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The Worldwide QE Quagmire

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com

Certain central bankers are now coming out of the closet admitting that their favorite shenanigans—ultralow interest rates and printing money with utter abandon—can’t solve the very problems they were designed to solve, which has been obvious for a long time. What they’re not yet admitting massively, though some are starting to hand out hints, is just how much havoc these policies are wreaking.

“It would be a mistake to think that central bankers can use their balance sheets to solve every economic and financial problem,” said the Bank for International Settlements in its annual report released on Sunday. The organization, which groups together 58 of the world’s largest central banks, has on its board all the usual suspects: our very own Chairman Ben Bernanke and NY Fed President William Dudley along with ECB President Mario Draghi, PBoC Governor Zhou Xiaochuan, and so on. “In fact, near zero policy rates, combined with abundant and nearly unconditional liquidity support, weaken incentives for the private sector to repair balance sheets and for fiscal authorities to limit their borrowing requirements,” the report goes on. And “they distort the financial system.”

The numbers are stunning. Central banks, the report points out, printed $18 trillion “and counting” to buy often crappy assets that are now decomposing on their balances sheets—”roughly 30% of global GDP.”

 

Though it’s been nearly four years of zero interest rate policy (ZIRP) and serial Quantitative Easing (QE), the global economy is becoming more unbalanced, “and a safe financial system still eludes us,” the report said. Big banks continue to jack up leverage “without enough regard for the consequences of failure” because “they expect the public sector to cover the downside.” Leverage and trading have pushed the financial sector “towards the same high risk profile it had before the crisis.” And yet, there was good news: “Pessimism has become tiresome, so optimism is gaining a foothold.”

On Monday, Jeffrey Lacker, President of the Richmond Fed, came out swinging. “Monetary policy doesn’t have a lot of capability right now for enhancing growth,” he said, contradicting Chairman Bernanke who confirms every chance he gets that the Fed isn’t out of bullets, that in fact it will never be out of bullets, and that it can still get mortgage rates down further to goose the housing market off what appear to be a series of lower lows. Lacker already dissented from last week’s extension of Operation Twist and seemed to be in an uppity mood. “The impediments to growth are things that monetary policy is really not capable of offsetting,” he said.

It’s uncertainty that impedes growth at the moment, he said. Businesses “can’t do the math” on taxes, healthcare, etc., and so they hold back on investments and hiring “until Congress figures out how we get on a sustainable fiscal path.” A very pessimistic assessment as Congress, the way it’s going, is unlikely to ever figure that out.

“Structural factors” caused the recession—and the unemployment and housing morass—and those factors are still impeding growth, he said. So it would be a “mistake” to tie monetary policy to the unemployment rate. Same thing with the housing recovery. Vacant homes are the problem, not the already “awfully low” mortgage rates. And further monetary stimulus would “just raise inflation.”

That ZIRP and QE have done nothing for housing and the broad employment picture, and might on the contrary have helped prolong the nightmare, becomes obvious when the timing of these policies is superimposed on the graphs of the BLS Employment-Population ratio and the Case-Shiller home price index [for a graphic depiction of this failure, read.... The Big Lie].

What I haven’t heard anyone at the Fed admit yet is that ZIRP and QE have actually coagulated into impediments to growth—for a whole litany of reasons. We now have dysfunctional capital markets where investors lend money to the government for free or even at a guaranteed loss. We have financial repression where yields are so low that investing in relatively safe assets, such as high-grade bonds and CDs produces a loss after inflation—an insidious tax on those who don’t want to risk losing 30% in the stock market just to stay ahead of inflation. And it’s a phenomenal subsidy for the other side that gets the money for free (or even at a negative cost). By eliminating income streams that consumers have been counting on, financial repression ends up decimating growth in the broader economy—a dilemma that Bruce Krasting depicted in “Broken Fences,” multiplied by the millions on a daily basis across the country.

