A Fed Insider Comes Clean on the Everything Bubble

Monday, March 18, 2019
By Paul Martin

by Phoenix Capital
Mon, 03/18/2019

The Fed just realized two things:

1) It cannot normalize policy EVER without blowing up the Everything Bubble/ financial system.

2) The Fed is well behind the curve when it comes to dealing with the next downturn.

Regarding #1, we’ve had some developments in the last month.

Recently, Dallas Fed President Robert Kaplan published an article on one of the Fed’s websites outlining the risks to the corporate bond market.

U.S. nonfinancial corporate debt as a percentage of GDP is now higher than the prior peak reached at the end of 2008…Nonfinancial corporate bonds outstanding in the U.S. grew from approximately $2.2 trillion in 2008 to approximately $5.7 trillion at year-end 2018…

Source: The Dallas Fed

Kaplan is here admitting that the US corporate space is now MORE leveraged to the real economy than it was in 2008. He notes, that as a result of this, the US economy is MUCH more sensitive to interest rates.

An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest rate sensitive than it has been historically.

Source: The Dallas Fed

Even more astonishing Kaplan stated that THIS was the reason why the Fed has decided to stop hiking interest rates!

In January I suggested this was the primary reason why the Fed made such an abrupt U-turn regarding monetary policy. It’s truly extraordinary that a Fed President is confirming this in public.

Remember, the primary mandate of the Fed is to maintain financial stability. This inherently means downplaying risks/ potential threats to the financial system/economy. So as much as you or I would like the Fed to be bluntly honest, the fact is that the Fed has to sugarcoat things to avoid panics.

With that in mind, the above admission by Fed President Kaplan is BEYOND extraordinary. Here we have the head of a regional Federal Bank admitting on record that the financial system, specifically the corporate bond market, is now MORE leveraged than it was in 2008 as direct result of Fed policy.

The Rest…HERE

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