While Wall Street Bubbles, JayPo Babbles

If you want to understand why we are heading for a financial Gotterdammerung, just consider the specious nonsense and mendacious cant that issued from JayPo’s post-meeting presser last week. It’s all the worse because this drivel is not just his opinion – it embodies the oppressive groupthink of the entire central bank and its Wall Street megaphones, servitors and overlords ( e.g. Goldman Sachs).

In again insisting there were no visible signs of excessive speculation and threats to financial stability ( viz. why would Wall Street admit otherwise?), Powell claimed, among other things, that the undeniable eruption of business borrowing since the financial crisis was no sweat whatsoever.

In fact, he claimed that business and household debt were two of his four measures of financial stability and that all was copacetic on those fronts:

In terms of households and businesses, households entered the crisis in very good shape by historical standards. Leverage in the household sector had been just kind of gradually moving down and down and down since the financial crisis. Now, there was some negative effects on that. People lost their jobs and that sort of thing. But they’ve also gotten a lot of support now. So, the damage hasn’t been as bad as we thought. Businesses, by the same token, had a high debt load coming in. Many saw their revenues decline. But they’ve done so much financing, and there’s a lot of cash on their balance sheet. So, nothing in those two sectors really jumps out as really troubling.

WTF is he talking about?

During the 19 months since August 2019, the Fed has injected a staggering $3.9 trillion of freshly minted cash into the canyons of Wall Street. Some of this massive balance sheet expansion temporarily ended-up as elevated business and household cash balances for one simple reason: The fiscal authorities and the red hot corporate/junk debt markets have been dispensing the Fed’s tsunami of cash faster than households and businesses can actually spend it!

And this is called evidence of financial health and stability?

No, it’s self-evidently a mindless, over-the-top experiment in money-printing that all of history and all of the laws of rational finance militate against.

After all, how can you call a 103% expansion of the Fed’s balance sheet rational during a 19 month period in which the indicators of main street activity have all fallen backwards?

Percent Change: Q4 2020 Versus Q3 2019

• Federal Reserve balance sheet: 103%;
• Nominal GDP: -0.2%;
• Business sector value added: -0.6%;
• Industrial production: -3.3%;
• Total labor hours worked: -5.1%%;

Federal Reserve Balance Sheet, August 2019 to February 2021

In the sections below, we demonstrate how Washington has turned the Fed’s massive outpouring of fiat credits into a simulacrum of excess “savings” in the business and household sector, when the truth of the matter is that both are drowning in record debt.

The fact that JayPo would focus on these utterly artificial and transient cash balances while ignoring the record $34 trillion of debt held by the household and nonfinancial business sectors combined is surely not an oversight; it’s mendacity of the first order, or, less politely, a pack of lies.

First, consider the explosion of checkable deposits and currency held by households. Between the pre-Covid benchmark in Q4 2019 and Q4 2020, these balances soared by nearly $2 trillion or 189%. That was off the charts of history as shown below.

In fact, the checkable deposit/currency level was virtually flat at $1.0 trillion between early 2014 and the end of 2019, and only erupted skyward when the stimmy checks, UI top-ups and other Washington free stuff began pouring into households in April 2020.

Household sector balances of checkable deposits and currency, 2000-2020

Moreover, balances in savings and money market accounts also rose substantially during the year of the Covid. These account balances stood at $12.4 trillion in Q4 2019 and had risen by $838 billion to $13.2 trillion by Q4 2020.

In all, combined household cash accounts – checking, savings and money markets – stood at an off-the-charts $16.49 trillion at the end of Q4 2020. That represents a $2.8 trillion gain during this 4-quarter period (brown bars in the chart below).

For perspective, the total deposit gain during 2019 compared to 2018 was just $980 billion or only 34% of the gain during 2020. And during 2018 and 2017, the gain was just $525 billion and $405 billion, respectively.

In any event, the chart below tells you all you need to know. Until the 2020 outbreak of Fed money printing and Washington Everything Bailouts, the year-over-year gain in total household cash account balances (brown bars) varied between $400 billion and $800 billion, while checking account balances alone (purple bars) barely changed at all.

Year-Over-Year Change In Total Household Cash Account Balances (brown) and Checking Accounts (purple), 2011-2020

Needless to say, the above eruption in America’s checking and other cash accounts did not happen because wages and salaries were booming, thereby providing the wherewithal for a $2.8 trillion gain in available cash. Actually, between Q4 2019 and Q4 2020, aggregate wage and salary disbursements rose by only an anemic $40 billion or just 1.4% of the gain in cash deposits!

No, America did not go on an ultra-austerity diet on the consumption spending front, either. Between Q4 2019 and Q4 2020, personal consumption expenditures declined by only $320 billion or 2.2%, notwithstanding the lockdowns and stay-at-home orders. These so-called Covid mitigation measures mainly caused consumption spending to shift from services that were closed by orders of the state to goods that could be ordered on-line and delivered to the doorstep.

Taken together, higher wages and lower spending add up to just $360 billion over the four quarter period, and this change accounts for just 13% of the surge in checking and other cash deposits.

So the question recurs: Is there something wrong with the NIPA (national income and products accounts) math or is JayPo’s assertion that households are financially solid because they’ve got a lot of cash just a load of self-justifying baloney?

The answer, of course, is yes and yes.

The NIPA accounts were designed by Keynesian economists 80 years ago and are inherently flawed; and the current head of the most powerful financial institution on the planet does not, apparently, even know the differe

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Article from LewRockwell

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