The 18th of September will go down in history as a turning point in US financial history. It was supposed to be the day that the Federal Reserve started to reign back on its aggressive Quantitative Easing (QE) programme (buying US bonds – effectively printing money) but it never happened, it is business as usual in the money printing business. For more than a year the “Fed” has been buying bonds and mortgage backed securities to the tune of $85 billion per month, passing the money created to its primary dealer banks and effectively funding the US government’s budget shortfall and bank insolvency (particularly with their dud mortgage securities). The public pronouncements have been about stimulating the US economy post the financial crisis, generating growth and helping to ease unemployment. Accordingly the US Federal Reserve has couched its language re its bond purchases together with targets for growth and reductions in unemployment levels. As growth returns to normal and unemployment declines (theoretically) the promise was to reduce the QE programme. Ben Bernanke the Chairman of the Federal Reserve even went as far as to float the idea in June of this year that he would “taper” the bond buying starting later this year (hence the focus on the 18 September FOMC meeting) and he even gave an analogy of “lifting the foot from the accelerator” of a car to signify how the economy was improving, and the QE would taper out, ending in the middle of next year (2014):
“appropriate to moderate the monthly pace of purchases later this year [and] continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year”. [Ben Bernanke 19th June, 2013]
The 18th September announcement to continue QE at $85 Billion per month is a massive turn around and humiliation for Bernanke who is due to end his tenure as Fed Chairman next January. Even a symbolic small reduction in the $85 Billion per month could not be announced. Many thought a reduction to $75 Billion would occur, which although still $900 Billion per annum would have been indicative of at least some progress. The reality is that QE has little to do with unemployment or general stimulus of the economy. The money goes to banks who jealously need it to rebuild their seriously diminished balance sheets. The money is drip fed into the stock market to keep it afloat, and is used via the US “plunge protection team” to keep the price of gold (in dollars) low – short selling the gold and silver markets aggressively to keep a cap on the only real monetary alternatives to the dollar. To keep the accounts in balance the Fed buys new US Treasuries which are issued to fund the US government’s large budget deficit which runs at $700 Billion and although down from last years enormous $1,200 Billion per annum – conveniently matches the QE numbers. So in this regard the QE is essential as foreign governments notably China and Japan no longer wish to buy US bonds. The US is in a declining spiral of high budget deficits and lowering demand for the dollar, hence the Fed is printing this money whilst trying to keep a brave face and tell the world that its economy is improving.
The progression of US debt is frightening; from $1 Trillion in 1980, to $8 Trillion when Bernanke took over at the Fed, to its current level of close to $17 Trillion dollars. The US Congress may debate the merits of how or whether the debt ceiling should or shouldn’t be raised, but the truth is that the US is hopelessly addicted to debt and cannot pull back from this easy option of more money printing.
In many respects the about turn by Bernanke was predictable. In May and June when chatter from the Fed about reigning back on QE was most audible, it was effectively a form of trial balloon in which the governors were testing the markets as to their reactions. And the key market reaction was bad. Bond markets plummeted as the yield on the benchmark 10 year Treasury note went from 2.15% to 3%. While historically bond yields would normally be over 4%, with debt levels so high in the western world, governments are forced to keep interest rates as low as possible in order to keep interest costs on the high debts to a manageable level, and to try and encourage house buying (via low mortgage rates), in order to promote the façade of confidence and promote higher spending by homeowners brooding over the inflated values of their homes. But the key consideration is that foreign interest in US bonds is declining and if no one wants to buy the bonds the domestic investment market would only be interested with much higher interest rates to reward against the steadily growing risks of this inflated market. Quite the mess.
In Europe the situation is little different. Southern European countries (PIIGS) have expanded their debts exponentially. The debt to GDP (government debt) of Portugal, Spain, Ireland, Italy and Greece ranges from 100% to 180%. The UK is over 400% when personal and financial debt is considered. Attempts at austerity have not worked with anaemic growth and still growing debts. There is sadly no way out for these countries whose populations are suffering terribly. The best solution would be to leave the EU and the Euro, renege on the debts and devalue currencies. However the Euro has removed this option and unless/until they drop the Euro they are hopelessly tied in.
A seriously bad place
World central bankers are now in a corner. Governments continue to overspend to keep social programmes going, keep spendthrift banks afloat and to keep the electorate mildly happy (unaware) and likely to keep voting for them. But to keep paying the bills there is no one left to borrow from. Growth is poor to non-existent, unemployment stubbornly high and debt (public, private, and financial) just keeps rising. To maintain QE as the only policy will eventually lead to high levels of inflation as it always has in the past. Coupled with this spectre is the likelihood of these same central bankers losing control of interest rates. Investors will no longer tolerate the wanton devaluation of fiat currencies led by the US dollar. The bond market vigilantes are already moving in for the kill and rates will rise with the disastrous consequence of the high debt levels going even higher due to high interest payments on the mountains of debt. Higher mortgage rates could also kick off a greater housing crash than that of 2008.
Faced with the choice of balancing the budget and putting the economy into a depression through deep austerity cuts, or continued printing of money and potentially killing the dollar – the choice is continued money printing.
Capitalism is the cause not the solution to the problem
Although Capitalism is built upon a messy compromise (between acceptance of religion and the dominance of man made secular law) few would have envisaged the compromise we now see between the free market and blatant market intervention/manipulation (money, markets, currencies) that is more akin to a Soviet command economy. The continued recourse to more QE has unerring similarities to Weimar Germany where the initial rounds of money printing were applauded by a non-questioning public and media. The trajectory of money supply growth, government overspending and QE follows the familiar pattern moving towards out of control parabolic rises. Confidence in the Bernanke’s of this world to control the slide out of control is low. China, Russia and other BRIC nations are steadily but surely moving away from US dollar hegemony via greater trading with their own currencies including the enormous oil market.
For the benefit of the few
Part of the scam of QE is the notion that the money will “trickle down” to the less fortunate in society. Like the classical Capitalist notion of trickle down of earnings, this too is hopelessly flawed. The QE money is predominantly being held on the balance sheets of the largest banks which were deemed too big to fail, not only are they hoarding this manufactured money, they are also gambling with it via the shadow banking system, with money on deposit from the Federal Reserve being used in derivative gambling schemes. In one such scheme JP Morgan lost over $5 Billion dollars and without this bet going sour nothing of it would have come to light. So the Federal Reserve favours the large banks, who perhaps not surprisingly make up the board members of the Federal Reserve. The money created goes to them and they utilize it as they will. The absence of lending to business and the masses is secondary and of little surprise as the banks know the economy is poor and many loans will not be repaid – far easier to dominate markets for the bank’s gain via derivative bets.
In future years academics will write about these times and will be astounded that so many were duped by so few, and for the benefit of the few. Lessons of Weimar Germany have not been learnt or are conveniently forgotten by those looting the system. The only antidote to this largesse is to have a sound non interest bearing currency based on gold and silver which cannot be manipulated in the banking system, and which the government cannot manufacture from nothing. The corrupt relationship between banks, quasi government banks (central banks which are really privately owned) and governments must come to an end fundamentally for progress to be made. Is it only the Muslims driving for a return to the Caliphate economic governance that can see this?