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The Rats Keep Pressing The Bar: Two Amazing Stories, One Inevitable Result

Anyone who doubts that the global financial system has run out of (good new) ideas has only to track the recent words and deeds of central bankers and mainstream economists: Slightly-negative interest rates didn’t lead people to borrow more? We’ll go more negative! Buying up all the government bonds didn’t prevent deflation? We’ll start buying corporate bonds and equities!

Still, it’s shocking to see where this endless repetition of the same actions takes us. A recent Bloomberg article, for instance, notes that even though corporate profits are falling and individual investors are dumping equity mutual funds, company share buybacks are surging:

There’s Only One Buyer Keeping S&P 500’s Bull Market Alive

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year.

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

Share repurchases March 16

“Corporate buybacks are the sole demand for corporate equities in this market,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in a Feb. 23 Bloomberg Television interview. “It’s been a very challenging market this year in terms of some of the macro rotations, concerns about China and oil, which have encouraged fund managers to reduce their exposure.”

Should the current pace of withdrawals from mutual funds and ETFs last through the rest of March, outflows would hit $60 billion. That implies a gap with corporate buybacks of $225 billion, the widest in data going back to 1998.

Another recent Bloomberg article highlights the emerging school of economic thought that says governments’ big mistake of the past decade was to borrow and spend too little:

Ignored for Years, a Radical Economic Theory Is Gaining Converts

In an American election season that’s turned into a bonfire of the orthodoxies, one taboo survives pretty much intact: Budget deficits are dangerous.

A school of dissident economists wants to toss that one onto the flames, too.
It’s a propitious time to make the case, and not just in the U.S. Whether it’s negative interest rates, or helicopter money that delivers freshly minted cash direct to consumers, central banks are peering into their toolboxes to see what’s left. Despite all their innovations, economic recovery remains below par across the industrial world.

Calls for governments to take over the relief effort are growing louder. Plenty of economists have joined in, and so have top money managers. Bridgewater’s Ray Dalio, head of the world’s biggest hedge fund, and Janus Capital’s Bill Gross say policy makers are cornered and will have to resort to bigger deficits.

“There’s an acknowledgment, even in the investor community, that monetary policy is kind of running out of ammo,” said Thomas Costerg, economist at Standard Chartered Bank in New York. “The focus is now shifting to fiscal policy.”

Currency Monopoly
That’s where it should have been all along, according to Modern Money Theory. The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.

Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen — but they’re also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don’t need to finance spending by collecting taxes, or even selling bonds.

In the U.S., one presidential candidate is at least listening to MMT economists. Advisers to Bernie Sanders include some of the school’s leading advocates: Stephanie Kelton, a Sanders hire to the Senate Budget Committee, and James K. Galbraith, whose father helped shape President Lyndon Johnson’s “Great Society” programs.

The match makes sense. Sanders is promising massive investments in health, education and infrastructure. Economists who see more danger in fiscal austerity than looseness make natural allies.

At first glance, corporate share buybacks and a theoretical debate over fiscal policy might seem like unrelated developments. But in reality they’re both parts of the meta-trend of policy makers becoming lab rats obsessively pressing the bar that used to dispense treats, even though the treats have run out.

Corporations buying back their shares at record prices while their profits are plunging (thus requiring them to buy at the top on margin, a classic dumb-money behavior) are doing something that has failed miserably at the peak of most previous business cycles. Yet corporate treasurers and CEOs, despite being old enough to remember several such cycles, are still compelled to press the bar because they have no other way of quickly goosing the share price — and thus the year-end bonus pool.

Economists who want governments to run bigger deficits financed with newly-created currency seem to miss the fact that today’s policy is already pretty much that. When a central bank buys most of the bonds its government issues, that government is in effect financing itself directly through money printing. So Modern Monetary Theory is being tried on a vast scale as this is written.

And so far, this combination of massive deficits and multi-trillion-dollar bond purchases isn’t working. Inflation is negative in huge sections of the world and growth is anemic at best pretty much everywhere. But here again, that bar is just so tempting because back in the 1950s or 1980s or whenever it yielded such tasty treats. So we get the spectacle of the BoJ and ECB running out of government bonds to buy and turning to corporate bonds and equities, thus directly financing even more than their governments’ deficits.

The implication is that these ideas will be taken farther than ever in coming years. And their inevitable failure will be commensurately epic.

12 thoughts on "The Rats Keep Pressing The Bar: Two Amazing Stories, One Inevitable Result"

  1. Besides the irony of “Modern MONETARY Theory” advocating greater FISCAL action, basically what’s being proposed is un-backed (by debt/bonds) money creation to fund anything and everything ad infinitum. Another irony is that such a scheme would require the central banks (e.g., the Fed) to “print”/create currency/digits “off the books” because there would be no corresponding “asset” (ordinarily government bonds) to balance it. Therefore, not only would the governments have to agree to such a thing, so would those governments’ central banks.

    Now, here’s the most fascinating part – at least to me – the Gov/CBs would only agree to this iff (i.e., “if and only if” from 8th grade math) they think the vast majority of people won’t understand what’s being done. If people get it, then price inflation will very quickly wipe out every possible advantage such a scheme might provide. If they don’t then the usual hierarchy of those who get the new money first will benefit the most.

    No matter what, I don’t see how this game would ever end other than by collapse, and the weird thing is, neither do the promoters of MMT.

  2. Brilliant metaphor. Too bad these idiotic or criminal rats are going to destroy the world in the process, if they haven’t already.

    1. They are not destroying it, in their minds. They are merely sowing the chaos that is required to impose THEIR order when people have had enough of the chaos.
      To destroy OUR world and culture is required and part of the plan. We must submit to their will and their “peace”, whether we like it or not. Plunderer James Warburg said that clearly in front of a Senate committee in 1950: “We shall have world government, whether or not we like it. The question is only whether world government will be achieved by consent or by conquest”.
      So far, nothing has changed this policy and path we are on… and we are a darn sight nearer to their goal than in 1950.

  3. This is precisely why I’m voting for Bernie Sanders.. The faster this economy goes of the rails & burns, the sooner newly-rational men & women can begin rebuilding from the ashes of difficult lessons learned the hard way.
    Let’s get it on.

      1. Bernie has said specifically that he intends to use central bank policy to fund “free” higher education and simultaneously retiring existing student debt. Extrapolating this socialist fantasy to its natural conclusion, the United States under a Bernie Sanders administration will closely resemble Venezuela.

  4. ” Whether it’s negative interest rates, or helicopter money that delivers freshly minted cash direct to consumers, central banks are peering into their toolboxes to see what’s left.”
    You would think, by this time, it would be obvious that the Fed’s helicopter has been dropping cash into the roofs of the big banks that own it, and not “direct to consumers.” They still charge 10-20+% to their cardholders, pay savers nothing, and if that were not bad enough, the new trend of NIRP amounts to nothing but a new tax, all of which proceeds go to these same banks.

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