Money Cannot Buy Growth

Tyler Durden's picture

Authored by Andy Xie, originally posted at Caixin,

Money Cannot Buy Growth

China and the United States are running the greatest experiment in monetary stimulus in modern economic history, and the evidence shows it is not working

Since Alan Greenspan became the Fed chairman in 1987, there has been a policy consensus on the primary role and effectiveness of monetary policy in cushioning an economic downturn and kicking it back to growth. Fiscal policy, due to the political difficulties in making meaningful changes, was relegated to a minor role in economic management. Structural reforms have been talked about, but not taken seriously as a tool in reviving growth.
In the four years after the global financial crisis that began in the summer of 2008, the United States' monetary base more than tripled and China's M2 has doubled. This is the greatest experiment in monetary stimulus in modern economic history.
Staving off crisis and reviving growth still dominate today's conversation. The prima facie evidence is that the experiment has failed. The dominant voice in policy discussions is advocating more of the same. When a medicine isn't working, it could be the wrong one or the dosage isn't sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day.
When the crisis began, I predicted how central banks and governments would react: they would ease monetary policy and increase fiscal deficits, the medicines wouldn't work, they would increase the dosage and the end game is worldwide stagflation. I argued in favor of monetary and fiscal stimulus to the extent to stabilize the situation, not to revive growth. The latter needed structural reforms to be achieved.
Structural reforms are difficult because they would upset a lot of people and are slow in producing results. Smart and powerful people usually want to produce quick results to show their worth. This is why policy actions often take the path of least resistance, even if they lead the world to the edge of the cliff.
Smart People, Great Harm

The effectiveness of monetary policy was last discredited in the 1970s. The persistent attempts to revive growth with easy money led to stagflation. The lesson had a powerful impact at the time. Many theories were developed to explain why monetary policy didn't work. The rational expectation theory was the main one. Soon after inflation was killed by high interest rate policy and the resulting recession, many theories were developed to revive the argument in favor of monetary policy. Smart people want to be relevant and effective. This is why they cannot hold onto a theory that denies their relevance in the real world. This is why the economics profession so quickly embraced monetary stimulus again so soon after it failed so miserably.
In parallel with the new fondness for monetary stimulus, the economics profession in the 1980s advanced the theory of an efficient market with respect to finance. It is a child of the rational expectation theory applied to finance. Even though the economics profession found enough ammunition to shoot it down in monetary policy, it embraced it for financial markets. The combination led to Greenspan's monetary policy and financial supervision at the Fed for nearly two decades. He created possibly the greatest man-made economic catastrophe in human history. The world still lives under his shadow.
The real world has turned to be opposite to the favored positions of the economics profession: the financial market is not only inefficient but systematically bubble-prone, and monetary stimulus has abetted in bubble creation and its growth impact is merely the bubble spillover. Greenspan managed the U.S. economy largely through building up asset bubbles, even though he may have believed otherwise. As the U.S. dollar is the reserve currency for the global economy, Greenspan's policy was responsible for bubbles around the world.

Is Bernanke Greenspan II?

