Tag Archives: QE

QE’s Creeping Communism, by Peter Schiff

Want to know how endless quantative easing turns out? You need look no farther than Japan. From Peter Schiff at europac.com:

Most economists and investors readily acknowledge that the current period of central bank activism, characterized by extended bouts of quantitative easing and zero percent interest rates, is a newly-blazed trail in economic history. And while these policies strike some as counterintuitive, open-ended, and unimaginably expensive, most express comfort that our extremely educated, data-dependent, central bankers have a pretty good idea as to where the trail is going and how to keep the wagons together during the journey.

But as it turns out, there really isn’t much need for guesswork. As the United States enters its eighth year of zero percent interest rates, we should all be looking at a conveniently available tour guide along the path of perpetual easing. Japan has been doing what we are doing now for at least 15 years longer. Unfortunately, no one seems to care, or be surprised, that they are just as incapable as we have been in finding a workable exit. When Virgil guided Dante through Hell, he at least knew how to get out. Japan doesn’t have a clue.

Despite its much longer experience with monetary stimulus, Japan’s economy remains listless and has continuously flirted with recession. In spite of this failure, Japanese leaders, especially Prime Minister Shinzo Abe (and his ally at the Bank of Japan (BoJ), Haruhiko Kuroda), have recently doubled down on all prior bets. This has meant that the Japanese stimulus is now taking on some ominous dimensions that have yet to be seen here in the U.S. In particular, the Bank of Japan is considering using its Quantitative Easing budget to buy large quantities of shares of publicly traded Japanese corporations.

So for those who remain in doubt, Japan is telling us where this giant monetary experiment leads to: Debt, stagnation and nationalization of industry. This is not a destination that any of us, with the possible exception of Bernie Sanders, should be happy about.

The gospel that unites central bankers around the world is that the cure for economic contraction is the creation of demand. Traditionally, they believed that this could be accomplished by simply lowering interest rates, which would then spur borrowing, spending and investment. But when that proved insufficient to pull Japan out of its recession in the early 1990s, the concept of Quantitative Easing (QE) was born. By actively entering the bond market through purchases of longer-dated securities, QE was able to lower interest rates across the entire duration spectrum, an outcome that conventional monetary policy could not do.

But since that time, the QE in Japan has been virtually permanent. Unfortunately, Japan’s economy has been unable to recover anything resembling its former economic health. The experiment has been going on so long that the BoJ already owns more than 30% of outstanding government debt securities. It has also increased its monthly QE expenditures to the point where it now exceeds the Japanese government’s new issuance of debt. (Like most artificial stimulants, QE programs need to get continually larger in order to produce any desirable effects). This has left the BoJ in dire need of something else to buy. Inevitably, it cast its eyes on the Japanese stock market.

To continue reading: QE’s Creeping Communism

The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That, by Tyler Durden

Zero Hedge touches on a topic that SLL has discussed for years: the diminishing, and eventually negative, marginal return from debt. In other words, debt, because it entails repayment, can be too much of a good thing. Right now, the world is in the too much of a good thing phase, to be followed by a debt contraction, because debt growth has exceed economic growth for many years and so there is more debt in the global economy than it can support. Interested readers are referred to the articles found in the Debtonomics Archive (tab is just above the picture of the train). From Tyler Durden at zerohedge.com:

One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to “BTFD”, we presented a critical report by Citigroup’s Matt King, who asked “has the world reached its credit limit” summarized the two biggest financial issues facing the world at this stage.

The first is that even as central banks have continued pumping record amount of liquidity in the market, the market’s response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster. As King summarized it “models linking QE to markets seem to have broken down.”

Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentally changed and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.

The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining.

King’s take: “there has been plenty of credit, just not much growth.”

Our take: we have – long ago – crossed the Rubicon where incremental debt results in incremental growth, and are currently in an unprecedented place where economic textbooks no longer work, and where incremental debt leads to a drop in global growth. Much more than ZIRP, NIRP, QE, or Helicopter money, this is the true singularity, because absent wholesale debt destruction – either through default or hyperinflation – the world is doomed to, first, a recession and then a depression the likes of which have never been seen. By buying assets and by keeping the VIX suppressed (for a phenomenal read on this topic we recommend Artemis Capital’s “Volatility and the Allegory of the Prisoner’s Dilemma“), central banks are only delaying the inevitable.

