The Fed desperately needs to keep credit expanding or the economy will tank. But it's an unsustainable scheme.

Key Credit Points

• In 1984 it took $1 of additional debt to create an additional $1 of Real GDP.
• As of the fourth quarter of 2018, it took $3.8 dollars to create $1 of real GDP.
• As of 2013, the national debt was growing faster than GDP

If interest rates were 3.0%, interest on total credit market debt would be a whopping $2.16 trillion per year.

That approximately 11.5% of real GDP year in and year out.

Total Credit Market Debt Owed Detail

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Note that small credit contraction in 2008-2010. Recall the 'Great Recession" damage that accompanied it.

I do not expect a Great Recession repeat on that scale, all at once. But I do expect a prolonged period of credit stagnation as retiring boomers start to worry about their retirement. All it will take to set the wheels in motion is a prolonged downturn in the equity markets.

Total Credit Q&A

Q: How could such a tiny have such a great impact?

A: Banks were overleveraged and insolvent.

Choking on Debt

The Fed desperately needs to force more debt into the system, but the system is choking on debt.

One look at the above charts should be enough to convince nearly everyone the current model is not close to sustainable.

Here's another.

Housing Bubble Reblown

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How the heck are millennials (or anyone who doesn't have a home) supposed to afford a home?

Despite the fact that Existing Homes Prices Up 88th Month, the NAR Can't Figure Out Why Sales Are Down.

Negative Yield Ponzi Scheme

Note that Negative Yield Debt Hits Record $15 Trillion, Up $1 Trillion in 2 Business Days.

So far, all of this negative-yielding debt is outside the US.

Why?

1. The demographics in Europe and Japan are worse than the US.
2. Also note that the ECB made a huge fundamental mistake. Whereas the Fed bailed out US banks by paying interest on excess reserves, the ECB contributed to the demise of European banks, especially Italian banks and Deutsche by charging them interest on excess reserves that it forced into the system.

Tipping Point

We are very close to the tipping point where the Fed can no longer force any more debt into the system. That's the clear message from the bond market.

It will not take much of a credit decline to wreak havoc once again.

Currency War

Under orders from Trump, the US Treasury Declares China a Currency Manipulator

Negative interest rates on nearly half of European debt is another sign of a currency war.

The only way central banks have of forcing more debt into the system is via competitive currency devaluations.

Deflationary Outcome

For decades, bond bears have been predicting massive inflation.

Once again, I caution Hello Treasury Bears: 10-Year Bond Yield Approaching Record Low Yield.

The Fed is struggling mightily to keep inflation up. The sad thing is the Fed is clueless how to measure it.

The Fed does not see "inflation" because it looks at consumer prices, excluding housing.

Asset bubbles in junk bonds, in housing, and in equities are signs of inflation. The Fed missed those signs just as it did in in the housing bubble years.

Deflation Happens When Bubbles Burst

The existing bubbles ensure a deflationary outcome. And once again it will not take much of a credit decline to have a huge impact.

The system now requires increasing amounts of leverage to stay operational. That's what the first chart shows.

So prepare for another round of debt deflation, possibly accompanied by a lower CPI, especially if one accurately includes home prices instead of rents in the CPI calculation.

The currency war is merely a sign of the stress. Here's another: Gold Blasts Through $1500: Message? Central Banks Out of Control, Not Inflation.

Inflation will soon be in the rearview mirror, with the Fed once again missing the massive amount of inflation we actually had.