When the subprime crisis hit in 2007, the Bernanke Fed cut interest rates to ease the pressure. The policy triggered a massive increase in commodity prices, which depressed the U.S. and other developed economies and increased the pressure for the debt bubbles to burst. By mid-2008, it became apparent that the U.S.'s financial system was bankrupt because its underlying assets were hugely overpriced. The Fed turned its focus to saving the financial system through direct loans and cutting interest rates aggressively to ease the pressure on asset deflation. It has been successful at saving the financial system. Of course, a central bank can always print money to save its financial system, if it doesn't mind depreciating its currency. The unique status of the dollar as the sole global reserve currency gave the Fed plenty of room to increase money supply.
The Fed has failed in reviving growth in almost four years. Five years after the crisis first began, U.S. employment is still lower and household real income is also lower. The Fed still believed that it could get growth going and introduced a third round of quantitative easing and QE4 for that purpose. As I have argued many times before that globalization has cut the feedback loop between demand and supply even for a large economy like the United States'. The traditional thinking on stimulus is unlikely to be relevant in today's world.
One angle in QE3 and QE4 is their focus on decreasing mortgage interest rates. When a central bank targets a particular asset, it's likely to work in the short term. The current U.S. housing revival is largely due to the Fed's policy. Unfortunately, the revival is strongest in areas where housing prices are already high, threatening another bubble.
The most visible byproduct of QE is rising stock prices. After QE1 and QE2, stock prices around the world did well for six to nine months. When the Fed buys assets, some investors get the cash. The ones who get the cash first have the incentive to buy stocks to front-run the ones who would get the cash later. This dynamic is self-fulfilling in pushing up stock prices.
The Fed seems worried about some localized bubbles and threatens to end QE this year. Its action could be (1) to slow asset price appreciation or (2) to shed responsibility for the bubble consequences. It is too early to say which. One thing clear is that Ben Bernanke can't be Greenspan II. The world has changed: the debt levels are already too high, and the global economy is inflationary, as emerging economies are already experiencing high inflation. He couldn't run a bubble economy even if he intended to.
Bernanke is scheduled to leave the Fed in 2014. If inflation isn't serious then, he would be lucky and pass the hot potato to the next chairman. If inflation hits before his exit, he would have to take action. The Fed's balance sheet may top US$ 4 trillion then. It would be extremely difficult to shrink it fast enough to stop inflation. I suspect that the Fed would accept the money out already there turning into inflation.
China's Tipping Point

China's monetary policy has been an amplifier for the Fed's policy. When the latter is successful in increasing credit to expand demand, China's monetary policy would increase capacity to contain the former's inflationary effect. China could further increase money supply to run a bubble economy on the side without worrying about currency devaluation. This bicycle monetary machine ended when the United States' debt level became too high to grow. This is why the monetary growth between 2008 and 2012 had such low effectiveness on growth and many side effects like inflation, a property bubble and overcapacity.
In 2012, China's M2 rose by 13.8 percent and net fund-raisings reached 30 percent of GDP. The resulting growth was quite low. The National Bureau of Statistics showed no growth in thermal power production compared to 12.5 percent per annum in the previous decade. The Ministry of Railroads showed that the freight traffic in the first eleven months declined by 1.1 percent compared to 6 percent annual growth in the six previous years. Listed companies showed middle single digit revenue growth, which is likely in line with nominal GDP growth. Considering inflation was quite high, adjusting the nominal growth of listed companies for inflation suggests that the real economy had a very low growth rate in 2012.
How could so much capital (30 percent of GDP) have created so little growth?  Add up depreciation cash, retained corporate earnings and the portion of fiscal revenue in investment, and the total investment in 2012 probably reached 50 percent of GDP again. For such a high level of investment, a growth rate of 10 percent would be considered low. China's official statistics showed a GDP growth rate of 7 to 8 percent. My estimate is 3 to 5 percent. Either would show extremely low efficiency in turning monetary resources into growth.

The global economy was a debt bubble, functioning on China over-borrowing and investing and the West over-borrowing and consuming. The dynamic came to an end when the debt crises exposed debt levels in the West as too high. The last source of debt growth, the U.S. government, is coming to an end, too, as politics forces it to reduce the deficit. When the West cannot increase debt, China doing so is not effective on growth and could trigger yuan devaluation.
Only Reforms Can Revive Growth

