Monday, December 22, 2014

Voodoo Economics

David Stockman found religion in terms of intelligent economic analysis after his stint as Reagan's OMB director whereby Voodoo Economics reigned supreme, policies that did not work due to how the system was gamed, something very different to how Eisenhower ran things, a president who, IMHO, understood what sound economic policy was all about.

 Reaganomics (/reɪɡəˈnɒmɪks/; a portmanteau of Reagan and economics attributed to Paul Harvey)[1] refers to the economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics by political opponents and free market economics by political advocates.

The four pillars of Reagan's economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation.[2]

Stockman's latest missive, The Fracturing Energy Bubble Is the New Housing Crash, rings true regarding Shale Oil, fracking's first cousin, the one trick pony whose rather limited act is in its final phase of existence.

In short, the Fed exported bubble finance to the entire world, but most especially China and the EM. The upshot was an extended era of booming but phony global growth, and a consequent artificially high oil prices at $115 per barrel.

When central bank inflated oil prices were coupled with lunatic junk bond yields in the US shale patch at barely 300 bps over the central bank repressed yield on the US treasury note, the result was the same old bubble thing. Namely, a half trillion dollar flow of high yield bonds and loans to the energy sector, and a wholly artificial explosion of US shale liquids production from 1 million to more than 4 million barrels per day.

Like in the case of the housing bubble, the energy boom was an accident waiting to happen— testimony to another even grander experiment by the madmen running the world’s central banks.  It is now exploding right on schedule. The plunging graphs subsequent to the housing bust are now being re-gifted to the energy patch and all the bloated, unstable chains of finance and real economic activity which flow from it.

The graph above, which shows that every net job created in the US during the last seven years is attributable to the shale states, will be one of the first to morph into a less happy shape.

But there is something else even more significant. The global oil price collapse now unfolding is not putting a single dime into the pockets of American households—-the CNBC talking heads to the contrary notwithstanding.  What is happening is the vast flood of mispriced debt and capital, which flowed into the energy sector owning to the Fed’s lunatic ZIRP and QE policies, is now rapidly deflating.

That will reduce bubble spending and investment, not add to economic growth. It’s the housing bust all over again.

Any questions?

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