The Madness of QE

BALTIMORE – Like a house on fire, the election continues to draw a crowd of gawkers. We joined them for the final debate, warming our hands and hoping to see the whole damned place burn down.

 

glykonLike the ancient serpent deity Glycon (whom we have discussed previously), the candidates promised miracles galore:  they shall tell fortunes, help find fugitive slaves, detect thieves and robbers, cause the discovery of treasures, heal the sick, and raise the dead. It will be a glorious future!

 

The debate brought a shift to policy issues. But, as usual, it was a pathetic discussion.  One, a slick, conniving pro with more jackass solutions to the problems she helped cause. The other, floundering, unable to form a coherent critique of his opponent’s claptrap programs.

Both of them offered to heal the sick, enrich the poor, and raise the dead.  Occasionally, by accident, an intelligent idea came running out of the house with its hair on fire; the candidates quickly shot it dead.

Hillary’s Deep State economics don’t work. We’ve been arguing for years that fixing the price of credit by central banks would have the same consequences as fixing any other price: disaster.

If you set the price of credit too high, borrowing gets too expensive, and the shelves groan with unsold inventory as you punish demand. If you set the price too low, buyers are happy at first, until the manufacturer gets tired of taking losses and the product disappears.

 

industrial-production-dehomogenizedThe influence of serial credit bubbles on the economy’s structure of production: the resources devotes to capital goods and consumer goods production have kept drifting apart in favor of the former and to the detriment of the latter. If one scours the internet for things to buy, there is always a wealth of goods to choose from. And yet, we have noticed – this is a purely anecdotal observation, mind – that increasingly often, these products are actually no longer available – click to enlarge.

 

The only price that works is the one you don’t set, the one that is discovered by buyers and sellers moving freely as supply and demand shift. So it was that when the Fed nailed the price of credit to the floor, we expected the typical debacle.

And now, others are coming around to our point of view. Here’s William Hague, the former leader of the British Conservative Party, explaining in The Telegraph why QE is a bad idea:

 

  1. Savers find it impossible to earn a worthwhile return, which drives them into riskier assets, thus causing the price of houses and shares to be inflated ever higher.
  2. Higher asset prices make people who own them much richer while leaving out many others, seriously exacerbating social and political divides and fueling the anger behind “populist” campaigns.
  3. Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion.
  4. Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany, in particular.
  5. Those people who are able to save more do so because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more.
  6. Companies have an incentive to use borrowed money to buy back shares – which they are doing on a big scale – rather than spend the money on new and productive investments.
  7. Central banks are starting to buy up corporate bonds, not just government bonds, to keep the system inflated – so they are acquiring risky assets themselves and giving preference to some companies over others.
  8. “Zombie companies,” which can only stay in business because they can borrow so cheaply, are kept going even though they would not normally be successful – dragging down long-term productivity.
  9. Pumping up the prices of stock markets and houses without an underlying improvement in economic performance becomes ever more difficult to unwind and ultimately threatens an almighty crash whenever it does come to an end – wiping out business and home buyers who got used to ultra-low rates for too long.
  10. People are not stupid; when they see emergency measures going on for nearly a decade, it undermines their confidence in authorities who they think have lost the plot.

 

william-hagueWilliam Hague, former leader of Britain’s Tories – not a big fan of QE, and he’s right.

Screenshot via BBC

 

A Different Show

But they haven’t lost the plot at all – Hillary and her backers are following the script perfectly. The trouble is it wasn’t the show Mr. Hague and others thought it was. It was more like House of Cards or Game of Thrones than Father Knows Best or The Andy Griffith Show – the good guys were never meant to win.

 

cersei-clintonThe mad queen on her iron throne

Image credit:

 

Fixing prices never makes sense for the public. It makes sense only when you are trying to achieve a result that willing buyers and sellers – the public – wouldn’t achieve on their own… and wouldn’t want.

QE is designed to steal from the public and reward the privileged elite. Pushing down interest rates punishes ordinary savers; it benefits big borrowers, the rich, and Wall Street. That is the way the system is really rigged.

It is obvious why Ms. Clinton didn’t mention it last night. She is one of the riggers.  A member of the Establishment… the Deep State… the Parasitocracy. She benefits from the rigged-up system.

In 2013 alone, she was paid $675,000 for three speeches to Goldman Sachs. We don’t know what she said, but we doubt that Goldman was paying for financial advice. Mr. Trump didn’t mention either in the final debate. Too bad.

 

Chart by St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

The above article originally appeared as “Hillary’s Rigged Economy” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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