Globalization has changed how a national economy works, even one as big as the United States'. The biggest change is that national policies can't affect wages. They are internationally determined. When a government tries to stimulate with more fiscal spending and lower interest rates, its short-term effect, if any, is to increase capital income. As technologies become more effective in spreading work around the world, the wage squeeze in the developed economies would become more intense.
The technology shock to the white-collar economy in the West is just beginning. It makes it easier to shift white-collar jobs around the world and eliminates even more jobs. The resulting efficiency gain is hard to realize if the displaced workers cannot find alternative employment quickly. The labor market statistics in the West strongly suggest the importance of this force. In the United States, the labor force has shrunk because, I believe, many found the available wage not worth the bother. These dropouts are better off shifting to pensions or disability benefits. The only way to bring them back into the labor force is to cut the cost of living to make the low wage worthwhile.
I believe that the developed economies must make their labor market highly flexible, income redistribution efficient, and non-tradable components of the living cost – housing, health care and education – low and effective. This is a simple prescription. But it takes time to produce benefits and could upset vested interests in many industries. The easy way out is to print money, hoping that the pie would grow to take care of everyone. This has failed and will do so again.
China's competitive advantage is its labor cost. It is the reason for China's growth in the past decade. But, the system has been allocating the fruits from growth through asset inflation. It is disproportionately in favor of the government. One effect is to increase investment beyond what a normal market economy would allow. The system essentially sucks in the labor productivity gains into the government through inflation tax. It has worked because the pie was expanding fast enough to withstand this burden. As the pie stops growing quickly, the inflation tax is hard to collect. This is why the property bubble is deflating and the government is short of money.
So many who have benefited from the system long for the return of yesterday. The policy focus so far is to change perceptions through propaganda, hoping to revive asset markets. The problem is that China cannot put on this show alone. While the West suffers debt crises, China cannot crank up exports to charge up an asset bubble. The bad news is obviously not acceptable to those who are used to easy bubble money. China's policy focus is likely to remain on changing perceptions in 2013.
The Inflation Explosion

Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth. Emerging economies are already experiencing high inflation. Historically they worry about inflation, but don't do much about it as long as their exchange rates are stable. India is already facing devaluation. It is taking inflation more seriously. Other big emerging economies don't face the same pressure. They are not taking action. Their exchange rates will tumble when the Fed raises interest rates.
The developed economies have low inflation rates because their labor markets are depressed and their economies are mostly about labor costs. Their inflation will come when either their labor markets tighten up due to declining labor force or imported inflation raises inflation expectation and wage demand. Both forces are intensifying. The Fed has promised to take action when the United States' inflation rises above 2.5 percent. It was 2 percent last year. In 2014 it would break through the level. The Fed has to raise interest rates in 2014.

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Manthong's picture

Liquidity cannot buy velocity.

LawsofPhysics's picture

especially when it is being mis-allocated and mal-invested.

zerozulu's picture

So if money cannot buy growth and money cannot buy happiness. It means growth cannot buy happiness?

EnslavethechildrenforBen's picture


Animal, vegetable, mineral.

The first two grow.

The third stays a constant, it can neither get in to or out of the universe.

When you hear about growth, what they really are talking about is simply theft.

Seer's picture

"When you hear about growth, what they really are talking about is simply theft."

Thank you for that!

It is, as we know, it's but a sales pitch to attempt to sell yet another Ponzi bubble-up.  Always looking for suckers.  More and more tricks and mirrors being used now that any semblance of growth of the physical sort cannot occur (it's been all [net] virtual for quite some time).

Seer's picture

If I drink a lot things seem to spin pretty fast!

TheFourthStooge-ing's picture


The dominant voice in policy discussions is advocating more of the same. When a medicine isn't working, it could be the wrong one or the dosage isn't sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day.

The patient doesn't care because the medicine has him tripping balls.

LawsofPhysics's picture

Don't tell krugman, lest he be rquired to return that nobel.

Bunga Bunga's picture

That "Nobel" is only a trophy sponsored by banksters, that you get if you lick their ass. 

pods's picture

Sorry to bother you Dr. Krugman, but there is a Mr. Dimon on the phone, and he says something about it being time to toss his salad?

Are you supposed to have lunch with Mr. Dimon, because it is not on your schedule?


Wilcat Dafoe's picture

Heh heh, and I bet after Krugman and Dimon finish their salads, they tongue each other's arseholes!


TheFourthStooge-ing's picture

Maria Bartiromo, Davos salad tosser, took care of Mr. Dimon today.

I believe Dr. Krugman is on Jamie's lunch schedule for tomorrow.

Bunga Bunga's picture

What the Keynesians ignore in ther "science" is that marginal productivity of debt always goes below zero.

Börjesson's picture

This was one of the best analyses I've read here in recent months. Well done, Andy Xie!

Seer's picture

Yeah, it reads really well as long as you don't question the unstated premise of perpetual growth on a finite planet.

