QE is actually an acronym for Quick & Easy money. Bailout Ben effortlessly cranks out US$85 billion each and every month.
He intends to maintain the current pace of Quick & Easy until some magic (or more accurately, conjured) GDP figure pops up on his screen and then he might consider ‘tapering’ the quantity of paper he is pumping out — only if the market doesn’t have a massive tantrum.
Bailout Ben is having a lend of all of us, while at the same time he is lending (via a manipulated bond market) money to the US Government to finance its profligacy at historically low interest rates.
Ben is creating his own Minsky moment — ‘stability leading to instability’.
The following graph shows The Great Credit Contraction is taking its toll in the private sector. Since 2008 nearly US$4 trillion of private sector debt (green line) has been repaid or defaulted on.
To offset this contraction, government debt (red line) has been steadily rising (courtesy of QE). The net effect of the pluses and minuses has been a slightly higher overall debt (blue line).
Bailout Ben is using debt to cure a debt problem. Q & E money is masking the underlying economic malaise.
The private sector has lost its appetite for debt and banks are as equally apprehensive about lending. Hence the stagnating private debt pool. The only willing borrower and lender in the system just happens to be the US Government and its privately owned bank. What a cosy little arrangement.
Private sector engagement is the key to sustained economic recovery and this is not happening. Government fabricated ‘activity’ is nothing more than smoke and mirrors.
To further muddy the waters for the private sector, Bailout Ben is distorting market risk with suppressed interest rates.
Bernanke’s zero interest rate policy (ZIRP) forces investors to seek alternative investments — effectively lowering investors risk thresholds.
This is reflected in the US junk bond yield (as measured by Barclays US Corporate High Yield Index) currently sitting around 6%. In my opinion 6% is nowhere near enough return to offset the possible capital tear-up that can happen when this sector ‘turns turtle’.
Bailout Ben has (so far) produced a great sleight of hand. The post-GFC ‘paper job’ has created the illusion of stability in the system and investors have been suckered into accepting ‘junk’ for a measly 6% return. Well done Ben, you have managed to make a decaying carcass look like rib fillet.
The reality is Bernanke’s Q & E has made the system more unstable than it was in 2008 — that is no mean feat. Printed money is propping up markets, but Wall Street is not Main Street. Trillions of newly minted dollars have not produced any meaningful recovery.
This is reflected in the recent reporting season. The Credit Strategist Michael Lewitt wrote recently,‘Companies warning investors to expect disappointing results outnumbered those promising better results by a 6.5-to-1 margin, the worst ratio since 2001.’
The company warnings make sense when you combine them with Mort Zuckerman’s piece in last week’s Wall Street Journal (emphasis mine):
‘The jobless nature of the recovery is particularly unsettling. In June, the government’s Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "’jobs."’ No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 — three million more part-time positions than when the recession began at the end of 2007. That’s just for starters. The survey includes part-time workers who want full-time work but can’t get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.’
Part-time and under-employed workers do not bask in the glow of Bernanke’s so-called ‘wealth effect’. As an aside, the reason part-time employment is on the rise in the US is due to pure political ‘genius’.
Under the Affordable Healthcare Act (aka Obamacare) employers are not required to pay insurance premiums for temporary employees (those working under 29 hours per week). Guess what, employers just happen to be converting full-time employees to part-timers and new employees are temporary (part-time) workers. Gee what a surprise.
With the US economy still in a critical condition and arguably worsening, we have the ludicrous situation where investors have been conned into accepting a higher level of risk with a much lower return.
All Bailout Ben has done is delay the day of reckoning and guaranteed the biggest market meltdown since The Great Depression — although this one might even be bigger than 1929/30.
Indebted governments (becoming even more indebted with each passing day) have absolutely no way of growing their way out of this problem without a willing and able private sector. That ain’t happening anytime soon.
The only gearing happening in the private sector is from baby boomers ‘gearing up’ for retirement. Therein lies the conundrum; the biggest demographic driver of economic growth in the last thirty years has changed its focus from over- indebtedness to over-50 villages. Tax revenue shrinking and welfare entitlement spending increasing is a surefire way to widen the budget deficit chasm.
Bailout Ben has painted himself into a corner. The mere mention of tapering caused the market to fall 5% in the blink of an eye. The market’s dependency on QE has reached an unhealthy level. Eventually all artificial means of support fail — QE will be no different.
Bernanke’s experiment in trying to defy the history of printed money has failed, it’s just that the chapter has not yet been written. If you want to know how it ends read the ones on Argentina, Yugoslavia, Weimar Republic and Zimbabwe.
How does Bernanke undo the mess he has created? Simple, in early 2014 he intends joining the ranks of boomer retirees. His successor (another political sycophant) will have the ‘privilege’ of standing watch over the impending market train wreck.
Multiple excuses will be given as to why the system failed, but there is only one reason — more debt does not cure a debt problem. The short-term rush by central bankers to create ‘stability’ has sown the seeds for even greater instability.
The Wizard of Oz (Bernanke) has been having a lend of us — lulling investors into a false sense of security.
In my opinion investors should interpret QE as being short for Quick Exit. Run as fast as you can to the safety of cash.
Remember when it comes to a collapsing market, it is better being out a year early than a day late.
for Markets and Money
From the Archives…
Why There’ll Be More Fringe Benefits Tax-Like Bombs in the Future
19-07-13 – Greg Canavan
The End of The Economy Deformed by Easy Money
18-07-13 – Greg Canavan
A World Without Money?
17-07-13 – Bill Bonner
A Credible Threat to Gold?
16-07-13 – Greg Canavan
The Making of a Modern Debt Slave…
15-07-13 – Bill Bonner
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- The presidential decision that paved the way to our six decade-long debt binge: Australia — and the rest of the world — is living a lie. Debt has funded our lifestyle, NOT production and savings. Today’s global debt stands at $200 trillion. That scary number is the official debt level. The real debt tally will spin your head…
- What happens when Australia’s gigantic credit bubble goes ‘pop’: We’ve experienced two previous credit bubbles from 1880–1892 and 1925–1932. The current credit bubble has been building since 1950. A 65 year build-up. What happens when this bubble finally pops? As Vern will show you…it’s not pretty.
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