Groundhog day for Quantitative Easing

“Insanity is … doing the same thing over and over again, and expecting different results”

  • A quote usually attributed to Albert Einstein, but likely much older

There comes a point when someone acts so supercilious despite being so obviously wrong that you really have to control what

Groundhog Day In IllinoisLast week there was a sharp and nasty exchange between a commenter and a previously distinguished columnist in the Financial Times, Mr Martin Wolf. Now, I can confess a certain admiration for the Martin Wolf of old, whose brand of analytical and well-explained commentary offered a pleasant interlude to the nonsense written up by Wall Street economists for a long enough time. For the past decade (almost) though, Mr Wolf has worn his neo-Keynesian thoughts on his sleeve to the point where they have now overtaken common sense (and courtesy) in discussions.

This is from the comments to the blog article by Gavyn Davies entitled “The Fed board is now seriously split” on Oct. 18, 2015

Martin Hutchinson

“Clear thinking Keynesian” is surely an oxymoron.

The likelihood is now that the Fed will not have raised rates before the next recession hits. In that case, the squawks for something even more unorthodox and damaging will be overwhelming. Hopefully the political climate will change in January 2017, and allow a rapid replacement of the current Governors and return to monetary normality, however painful it will be to burst the current asset bubble. At least a severe deregulation (if it happened) should allow for more productivity growth, thereby counteracting the costs of mis-investment liquidation.

Martin Wolf, FT

@Martin Hutchinson Yes, let’s have a good depression, at last. That would be really clear-thinking.

Where this neo-Austrian drivel comes from is a real puzzle.”

When people run out of ideas, cheap shots are the first thing to resort to. The simple problem for Keynesians is that

  1. Despite keeping rates nearly at zero for the past 6 years and counting, there has been no real change to global growth
  2. Data has been weaker substantively of late, with poor employment in the US, declining GDP numbers in Europe and a reversion to the lost decade in Japan.
  3. China, Korea and India are also seeing slower economic growth against the headwinds of G7 macro performance; despite the tail wind of falling commodity prices
  4. The only beneficiaries of zero interest rate policies (or ZIRP to use the Keynesian lingo, for something that’s so devastating for savers) are US banks who have managed to rebuild their capital bases over the past seven years
  5. Even the US banks are now discovering limits to growth within the context of zero interest rates, as changes in regulations and low economic confidence reduce demand for their services to all time lows. Earnings reports for the third quarter were full of negative surprises, with JP Morgan, Goldman Sachs and Morgan Stanley all showing weaker performance than was expected

A number of companies have already warned that the weak economic environment will cause them to cut thousands of jobs within the next 3-6 months. So much for a recovery : its not just banks, mind you.  The problem is now spreading, as Tim Price notes in his blog “The Price of Everything”:

“David McCreadie of Panmure Gordon tells it how it really is:

“The list of earnings casualties continues to grow. What is ominous is that the list is geographically agnostic and it includes well-run companies with respected management. Such is the growing momentum of misses, disappointments, warnings and downgrades the market won’t be able to hold the dam indefinitely. Reality is setting in and it’s not coming from equity strategists, it’s coming from companies. Phrases like ‘challenging market conditions,’ ‘lower than anticipated demand’ and ‘margin erosion,’ are now common currency. Given the technical backdrop it would be difficult to conjure up a more favourable bearish market scenario.”

For ‘challenging market conditions’, ‘lower than anticipated demand’ and ‘margin erosion’, read just one word. Deflation.”

Thus the wonderful Keynesians have managed, with their printing of trillions of dollars of new debts, merely to slide back into deflation and increased unemployment; the avoidance of which was the ostensible aim of aggressive monetary easing policies since the beginning of 2009. It is not as if they weren’t warned either – the experience of Japan since 2000 was an useful indicator of how badly ZIRP turns out even in a single economy, never mind unleashing it on hundreds of millions of people around the world with no supportive evidence whatsoever.

Austrian economists haven’t been correct about everything, but they have broadly called the market trends quite well:

  1. Inflation in asset prices (CHECK)
  2. Some savers (say, older ones) forced to reduce savings due to falling returns (CHECK)
  3. Postponement of conspicuous consumption by other savers mindful of the above (CHECK)
  4. Money created from nothing leads to nothing created (CHECK)

Central banks have been wrong with their intervention in broader economic subjects since 2009, away from their remit focusing on inflation and financial system stability. The biggest culprit of them all, Ben Bernanke, recently published his memoirs, named perhaps with a sense of intense irony “The Courage to Act”. As part of the book tour, he met the FT’s above mentioned Martin Wolf, and here’s part of the account that describes just how political the whole central bank apparatus has become these days:

“What about the idea that if the central banks are going to expand their balance sheets so much, it would be more effective just to hand the money directly over to the people rather than operate via asset markets?

Having gained the nickname “Helicopter Ben” for suggesting just such a policy, he is very much aware of this idea. But he responds by saying, “Well, it doesn’t have to be put in such an off-putting form. I think a combination of tax cuts and quantitative easing is very close to being the same thing.” This is theoretically correct, provided the QE is deemed permanent.”

This is missing the point of tax cuts – which are done when (a) nation runs structural surpluses or (b) a short-term fiscal stimulus. In contrast, QE expands the stock of money after all normal monetary measures such as cutting interest rates, fail to push borrowing costs to normal levels. The objective may well appear the same – stimulate consumption and with it, inflation that helps to diminish the value of debt over time – but the key factors leading to each are vastly different. One starts with success, the other with failure.

Economists go around creating self-serving data analyses (Thomas Piketty’s “Capital in the 21st Century” is a good example of such narratives) that support job generation policies for themselves but fail to produce benefits for the wider populace. Central bankers have taken this a lot further, creating jobs for themselves whilst pushing hundreds of thousands of job cuts in the real economy.

How does the madness stop? Perhaps it doesn’t – I am entirely convinced that there are enough intelligent people left in politics and economics but perhaps more depressingly, do not think there are enough of these left whose livelihood does not depend of keeping the current charade going. When the history of this period is written, future generations shall be left wondering how and why the rest of the world allowed these shenanigans to continue for so long even as the data made it plainly obvious we were heading in precisely the wrong direction.

Categories: AT Opinion, Chan Akya

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