Xie and others are no more than setup folks for another round of racketeering.  Tag team...

Wilcat Dafoe's picture

Coats of paint don't replace the rot, and the rot goes all the way down to appraisers who over-valued houses up to the credit agencies and banks that securitized mortgage debt and based further derivatives upon them.

What else is new?

Read Krugman's last couple of blog posts - read the comments from his disciples.  These people are a religious cult, and they are in power, and the Ivy League econ factories are pumping out more like-minded twats who know nothing but theory year after year.

As long as Austrians don't prevail at Harvard and Yale, no matter how demonstrably wrong they are, no matter how many verifiable idiots those institutions inflict upon the world, nothing will change because people falsely believe that 1. Economics is a predictive science and 2. Ivy League institutions are particularly good at it.

We need more engineers and fewer MBAs. That'll fix the economy.


Seer's picture

Perhaps we're discovering that our "lifestyle" is NOT sustainable?

Economics is a means to measure the activities of trade.  Perhaps worse than those problems that you note is that people have lost sight of the fact that everything is hinged on the PHYSICAL world, the world in which resources are quickly depleting.  While "engineers" might be able to apply some virtual muscle to our "problems," they cannot create matter*.

* To be technically correct, most matter is still around, it's just that it's not so convenient to round up anymore (this requires energy, and if it's one thing that's more obviously in decline it's energy).

BLOTTO's picture

Even a mechanic gets it...

When the engine is flooded - you don't add more gasoline.


Why doesnt a fucking HARVARD/YALE/OXFORD graduate not get it?


A. Oh, thats right, because thats the plan - that their isnt one. The plan is to just completely fuck the masses over.

Seer's picture

How logical is it to believe that when one has the world by the balls (most of the existing wealth) that it is then necessary to squeeze them?  People have been tolerating things up until TPTB supposedly set out to make things "bad."  History should be quite clear as to how unpredictable rapid change can be- I'm not thinking that squeezing is going to be much longer tolerated (it may not appear the case now, but it's a sure thing things will get to the point of intolerance), in which case the potentially devastating risks to themselves (TBTB) just doesn't really seem to be worth the pursuit of just a little more gain (if there is really any gains left to be had).

We're blaming the pilots when the problem is the vessel (system).  And the vessel is running out of fuel not because of some sinister plan, but because of the operational premise of perpetual growth has finally met the wall of finite planet.

Hondo's picture

It is actually the seeds of its own destruction.  As revenue stagnates and more tricks are played including laying off employees it only collapses the future (based on the past) to its final conclusion.  The Fed has to realize it cannot win.  If (which I don't believe will ever happen) things improved and investors concluded the Fed was headed in either a neutral or opposite direction (even a smidgen) the markets would collapse and force the Fed to bring back the needle.  Most of the world has become welfare queens just living or getting by with state handouts.....production and wealth creation are becoming scarce.

Martin T's picture

"In essence, the present creation of money, out of nothing by the banking system, is similar – I do not hesitate to say it in order to make people clearly realize what is at stake here – to the creation of money by counterfeiters, so rightly condemned by law." - Maurice Allais, French 1988 Nobel prize winner.

Shizzmoney's picture

Hey guys, according to the WaPost, there are no more such things as bubbles:

Yes, the stock market is booming. No, it isn’t a bubble.

What we’re seeing now is a stock market boom that is simultaneously driving Americans’ wealth higher, supporting economic growth, and is well-supported by the fundamentals of what companies are earning.

Those aggregate statistics are misleading. According to the Survey of Consumer Finances, 95% all stock is owned by the top 25%, and 89% of stock is owned by the top 10% in wealth. 

The increase in the stock market, as the reason household finances of US families are improving, is not true.  Look at Tax reciepts.  Look at unemployment.  Look at the income graphs from the past 30 fucking years.

For the majority of the middle class, individual retirement plans are the only remaining asset owned (who STILL have not fully returned to the stock market) .
BUT the Fed (backed by the big banks/investment houses) is trying - with low interest rates - to get these suckers to buy stocks in their portfolios.

When this peaks to their liking, THEN the bubble can be created and collapsed - wiping but the last remaining major asset still owned by the public - their retirement portfolios.