ZIRP and QE have had another effect, one that is starting to be very costly: misallocation and subsequent destruction of capital. In one sector it’s particularly brutal. Tens of billions of dollars have been sunk into an economic activity—drilling for dry natural gas—that has been highly unprofitable for years. What’s left today is a mountain of debt, and wells that will never produce enough to make their investors whole [for the last installment of that mind-boggling fiasco, read..... Where Endless Money Went to Die].

Doug Casey of Casey Research believes that we’re in the fourth year of “The Greater Depression,” that we’re not in a recovery but in “the eye of the hurricane” on our way to “the other side of the storm.” It would be “far more severe” than 2008 and 2009 and would last quite a while, “depending on how stupidly the government acts.” And yet, he sees reasons for optimism. Read.... How to Save Your Money and Your Life.

 

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Wed, 06/27/2012 - 12:07 | 2565248 Pat Fields
Pat Fields's picture

Why doesn't anyone seem to think it odd, that in the face of irrefutable empirical evidence of failing procedure, the 'money managers' persist on the same course? Why won't anyone consider the probability that they simply CAN NOT alter their course? Consider that ‘QE’ and massive ‘money’ creation isn’t a ‘choice’ for these people at all, but rather an irresistible force intrinsically driving their ‘acts’.

I propose that classical remedies like 'debt reduction', ’market correction’, et cetera, are foreclosed from enactment by the underlying monetary scheme of banknotes. Examination of its ‘mechanics’ is all that’s necessary to recognize this.

Banknotes are universally loaned into existence as principal at interest (and, there’s really no other way it can be structured). Since the disappearance of a pari pasu circulating currency (silver), to at least partially alleviate sourcing of the interest service funding, the interest too, has to be materialized by borrowing as well. Charts of ‘money supply’ blatantly reveal that beginning in the mid-to-late 1960s, M2 began a marked increase. The complex compounding on the interest side of the equation has since been inexorably progressing toward exponential magnification.

The first logical ‘victim’ of this confounding process to offset interest costs on the automatically inflating ‘float’ of banknote currency, is excess productive capacity for export, which we quickly saw in the 1970s. Next in line is productive capacity to meet domestic consumption, now occurring across the planet. The final collapse of the banknote scheme is imminent at this juncture. All the while, inept ‘money managers’, with the aid of their cohort, equal partner governments, have been, with increasingly frenetic urgency, concocting a bewildering array of ‘fixes’ that they pray will at last control this Maw they created. Their stupid belief in that ‘holy grail’ is the source of their turpitude. Mathematics is not subject to control. When the formulae all concur that a human being can’t fly without specifically designed accoutrement, one is a complete fool to jump from the precipice nevertheless. Well the ‘geniuses’ are soon about to hit the floor of the canyon in a great, dramatic heap.

The very concept of money really only works when it objectively shares supply-demand characteristics with all other goods-at-market. The delicate inter-relationship that naturally evokes rational ‘pricing’ across the entire spectrum can’t be artificially replicated in the vacuum of ‘finance’, where credit supplants the most appropriate commodity fitting into that grand web of inter-relationships.

 

Wed, 06/27/2012 - 11:40 | 2565160 ATG
ATG's picture

Long live WR.

ZH contributions appear to be variations on a theme today.

Could it be the tipping point finally arrived?

21st EZ bailout conference may finally kill Tinkerbelle Economics.

 

Puts are bears' best friend at the tipping point as people at once realize the EZ is queasy, no mo' free lunch and the Twist is dead. Turn out the lights:

http://www.youtube.com/watch?v=BGtwpIVp4sw

RichCash@RichCash8 Twitter

http://richcash8tradeblog.blogspot.com/ 

 

 

 

 

 

Wed, 06/27/2012 - 10:12 | 2564834 dizzyfingers
dizzyfingers's picture

Don't support organized crime: don't invest your children in cartel corporations' wars. Let them send their own kids.

Wed, 06/27/2012 - 09:26 | 2564638 NeedtoSecede
NeedtoSecede's picture

Shouldn't this article be titled the "Worldwide QEgmire?" 

