from Ambrose Evans-Pritchard: Readers of the Daily Telegraph were right all along. Quantitative easing will never be reversed. It is not liquidity management as claimed so vehemently at the outset. It really is the same as printing money.
It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy Photo: Alamy
Columbia Professor Michael Woodford, the world’s most closely followed monetary theorist, says it is time to come clean and state openly that bond purchases are forever, and the sooner people understand this the better.
“All this talk of exit strategies is deeply negative,” he told a London Business School seminar on the merits of Helicopter money, or “overt monetary financing”.
He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.
“If we are going to scare the horses, let’s scare them properly. Let’s go further and eliminate government debt on the bloated balance sheet of central banks,” he said. This could done with a flick of the fingers. The debt would vanish.
L: Doug, there is considerable disagreement over the significance of the Cyprus crisis. A lot of people are saying that it’s just a flash in the pan; Cyprus is a small country, far off, and doesn’t really matter. Other people are saying it’s very significant. The European Central Bank took unprecedented steps. What do you think?
Doug: I think this could be the spark that ignites the keg of dynamite under the current financial system. All banks, all around the world, are bankrupt, and have been for years. That’s because all the world’s banks run on a fractional reserve basis.
L: I know what you mean, but we should spell that out: by law and backed with government guarantees, banks only have to keep a tiny fraction of the money people deposit on hand. They lend out the vast bulk of it, and in even in good times, they could not return all depositors’ money at once, since loans cannot be called in instantaneously, and most would be defaulted on if they were. In bad times, the charade is even more hollow, since many loans that banks are currently owed will never ever get paid.
Doug: Yes, and they are all in that position. It was more serious in Cyprus because that economy is very leveraged to finance. In other words Cyprus was a banking epicenter for Europe. It was easier to make deposits – there were fewer questions asked – making banking the major business of the country. But I think the trouble will spread from there. It could spread to Luxembourg or Malta next; both are at least as leveraged to the financial sector as Cyprus. And from there… who knows?
Anyone with any sense should withdraw whatever cash they have in European banks, whether in euros or any other currency, immediately. Cyprus demonstrated that governments are quite willing and able to confiscate money sitting in a bank account in order to preserve the banking system. We live in Bizarro World.
Russell Comment — The government’s all-out propaganda campaign to tell Americans that all is well, surpasses any thing I’ve ever seen in 60 years of watching markets and the news. However, the huge propaganda effort by the government and the Fed is losing its believers.
Currently, the job picture is so brutal that the word is getting out. College graduates are taking no-pay intern positions in the hopes that the companies they work for (with no pay) may hire them for pay when their internship is over. Many interns are so desperate for money that they are taking menial jobs like waiting on tables in order to make ends meet. In other words, the disconnect between what the government tells us and stark reality is widening, and increasingly, the public knows it.”
Inflation is the Fed’s 100 year legacy.
Economist John Williams says don’t be fooled by the new highs on the Dow. Williams contends, “The economy is still in serious trouble. The banking system is still in serious trouble. The budget deficit is exploding out of control.”
Thanks to the Fed’s ZIRP, the investing world is on a constant reach for yield; and due to the fact that the last bubble of investor largesse (ignoring leverage and reality) was not ‘punished’ but in fact ‘bailed-out’, participants in the financial markets learned nothing. Just as the last crisis was formed on the back of an insatiable mortgage-backed security market desperate for new loans (any loans) of increasingly dubious quality to securitize, so this time it is subprime auto loans that have taken over. As a Reuters reviewof court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings. At car dealers across the United States, loans to subprime borrowers are surging – up 18% in 2012 YoY, to 6.6 million borrowers. Subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets; “it’s the same sort of thing we saw in 2007, people get driven to do riskier and riskier things.” Of course, with auto production having been the backbone of so many macro data points that are used to ‘show’ the real economy recovering (despite the channel-stuffing), now that the growth in auto-sales are stalling, it is for the subprime originators “under extreme pressure to hit goals” in their boiler-room-like dealings to extend loans (at ever higher rates) and securitize while the Fed ‘music’ is still playing. It seems we truly never learn.
How The Fed Fueled An Explosion In Subprime Auto Loans
Thanks largely to the U.S. Federal Reserve, Jeffrey Nelson was able to put up a shotgun as down payment on a car.