during that 22 year period, assets held by the bottom 50% of households (blue layer of the chart) rose by just $177 billion or 2.1% of the $8.3 trillion total gain. By contrast, liquid assets held by the top 1% of households (purple layer) rose by $2.35 trillion or 13 times more.
Indeed, the growth rate of these financial assets among the wealth tiers over this two decade period leaves little to the imagination. It amounted to a systematic distribution to the top. Yet the mad money-printers domiciled in the Eccles Building insist they had nothing to do with the outcome shown below.
Compound Annual Growth Rate Of Liquid Financial Assets, Q1 2000 to Q1 2022, By Household Percentile
- Bottom 50%: 3.49%;
- Next 40%: 5.30%;
- Next 9%: 7.05%;
- Top 1%: 8.44%
Time Deposits And Other Short-Term Investments By Wealth Percentile, 1990 to 2022
As we will elaborate in future posts, the Fed has spawned bubbles everywhere—-stock market bubbles, bond bubbles, debt bubbles, real estate bubbles, crypto-bubbles, even labor market bubbles.
So the Keynesian fools who inhabit the Eccles Building might consider putting out a banner saying “Bubbles R-Us”.
At least that would clarify their actual function.
This article was originally featured at David Stockman’s Contra Corner and is republished with permission.