As soon as the first "welfare" program paid its first penny we were on the slippery slope of moral hazard that has degraded the entire culture.  Corruption, entitlement, and group identity politics ("my" group deserves special treatment and yours does not) are the endgame of this degradation.  And without virtue this republic cannot stand.

Not long gold, not long silver, and I sold all my guns and ammo (just in case anyone is "listening").

Keep it up ZH!

Wed, 06/27/2012 - 00:34 | 2564034 OneTinSoldier66
OneTinSoldier66's picture

I could "do the math", if I would be given a real, actual, tangible "unit of account" to do it with!

Tue, 06/26/2012 - 23:26 | 2563881 nah
nah's picture

god damn thats alot of money

Tue, 06/26/2012 - 20:45 | 2563445 AUD
AUD's picture

This BIS stuff is just obfuscation. Until central banks admit that their monetisation of junk - government bonds, MBS & god knows what else, is the cause of the problem the current trajectory won't change.

I just don't see the BIS admitting it has lorded over the largest credit bubble in history.

Tue, 06/26/2012 - 19:05 | 2563211 q99x2
q99x2's picture

Play a dose of weasel for the utes and ole.

Tue, 06/26/2012 - 18:29 | 2563130 working class dog
working class dog's picture

Marc Faber is correct when he say's when MR. Bernanke prints and prints and prints, and keeps interest rates low, the excess dollars will find their way into a bubble, looks like the bankster alias hedgfunds went speculating on Natural Gas drilling.

 

I want Obama to print his own money for the treasury to pilfer at zero cost to the sheeple, and claw back the 2 trillion the Bernanke, Hank, and Timmah handed over to JP Morgan, and all the rest of the scum! Take this money and clear all the foreclosures and pay off all the responsible peoples mortgages, and tell the banks to go to hell. If they did this with Tarp, Jamie dimon would be cleaning toilets at Yankee stadium and the economy would be booming.

Tue, 06/26/2012 - 17:28 | 2562954 GOLDTEETHSILVER...
GOLDTEETHSILVERFILLINGS's picture

Follow the yellow brick road...

Tue, 06/26/2012 - 17:48 | 2563025 NJBDeflator
NJBDeflator's picture

yes indeed..i just wrote a paper called Boom-And-Bust: How Central Banking Has Evolved Markets

http://njbdeflator.blogspot.com/2012/05/boom-and-bust-how-central-bankin...

 

Tue, 06/26/2012 - 18:37 | 2563151 11b40
11b40's picture

Did you collaborate with Reggie?

Tue, 06/26/2012 - 16:31 | 2562786 sangell
sangell's picture

If Ben Bernanke had any decency he would have RESIGNED as Fed Chairman when he drove the US ( and global economy into a ditch). But he has no decency just ambition and ego so 4 years later the POS is still stuck in the same ditch he drove us into, spinning the wheels and refusing to get out of the drivers seat. It is time he is removed from the drivers seat...and that may have to be done physically.

Wed, 06/27/2012 - 00:41 | 2564048 OneTinSoldier66
OneTinSoldier66's picture

I agree.

 

But what about Greenspan!? What about ALL the Fed Reserve Chairs that have been a part of the 95% decline in the value of the dollar since the creation of The Fed? How about...

 

End The Fed!

Tue, 06/26/2012 - 20:53 | 2563486 Savyindallas
Savyindallas's picture

who's the moronic idiot who voted thumbs down? Are you a full scale retard?

Tue, 06/26/2012 - 16:14 | 2562727 ebworthen
ebworthen's picture

It is a transfer of wealth from the savers and the responsible of the world to the reckless and irresponsible.

An entire lexicon of catch-phrases, euphamisms, and obtuse labels have been applied to deceive.

"Derivatives", "CDS", MBS", "Buy-and-Hold", "Save for Retirment", "Shadow Banking", "Dark Pools", etc.

All can be distlled down to "Gun", "Knife", "Billy Club", "Cudgel", "Brass Knuckles" = "Give us your wallet and jewels."

Tue, 06/26/2012 - 17:15 | 2562914 Ned Zeppelin
Ned Zeppelin's picture

Correct- ZIRP is stealing, pure and simple.

