With every passing week that money markets rates remain pinned to the zero bound by the Fed—–the magnitude of the financial catastrophe hurtling toward main street America intensifies. That’s because 80 months—– and counting—–of zero interest rates are fueling the most stupendous gambling spree that Wall Street has ever witnessed or even imagined. Sooner or later, therefore, this mother of all financial bubbles will splatter, bringing untold harm to millions of households which have been lured back into the casino.
Then truth is, zero cost in the money market is irrelevant to main street. As we have repeatedly demonstrated the household sector is stranded at “peak debt” and, consequently, there is no interest rate low enough to elicit a pre-crisis style spree of consumer borrowing and spending. Based on the clueless jawing that occurred this weekend at Jackson Hole, the following simple chart that I laid out last week bears repeating:
On the eve of the financial crisis in Q1 2008, total household debt outstanding—including mortgages, credit cards, auto loans, student loans and the rest——– was $13.957 trillion. That compare to $13.568 trillion outstanding at the end of Q1 2015.
That’s right. After 80 months of ZIRP and an unprecedented incentive to borrow and spend, households have actually liquidated nearly $400 billion or 3% of their pre-crisis debt.
Likewise, zero money market rates are irrelevant to legitimate business finance. That’s because no sane executive would finance the life blood of his enterprise—–the working stock of raw, intermediate and finished goods——in the overnight money market; and self-evidently free overnight money is beside the point when it comes to funding long-term, illiquid but productive assets such as plant, equipment and software.
In fact, the only impact that free money market funding has on corporate America is round-about and perverse. To wit, it flushes money managers into a desperate quest for yield and provides stock speculators with endless opportunities to load