David Stockman on Soaring Debt And Plummeting Yields
The comments below are an edited and abridged synopsis of an article by International Man
After decades of money-pumping, the Fed has driven real interest rates so low that there are no more bond investors, just traders and suckers.
The former have driven the 10-year yield to just 150 basis points in nominal terms (and deeply into the red in real terms in the face of surging inflation numbers), because they are pricing in confidence that the Fed will keep buying $120 billion per month of government and quasi-government debt.
Inflation-adjusted yields remained around the 10%+ level for decades, but no more. The real yield is so low that fund managers are throwing caution to the wind and setting themselves up for massive future losses.
That’s not an honest price discovery. It’s the crazed trading fostered by central bankers who have lost touch with history, reality and sound finance.
There is $80+ trillion of public and private debt outstanding, amounting to a staggering 380%+ of GDP.
With each passing month of negative real yields and $120 billion of freshly minted fiat credit, the US economy is looking at burying itself in debt.
During 2020, conventional economics would have suggested a liquidation of business debt, especially when business leverage levels had previously reached dangerous all-time highs.
But not in the Fed’s financial markets. Business debt soared by $1.5 trillion in 2020 or by 50% more than the peak borrowing year of 2007 when companies were on a borrowing binge. This is truly aberrational.
The business leverage ratio stood at 35% in 1947 and plateaued at about 60% by the 1970s. But once the Fed got into the financial repression business, the ratio was off to the races. Business debt now amounts to an off-the-chart 111%.
The Fed can’t explain how the US economy can grow when it is mired in so much debt; how interest rates can be normalized in real terms without blowing up the entire financial edifice; and it doesn’t know what will happen if it continues to signal borrowing like there is no tomorrow by keeping real interest rates submerged in negative territory.