Tue, 06/26/2012 - 16:11 | 2562722 Whatta
Whatta's picture

I believe I saw a number recently that shows that we responsible savers are losing $400 billion a year in interest income due to ZIRP.

That is a lot of "Broken Fences" that could be mended.

Add the half trillion a year in new taxes at the fiscal cliff...

...deduct it all (and more) from GDP...smells like another lost decade for sure. Chalk up another win for Central Planners PhD Inc.

Tue, 06/26/2012 - 16:01 | 2562680 RallyRoundTheFamily
RallyRoundTheFamily's picture

And the truth is, there is something terribly wrong with this country, isn't there? Cruelty and injustice, intolerance and oppression. And where once you had the freedom to object, think, and speak as you saw fit, you now have censors and systems of surveillence coercing your conformity and soliciting your submission. How did this happen? Who's to blame? Well, certainly there are those more responsible than others, and they will be held accountable, but again truth be told, if you're looking for the guilty, you need only look into a mirror. I know why you did it. I know you were afraid. Who wouldn't be? War, terror, disease. There were a myriad of problems which conspired to corrupt your reason and rob you of your common sense. Fear got the best of you

Tue, 06/26/2012 - 20:56 | 2563498 Savyindallas
Savyindallas's picture

Those who do not recognize this quote-should. One of the best movies ever made.

Tue, 06/26/2012 - 18:34 | 2563145 11b40
11b40's picture

Since 9/11, Fear has become an industry unto itself, a deliberately and carefully constructed combination of business and politics.

Google Michael Chertoff and learn a little more about that scuzzy piece of human excretment. Take off your shoes boys and girls, & step right up to my x-ray machine.  Oh, and these are harmless x-rays, by the way.

Think a little about limp-Dick Cheney, and his cadre of paranoid, chicken-hawk neocons.  Remeber how much we are hated around the world for our "freedoms".  What is the code today - yellow, orange?  Lordy, please don't let it be the dreaded code red!  Funny how those code alerts were always raised going into elections or ahead of some other important goings on.  Were we being manipulated?  Curious minds should want to know, but don't seem to much give a rip.

Oh yes.  Be afraid.  Be very afraid, unless Big Brother is watching over and protecting you.

I swear, the very first time I heard the words HOMELAND SECURITY it hit me right in the gut & I knew the America I loved was melting away.

Wed, 06/27/2012 - 11:10 | 2565055 BeetleBailey
BeetleBailey's picture

Homeland Security - loosely translated to German, means Gestapo.

Tue, 06/26/2012 - 21:01 | 2563510 Savyindallas
Savyindallas's picture

The only person I hate more than Michael Chertoff is Dick Cheney  -or George Bush --or Richard Pearle - actually there are quite few in competition with Chertoff  - i.e. Larry Silverstain, and quite a few Democrats-hard to hate Obama -he's just a monkey- a ball-less homo-POS piece of human excrement Monkey-but a monkey nonetheless. It's hard to hate monkeys. 

Tue, 06/26/2012 - 16:19 | 2562749 cougar_w
cougar_w's picture

Fear is the mind killer

Tue, 06/26/2012 - 14:59 | 2562447 Bicycle Repairman
Bicycle Repairman's picture

When you want to run a centralized world controlled by a small cadre, you must to believe in and use centralized processes to solve problems.  You do not want to admit that you need the input of a great number of people to get the world to work and to get a modicum of the outcomes you desire.  The central banks have failed and I think they may start to admit that.  Other "top down solutions" include war with total domestic mobilization, or authoritarian government with direct central planning.  And we've had a taste of both of those.

I wonder what shoe drops next?

Tue, 06/26/2012 - 14:58 | 2562441 MrBoompi
MrBoompi's picture

Nobody wants to put himself out of business and see his investors and stockholders get nothing, but that's what we seem to be asking them to do.  No, someone with more authority must put them out of their misery for us, but they have been paid off to look the other way, or else they really don't have the authority we think they do.  These banks are in such bad shape they can't even afford to mark their bad investments to market and are forced to steal from the rest of us through inflation and outright fraud just to get by. 

