Friday, September 07, 2012

The world is about to be showered with more of what already ails it

The European Central Bank (ECB) announced this morning it intends to print money to pay the debts of over-spending governments—as Bundesbank head Jen Weidmann objected, “tantamount to financing governments by printing banknotes.” This cannot be sustainable.  Not that ECB head Mario Draghi cares.

The Japanese government, having tried and failed with every other option for two decades—easy money, zero interest rates, printing money to pay its debts—is finally ready to “abandon its Keynesian consensus”. That is, to try to spend close to what they receive in taxation. But with govt debt at an unsustainable 225% of GDP, it’s too little too late.

And in Jackson Hole, Wyoming, the world’s central bankers met, to be told by a Ben Bernanke oblivious to what has happened in Japan, and in denial about the results of his earlier monetary interventions (i.e., the hole we’re in now) that he is ready to unleash the American printing presses again to shower the world with more paper, and take the value of the currency he has sworn to uphold ever further into the basement.

As Jeffrey Tucker observes, “There is reality and there is Ben Bernanke. The two are ever more disconnected…

Never mind the elevated unemployment rate and worst economic recovery since the Great Depression. Never mind that the credit system is entirely broken down. The reality that we've lost a decade of growth to these policies is in the headlines. And at this very time, Bernanke figures that QE1 and 2 went so well, it's time for a third.
    One wonders if the Fed chair's plan is to create enough money from nowhere to buy all the government's debt, reducing the deficit and debt to virtually zero.
    Nobody in his right mind would think the value of the dollar could withstand that onslaught of printing, except maybe Bernanke.

Mr. Bernanke keeps alluding to some magic trick he will perform. But the audience is full of skeptics. He is pushing for more bond purchases (debt and money creation), plus what's being called jawboning. The latter is particularly ridiculous. He thinks that promising low interest rates further and further into the future is going to somehow cause a re-boom.
   
Why not just say we've abolished interest rates forever? Will that do it?
    Our economic problems are structural and can't be solved by the bearded banker. The central bank caused the boom, and then the bust of 2008 was not permitted to liquidate bad investments.
   The many attempts at stimulus only sucked resources from the private sector. They prolonged the agony. Moreover, the adjustment is being hindered by a costly regulatory thicket that discourages business expansion.
    Put it all together and you have the great recession, courtesy of the central bank and the government that created it one hundred years ago. But the arrogance and self-interest of the central bank mitigate against admitting error, even when it is more than obvious to the multitudes.
    Even if Ben and his friends aren't admitting error, the truth is coming out. And it's not just about economic fallacy.  It's about graft, financial irresponsibility, and bureaucratic bungling on an unimaginable scale. It's the age of information. Much to the ruling elite's regret, you can't keep the rackets secret anymore.

Meanwhile, in China, they’ve been so busy building bridges to nowhere—paid for by money printed out of nowhere--they haven’t noticed the incredible malinvestment time-bomb they’ve been racking up.

Bernanke, Jackson Hole, Politics, QE, Debt … I wonder what Peter Schiff would say about it all.

5 Comments:

Anonymous the drunken watchman said...

A link in this post takes me to an article which says

“Eventually, China will experience an economic crisis. The debts they ran up to malinvest can’t be repaid."

This sounds familiar - it seems everyone is in debt.... so who are the lenders?

9/08/2012 05:26:00 am  
Anonymous Nick said...

It's funny how a key part of Peter Schiff's business is selling gold, for which he accepts US dollars as payment.

9/08/2012 09:34:00 am  
Anonymous Stuart L said...

For me you're at your best when writing on economics.

I don't know what's going to happen but I'm still intrigued with Prechter's deflation theory.

Isn't this "printing money" just the issuance of digital credit? And you can't make people borrow if they have no appetite for it, no matter how low interest rates are.

There's been a massive increase in the U.S debt (how many more trillions?) in the last few years yet inflation hasn't taken off - so wouldn't we have had deflation if this hadn't happened?

9/08/2012 12:00:00 pm  
Anonymous the drunken watchman said...

anyone? help out a drunk?

is everyone in debt, or are there some lenders? Who are they?

(just trying to figure out who loses if everyone defaults.I mean, crisis after crisis, life seems to go on. I know we are promised the Big One,but what will it look like exactly?)

9/09/2012 08:35:00 am  
Anonymous Michael said...

@ Drunken Watchman....

This is my take on it... the governments' debts and the banking sector's debts can be reflected in the financial assets of the masses. Lets imagine that it's your superannuation fund or your bank account. When it finally becomes obvious that this debt will never be paid, then the asset that is linked to it (i.e. your super fund, and your bank account) no longer has any value. Hence, people like you lose their bank balance (because there are not enough reserves to cover the deposits) and your super fund was probably up to their eyeballs in government bonds. The upshot is that you're not nearly as wealthy as you might think you are. In this scenario, most people are in the same boat as you, so there will be massive price deflation.
There is one other more likely scenario. To avoid this deflation, this debt will be covered with the printing of paper money. You'll still have your super fund and your bank balance, only problem is that it won't buy you much more than a cup of coffee.
I'm sure there are layers of understanding. Anyone care to chip in?

9/09/2012 09:10:00 pm  

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