When "very
serious people" (even if it is those who once ran now defunct Bear
Stearns) announce it, with a 6 year delay, they make the Financial Times.
On the other hand, when Zero Hedge said
precisely this 6 years ago, it was cast as a tin-foil clad group of
conspirators who see the worst in every situation.
What is "it"? This:
The long-term consequences of global QE are likely to permanently
impair living standards for generations to come while creating a false illusion
of reviving prosperity.
In this case, it was said this week by Guggenheim's Chairman of Investments
and Global Chief Investment Officer, Scott Minerd. We are happy that
increasingly more "serious people" come to the same conclusion which
we posited first a 6 years ago.
The Monetary
Illusion
As economic growth returns again to
Europe and Japan, the prospect of a synchronous global expansion is taking
hold. Or, then again, maybe not. In a recent research piece published by Bank
of America Merrill Lynch, global economic growth, as measured in nominal U.S.
dollars, is projected to decline in 2015 for the first time since 2009, the
height of the financial crisis.
In fact, the prospect of improvement in
economic growth is largely a monetary illusion. No one needs to explain how
policymakers have made painfully little progress on the structural reforms
necessary to increase global productive capacity and stimulate employment and
demand. Lacking the political will necessary to address the issues, central
bankers have been left to paper over the global malaise with reams of fiat
currency.
With politicians lacking the
willingness or ability to implement labor and tax reforms, monetary policy has
perversely morphed into a new orthodoxy where even central bankers admittedly
view it as their job to use their balance sheets as a tool to implement fiscal
policy.
One argument is that if central banks
were not created to execute fiscal policy, then why require them to maintain
any capital at all? Capital is that which is held in reserve to absorb losses.
If losses are to be anticipated, then a reasonable inference is that a certain
expectation of risk must exist. Therefore, central banks must be expected to
take on some risk for policy purposes, which implies a function beyond the
creation of a monetary base to maintain price stability.
Global
Nominal GDP Growth, as Measured in Dollars, Is Projected to Decline
With a surging U.S. dollar and growth
remaining sluggish in much of the world, Bank of America Merrill Lynch
forecasts that world output measured in dollars could fall in 2015 for the
first time since the financial crisis. Over the past 34 years, this has
happened just five times.
What kinds of risk are appropriate for
a central bank? Well, the maintenance of a nation’s banking system would
plainly be in scope, given the central bank’s role as lender of last resort.
The defense of the currency as a store of value and medium of exchange is
another appropriate risk. This was the apparent motivation of Mario Draghi,
European Central Bank president, for his famous promise to defend the euro at
all costs in the summer of 2012. The central bank balance sheet has proven a
flexible tool limited in use only by the creativity of central bankers
themselves.
In response to those who argue against
the metamorphosis of monetary policy into fiscal policy, one need only point
toward the impact of quantitative easing (QE) on interest rates. The depressed
returns available on fixed-income securities, largely as a result of QE, are
acting as a tax on investors, including individual savers, pension funds, and
insurance companies.
Essentially,
monetary authorities around the globe are levying a tax on investors and
providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth
transfer payment schemes, have historically fallen within the realm of fiscal
policy under the control of the electorate. Under the new monetary orthodoxy, the responsibility for critical aspects
of fiscal policy has been surrendered into the hands of appointed officials who
have been left to salvage their economies, often under the guise of pursuing
monetary order.
The consequences of the new monetary
orthodoxy are yet to be fully understood. For the time being, the latest rounds
of QE should support continued U.S. dollar strength and limit increases in
interest rates. Additionally, risk assets such as high-yield debt and global
equities should continue to perform strongly.
Real Median
Household Income Has Been Flat for 20 Years
Despite ultra-loose monetary policies
over the past several years, incomes adjusted for inflation have fallen for the
median U.S. family. With the benefits of monetary expansion going to a small
share of the population and wage growth stagnating, incomes have been essentially
flat over the past 20 years.
In the long run, however, classical
economics would tell us that the pricing distortions created by the current
global regimes of QE will lead to a suboptimal allocation of capital and
investment, which will result in lower
output and lower standards of living over time. In fact, although U.S.
equity prices are setting record highs, real
median household incomes are 9 percent lower than 1999 highs. The report
from Bank of America Merrill Lynch plainly
supports the conclusion that QE and the associated currency depreciation is not
leading to higher global output.
The cost of
QE is greater than the income lost to savers and investors. The long-term
consequence of the new monetary orthodoxy is likely to permanently impair
living standards for generations to come while creating a false illusion of
reviving prosperity.
Wait, you mean printing money won't
fix the world's problems? Impossible.
Yet what is truly amazing is how many
"experts" revealed themselves as useful, if utterly clueless idiots
believing that one could create prosperity by printing money.
Comments
Money printing will put us in a 25 year global
depression. It’s time to pay off the
debt, balance the budget and End the Fed.
The Fed increased the money supply by 450%. You can pay that off with 10% inflation over
the next 45 years. The good household income that is now about $100,000 a year
will take $1 million a year in 2060.
Norb Leahy, Dunwoody GA Tea Party Leader
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