 

 

Tue, 06/26/2012 - 14:36 | 2562379 walküre
walküre's picture

Pessimism hasn't even come out of the gate just yet. Wait for utter and complete depression.

Only when depression turns in to anger, will we return to optimism.

We may get depressed but we're far from reaching a real state of anger yet.

Cooler heads will prevail when certain heads are chopped off.

Tue, 06/26/2012 - 14:16 | 2562328 Mad Mad Woman
Mad Mad Woman's picture

Oh what a tangled web the Powers that Be weave............when they practice to deceive the people of the world. Like I said before......these assholes better find a DEEP hole somewhere to hide. It won't be pretty.

Wed, 06/27/2012 - 09:55 | 2564755 Mitzibitzi
Mitzibitzi's picture

They have. It's under Denver airport.

Wed, 06/27/2012 - 01:18 | 2564103 OneTinSoldier66
OneTinSoldier66's picture

I <heart> Jon Corzine

 

/sarc

Tue, 06/26/2012 - 15:54 | 2562658 RallyRoundTheFamily
RallyRoundTheFamily's picture

I wish it would go down like this, but the blame game will be on 24/7.

red vs blue, black vs white, everybody vs muslims etc

Tue, 06/26/2012 - 13:31 | 2562198 BBullionaire
BBullionaire's picture

The BIS? what the same BIS that smashes the metals on a daily basis to support fiat, bonds  and the printing press. That's rich.

http://bulletsbeansandbullion.blogspot.co.uk/2012/06/spring-clean.html

Tue, 06/26/2012 - 13:05 | 2562124 doomandbloom
doomandbloom's picture

giggity giggity !

Tue, 06/26/2012 - 13:00 | 2562108 michael_engineer
michael_engineer's picture

The impediments to growth are cheap energy and cheap resources to use as inputs to make the outputs.

Tue, 06/26/2012 - 13:29 | 2562192 Chief KnocAHoma
Chief KnocAHoma's picture

ZIRP + QE1 + QE2 + CDS + MBS + EU + PIIGS = OH SHIT!

Tue, 06/26/2012 - 12:57 | 2562099 11b40
11b40's picture

“Structural factors” caused the recession—and the unemployment and housing morass—and those factors are still impeding growth, he said. So it would be a “mistake” to tie monetary policy to the unemployment rate. Same thing with the housing recovery. Vacant homes are the problem, not the already “awfully low” mortgage rates. And further monetary stimulus would “just raise inflation.”

How true.

First, the monetary policy of the past 4 years has never been about anything but saving the Bankers and Crony Capitalists that are wired into the political process.

Second, this is all a function of DEMAND, which is a function of un/under-employment and consumer debt, which are functions of all the factory and clerical jobs that have been shipped overseas.

Is it better for business to have a clear vision of all possible tax and other expense liability?  Well, of course, but that is not what is holding back investment in growth.  It's DEMAND.  I am so sick of Politicians, the Media, and the Financial community talking about everything under the sun as to why this economy is so screwed up....except DEMAND.  If suddenly a business finds they have a big backlog of orders they can't fill, and if they don't do something those orders are going to their competitior, future taxes and healthcare costs will be forgotten....it will be balls to the wall to fill the orders.  If it requires a new truck, a new shift, new machinery, or a new factory, it will be done IF THERE IS SUFFICIENT DEMAND.

Jow much longer can we deny how badly we have been sold out over the past 40 years?

Tue, 06/26/2012 - 17:14 | 2562910 Ned Zeppelin
Ned Zeppelin's picture

Agree ++1 11b40. Demand is the problem, and the utter vacuum where drivers of growth no longer exist.  There are no compelling drivers that will lead to the amount of demand the system requires to fed itself and pay back the debt.  

Tue, 06/26/2012 - 16:25 | 2562767 cougar_w
cougar_w's picture

Central Banks and economists ignore demand and won't talk about it because it's something they can't manipulate. Anything they cannot manipulate doesn't matter. Even if it matters a lot.