The bottom line is clear: at the macro level, the world is now tapped out, and there are virtually no pockets for credit creation left at the consolidated level, between household, corporate, financial and government debt.

To continue reading: The World Hits Its Credit Limit

The Casino Economy: Here’s How the Fed Lost Half Its Bet in 1 Week, by Harry Dent

From Harry Dent at davidstockmanscontracorner.com:

Since the financial crisis, central banks have injected trillions of dollars into the global economy. Their goal: to offset the natural downturn from slowing demographic trends and the crushing debt loads of the greatest credit bubble in history.

The Federal Reserve alone has created $4 trillion in QE since late 2008. They tried to solve an unprecedented debt crisis by adding more debt.

A toddler can tell you how backwards that is!

It’s killed investors looking for safe, long-term yields, while empowering Wall Street and hedge funds to lever up at low costs, and bet the casino on never-ending Fed stimulus.

Likewise, corporations buy back their own stocks to increase their earnings per share. It’s bogus accountant voodoo magic. It’s got nothing to do with fundamentals like growing your business. What a novel concept!

And yet, this is the world we live in today: a world in which governments buy back their own bonds, corporations buy back their own stocks, and Wall Street lives on speculation rather than real lending and investment.

As the Fed and other central banks bought trillions of their own bonds, they drove down interest rates to encourage more borrowing and spending.

But as it turns out, they were a little late to the party!

Consumers and businesses had already over-spent and over-borrowed in the great bubble boom leading up to the financial crisis.

As David Stockman puts it, we had already reached peak debt and excess capacity by 2007. Since we can’t go any higher, there’s just one direction left: building up financial bubbles, then deflation when they inevitably burst. It’s happened every single time in history!

To continue reading: The Casino Economy

The Song Remains the Same, from The Economic Cycle Research Institute

From the Economic Cycle Research Institute, at http://www.businesscycle.com:

Eleven trillion dollars: that’s how much of so-called Quantitative Easing the world’s central banks have done since the 2008 crisis. To put that in perspective, with eleven trillion dollars you could pay off pretty much all U.S. household debt – all mortgages, all car and student loans, credit cards – you name it.

So what did the global economy get for $11,000,000,000,000 in QE?

Following a post-recession pop, we got collapsing world trade growth, and that’s even with prices falling over the past three to four years.

Why is this happening?

It’s not because this time around things are different. To the contrary, the song remains the same.

For a long time, nearly four decades, growth has been getting progressively weaker during each recovery from recession. Of course, the U.S. is a major contributor to world trade and QE, but its trend of weaker growth is present in all major developed economies.

There are two key drivers behind this declining trend: demographics and lower productivity growth. Yes, it’s true that we’ve seen pretty good U.S. jobs growth recently, but that comes with productivity growth slamming down to zero.

Japan, with its “lost decades,” is at the leading edge of this long-term trend. But make no mistake, Europe, and as we see, even the U.S., are not far behind. Knowing this, will a trillion or so of more QE from the ECB make the trends in these charts turn and go the other way?

https://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-ecri-the-song-remains-the-same-1

He Said That? 11/2/14

From Michael Chadwick, CEO of Chadwick Financial, in an interview on CNBC:

At this point not much matters apart from central banker comments, QE, and political promises… I wanna know about valuations, I worry about the consumer; this feels a lot like 1999 to me.

We have to wonder, are the central banks working together; our QE ends one day; Japan QE ramps up the next – you gotta wonder?

Right now the world is a very vulnerable place… we are in the midst of a big bubble that will – down the line – be referred to as “The QE Bubble”

http://www.zerohedge.com/news/2014-11-01/feels-lot-1999-beware-qe-bubble

The cynical amongst us don’t wonder if central banks are working together, we take it as a given. The Japanese stepped up to the plate Friday, announcing its central bank would increase its quantitative easing asset monetization via balance sheet expansion as the Federal Reserve ended its latest program. World equity markets took flight. Why doesn’t the central bank cabal just get it over with and buy up every single piece of paper in the entire world? Dow 100,000 and economic nirvana!

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