Notes From Underground: Where Have You Gone Paul Volcker? Our Nation Turns Its Lonely Eyes To You

Today, in an act of major disfunctionality, St.Louis Fed President James Bullard called out CNBC‘s Jim Cramer about his continual call to keep rates at zero. Mr. Bullard called Cramer’s continued push for the FED to remain as easy as possible “unsavory.” The fact that Jim Bullard went into Cramer’s den to state his case is unsavory. If the Fed is so concerned about the pressure emanating from the CNBC airwaves, why would you lend them more credibility by appearing on Squawk Box? Fed Presidents and Governors are always making themselves available to the electronic media in an effort to “enlighten” the public. Can the FED really be concerned about the daily discussions about policy and the pressure it might provide to keep equity markets elevated? Please bring back Volcker and restore some dignity to the world’s central bank.

Besides the Bullard discussion, me and Rick discussed the possible reasons behind the FED‘s decision to hold rates at the zero bound and for Chair Yellen to deliver a very dovish press conference. The bottom line was that something is unnerving the FED and other central banks. I cited the possibility of the growth of global debt as reported in February in a McKinsey report. When in doubt look to the debt/credit markets.

Besides my hit with Rick, I advise watching Rick’s solo hit an hour later in which he lays out the data in the McKinsey report. The report, “Debt and [not much] Deleveraging,” details out that the global stock of outstanding debt increased $57 trillion since the second quarter of 2007, growing from $142 Trillion to $199 Trillion. If GDP growth is slower than debt accumulation then the global debt pile will have problems being serviced. This MAY be the key to the Fed’s trepidation about raising rates. What we will be watching is what this will mean for possible trades going forward. Enjoy the hits (they’re linked in the text above) and be back Thursday.


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18 Responses to “Notes From Underground: Where Have You Gone Paul Volcker? Our Nation Turns Its Lonely Eyes To You”

  1. Chicken Says:

    The bottom line is, the thieves at the FED simply pumped another bubble on behalf of their future employers.

  2. Alex Says:

    “If GDP growth is slower than debt accumulation then the global debt pile will have problems being serviced. This MAY be the key to the Fed’s trepidation about raising rates.”

    I don’t think ‘MAY’ is the right word to use Yra,

    ‘IS’ would be better.

    These jokers are trapped and they know it.

    Forget about all the talk about long term and prudent planning. They like the politicians are only after the quick fix, what will work today is important and to hell with next month. Hopefully when that time comes another quick botch job will do the job. That strategy will normally work for sometime until it doesn’t then the whole thing blows sky high.

    But then, we probably all know what the excuse will be – blame it on external events out of their control. Japan/Europe/EM/Uncle Tom Cobley, it all sounds good and the media will play along, they always do.

    Then repeat the whole sorry exercise.

  3. pittrader1988 Says:

    If debt is growing faster, then wouldn’t it be better to raise interest rates and create different economic incentives?

  4. yra Says:

    pit trader–yes but that ship sailed in the time of the taper tantrum—the Fed has moved the goal posts so often it has cost them but of course KrugmaN ET.AL would argue to look at Sweden

  5. The Bubble is Somewhere Else Points and Figures Says:

    […] another bubble in response to the financial crisis of 2008.  There is a debt bubble and my friend Yra Harris wrote about it.  There has been a large increase in the global growth of debt.  Debt is a double edged sword. […]

  6. Joe Says:

    This is a continuum of our institutions using the popular culture to explain and gain wider acceptance. Maybe Bullard’s next appearance is on Jimmy Fallon?

    • yra Says:

      Joe–absolutely.It is an infamnia that Bullard takes to the airwaves or any FED governor would do that—when does transparency become lunacy

  7. Dan DeRose Jr Says:

    Yra, Bill Gross discussed this very topic 1 yr ago and included some discussion of rate curves as the epicenter of concern. With 1 yr rates up to 33bp from 9, 1y1y rates unch at 1.10, and 1y2y rates lower by 45bp, one has to wonder if it’s the widening in credit spreads that has the Fed concerned (wider by 20 in IG and 40 in HY but that overlooks the distribution of changes across industries) or solely USD strength/emerging markets. Regardless, there’s bound to be some opportunity if one believes in the ‘don’t fight the Fed’ mantra. (I’ve never been much a fan.)

    As an aside, this whole discussion (large build up of debt caused by low rates preventing normalization caused by large debt) reminds me of Einstein, a real physicist.

    “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction.”

    Gross link:

  8. yra Says:

    Dan–great post and the last note is why we love Professor Waspi and should be lining up to take his finance course

  9. Rob Syp Says:

    It wasn’t enough for Volkswagen to have the benefit (competitive advantage) of the Euro as you have wonderfully wrote about over the years especially the era vs. the Yen. Now comes this new round of chicanery…..

    On the subject of the Euro which has been a main theme of your blog and being a sounding board of The Rotten Heart of Europe when does the refugee migrant crises become an issue or it already is?

    You wrote maybe a month ago it’s been quiet times for Mario!

  10. arthur Says:

    Interesting Paul Volcker interview…

  11. Chicken Says:

    The clock must’ve fallen off Mario’s office wall.

  12. yra Says:

    Rob Syp–the refugee migrant issue will explode on the scene in time especially as Germany suffers from the VW debacle of arrogance.The French are having a bout of Shadenfreude and this will cause more stress in the germany-France relationship.This weekend brings the Catalan election–pay attention for we will get a sense of the disenchantment in Spain.The Spanish economy has been the rave of all buy analysts pushing for increased exposure to Europe–watch these results this weekend

    • Chicken Says:

      Catalan Separatists Win Narrow Majority in Regional Elections

      They’re tired of the same old thing, or should I say, the old same thing?

  13. yra Says:

    arthur–thanks for linking the recent Volcker interview–a good read for those wanting a living history of global macro

  14. Chicken Says:

    Peeking under the hood, it appears bulls were flattened again this week.

  15. Dustin L. Says:

    Great stuff Yra! It’s hard not to admit the Fed is stuck between a rock and hard place. The term “fiscal dominance” I feel is worth everybody’s time familiarizing themselves with. It is a nice quick summation of the challenges faced by the the world’s central banks. Do markets and the CB’s think we can grow our way out of this debt overhang, or that we need to monetize it? As much as I feel real capital is destroyed in monetization and thus progress in holding r< (time preference + inflation), I think it is politically the most savoury politically. In the process you can make those evil creditors of the world the scapegoats and vilify them. A mix of select defaults and monetization is still in my opinion the most likely outcome to ditch our world of debt overload and get a fresh start at more sustainable levels however, at great cost and pain. That said, it's probably worth a try to raise rates and see what happens. I would like to pose a question to everyone, do you believe policy makers can get away with financial repression? Or will capital prove to win the day and punish the central planners policy wonks who think they are in control? What are the implications for capital flows and the unintended consequences? These are key questions going forward for economies and market outcomes. To borrow Ben Hunt's framing of these questions, ultimately do you believe in central bank and central planners omnipotence in driving market outcomes? I think that is a more complex and loaded question than many, including myself, perceive. (Note, the question implies not can our central planners drive markets successfully to effective outcomes but, rather can they effectively control asset prices at all over long periods?)

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