Tue, 06/26/2012 - 15:24 | 2562556 John_Coltrane
John_Coltrane's picture

The transition from a "growth" economy to a steady-state one requires lower expectations-that's the problem.  All exponential growth processes are eventually truncated-usually at a critical point also known as a phase transition.  That's what we're experiencing now with the lack of demand you so correcctly identify as the problem whose name will not be mentioned.  As they say, you can't push on a string and expect the other end to move-but central bankers keep trying.

Tue, 06/26/2012 - 12:52 | 2562087 Lionhead
Lionhead's picture

I'm glad to see more folks beginning to see the failure of ZIRP & QE-x. This non-sense created by the faculty lounge leaders, staff & sycophants of the Federal Reserve System is the end of them. The final bubble will be their US Treasury Notes. When that explodes it will take down the entire system with it. The Chinese are ahead of the USA because at least they employ people that have real world trading experience. Compare to the new chap from the FED that's replaced Brian Sack. Another over educated ideologue with no trading experience, yet this person is to head the PPT. Only an idiot would put such a person in charge of this position.

The solution will only come when the enabling politicos & their banking bosses are eliminated from control. You can see today the in-fighting already starting in Euro-land as each faction squabbles over how to solve their problems. They had their chance with Euro-bonds, but declined. They have crossed the Rubicon as the US will do someday.

Tue, 06/26/2012 - 21:53 | 2563634 rufusbird
rufusbird's picture

I am not so sure about one point..."Only an idiot would put such a person in charge of this position." Consider is much easier to control a person who does not have enough experience to have formulated some strong ideas about how things work...

Tue, 06/26/2012 - 12:33 | 2562020 Snakeeyes
Snakeeyes's picture

Global Socialism. Every modern country went crazy with safety nets and borroweed to keep their scam alive, End of story.

Wed, 06/27/2012 - 00:47 | 2564062 Clowns on Acid
Clowns on Acid's picture

Agreed Snake iiii's - But what to do now?

Tue, 06/26/2012 - 13:34 | 2562209 Chief KnocAHoma
Chief KnocAHoma's picture

Global Socialism. Every modern country went crazy with safety nets and borroweed to keep their scam alive, then humanity woke up, discovered the lies and began cutting the balls off the liar politicos and their banker friends in retaliation for sending the world back into the dark ages.

Fixed it.

Tue, 06/26/2012 - 18:03 | 2563063 mjk0259
mjk0259's picture

Not so much US. Budget was close to balanced under Clinton. Only major expansion in social programs since then was Medicare Rx but welfare was reduced same time. Much of debt attributable to Iraq, Afghanistan, bank bailouts and tax cuts for wealthy. Ireland wasn't running a deficit either - just made the mistake of taking over all bank debts.

Tue, 06/26/2012 - 19:55 | 2563311 Overfed
Overfed's picture

Don't forget that the budget was "balanced" by dipping into SS and with a little creative accounting. But yes, since 9/11, the .gov has been really spending way too much.

Tue, 06/26/2012 - 23:26 | 2563882 Lord Koos
Lord Koos's picture

Starting wars without raising taxes to pay for them is pretty much a recipe for failure.

Wed, 06/27/2012 - 01:06 | 2564092 engineertheeconomy
engineertheeconomy's picture

You are wrong. Starting wars with the printing press just causes higher prices and higher unemployment for the poor. Taxes would be double dipping (or double fucking) the poor because the central bankers would only use that revenue to buy cocaine

Tue, 06/26/2012 - 13:32 | 2562200 eatapeach
eatapeach's picture

The story doesn't end there, no. It gets much more interesting when titsuckers outnumber tits.

Tue, 06/26/2012 - 14:35 | 2562375 Think for yourself
Think for yourself's picture

The story doesn't end there, no. The BIS stands really, really close to the top of the pyramid. I can't bring myself to believe they would criticize the current status quo without standing at the ready to implement the next paradigm that will serve the puppetmasters.

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