JUNK BONDS FOR OIL UNDER PRESSURE

With oil prices down by over 20% this year, the junk bonds for oil exploration are under major pressure. The tipping point is imminent. The economics of this is explained here.

David Stockman refers to this possibility in this excellent video.  Here is Stockman's Contra Corner website.

He thinks that our economy is on the edge of a major crisis. I am not convinced of this, but if we are talking two or three years out, I agree.

The problem is the yield curve. Always before, it offered a good indicator of recession. It is not now. Short-rates are still low.

He thinks the FED will be called into question during the next crash. I think he is correct. But will the Federal Reserve Act of 1913 be repealed? I doubt it.

Today, only Rand Paul is openly hostile to the FED. The Republicans are Keynesians. So, there is no strong opposition.

The interview is very good on Keynesianism. This outlook is bipartisan. There is no real opposition to the FED or federal deficits. The stock market bubble protects the FED from criticism. Next time when it pops, more critics in Congress will pile on the FED. But will there be enough to force a repeal of the 1913 Act? Don't invest in terms of this scenario.

Reality: there is no Paul Volcker today at the top of the FED. There is also no crisis.

My view is this: there is more criticism of the FED today than in 2007. Ron Paul spearheaded this in the 2007 lead-up to the 2008 Republican primaries. Then the recession hit. On the fringes of politics, there is a growing awareness that the FED's policies are not working well.

We are not crazy. The Keynesians are crazy. They believe in stones into bread, as Mises said in 1948. Read his short article here:  http://mises.org/daily/1840. But 1948 was a long time ago. Mises was not believed then. We are not believed today.

The FED will not be immune next time, but I do not expect Congress to eliminate it. Yellen will call for more power. Congress in terror will grant this, complaining all the way. "We will give you more power this time. But don't let this happen again." She will assure Congress that the FED can get things under control again.

Why the capitulation? Because someone has to buy the government's IOU's. That has been the political bottom line ever since 1694: the Bank of England.

But the Keynesian program is coming unglued in Japan. Europe is not much better. China could also crash. With each cycle, the foundation of fiat money looks less sustainable. But in the meantime, critics of central banks sound utopian.

This article and video originally appeared at Gary North's Specific Answers.