In this item at his Contra Corner blog, David Stockman again has a hard time accepting the idea that the solution to our economic woes is as simple as spurring aggregate demand after the savings rate went to zero and the nation reached peak debt a few years back.
The Fed can do only do two things to influence these income and credit sources of spending—–both of which are unsustainable, dangerous and an assault on free market capitalism’s capacity to generate growth and wealth. It can induce households to consume a higher fraction of current income by suppressing interest rates on liquid savings. And it can inject reserves into the financial system to induce higher levels of credit creation.
But the passage of time soon catches up with both of these parlor tricks. When household savings decline to the vanishing point, as has occurred since the turn of the century, there is no more incremental spending to be extracted from current income.
Likewise, when balance sheets become totally exhausted with leverage—as is also the case at present—there are no more one-time increments to spending available from the simple expedient of ratcheting-up household and business leverage ratios. That condition amounts to “peak debt” and it characterizes upwards of 90% of US households today.
Of course, this condition is more politely called “a balance sheet recession” and, as we’ve learned in recent years, one of the common side effects of central bank handling of balance sheet recessions is ever larger, increasingly dangerous asset bubbles.