The public is clearly getting cold decked. 

Floodmaster's picture

---->The combination led to Greenspan's monetary policy and financial supervision at the Fed for nearly two decades. He created possibly the greatest man-made economic catastrophe in human history. The world still lives under his shadow.<----

The money was 'printed' back THEN, Bernanke just try without success. Do you remember when everyone was happy and everything was good...

zerozulu's picture

Oh man, its simply greed and arrogance that destroyed The United States.

realtick's picture

True but those things are not chartable as far as I know.

joego1's picture

The large feedback loop explains a great deal of what we see. As much as we may see imported inflation political problems and war might be more of what we might expect.

Orange Pekoe's picture

Bankers are taking advantage of the weak economy to charge more for currency. They aren't helping the economy.

Man is the only animal that can remain on friendly terms with the victims he intends to eat until he eats them. --Samuel Butler

Why is that? Man is a good liar.


Seer's picture

It's nature.  Nature is deceptive.  Humans are OF nature.

We're fairly fine until dinner time comes around...

GCT's picture

I am going to be a bit contrary today and disagree with this. If they would have handed the people the money instead of bailing out the rich and corporations they may have indeed had some growth.  People would have paid down their debt, maybe even their mortgages and it might have restarted the economy.

An income tax holiday for a year may have worked as well.  But most of the non working people would have cried foul because they would not have been included in the holiday. I still think this may work but never going to happen as we cannot have the productive getting a break.  The problem is we cannot bail everyone out and that would take leadership to tell the sheeple this.  For the life of me I do not understand why we should continue this circle jerk without directly helping out the productive class of people.

I hope some of you can enlighten me on this.  I just do not understand why we buy defaulted property loans from banks when they could have just as easily saved the people with all that has been spent that will never be paid back anyways. 

I am honestly looking for answers to this mess.  Thanks for any replies all! 

Wilcat Dafoe's picture

People thought that if the major banks failed, "the economy" would crash.

What really would have happened is that many of the people who work in financial services, a sector which drove 'the economy' after the dot com bubble by trading around mortgage backed IOUs, would have been out of work.

Which would have been a good thing.  Lending from small banks would have continued, and we'd be looking at lower inflation right now.

And perhaps some of the tens of thousands of assholes with MBAs who know dick about running a business or innovating would have gone back to school for engineering.

Shizzmoney's picture

But most of the non working people would have cried foul because they would not have been included in the holiday.

And as a working liberal, I would gladly tell them to "go fuck themselves".

bank guy in Brussels's picture

You are quite right, the article is missing it, the writer actually knows little about 'monetarism' and is arguing against a caricature of it

There are in fact a small group of monetarists who are neither the debt-piling Keynesians, nor the liquidationist 'let everything collapse' Austrians that are dominant on ZeroHedge, nor the central bank 'QE' drones

And they have very specific things to say ... with good historical basis

Ambrose Evans-Pritchard is terrific in the UK Telegraph, if you follow his columns and blog posts he is extremely enlightening on this

You are very right is that one problem is that the monetary transmission is being done to banks and banksters, not to real people and the real economy ... the QE stuff is not the real monetarist approach, it is a weak, bankster-friendly part-imitation of it.

In fact, the monetarist solutions have not really been tried ... They are starting to get tried now, particularly in Japan, with the targeting of raising *nominal* GDP a couple points higher than the interest rate

Evans-Pritchard covered how Japanese Prime Minister Takahasi essentially tried such an approach in 1932-36, which made Japan the top country in the world that best escaped the Great Depression ... until the military murdered him for trying to cut wasteful Japanese military spending ... ZeroHedge linked to that yesterday, pooh-poohing it, because Japan hyper-inflated after Takahasi was murdered ... but that wasn't the fault of him or his programme.

Start reading Ambrose Evans-Pritchard, he is the best economic journo out there ... ZeroHedge is terrific with its corruption exposures, but Evans-Pritchard is totally essential for economic perspective today, and a bit wiser than ZH on macro-economics ... Evans-Pritachard is wrong on some things and makes some goofy calls, he is blind-stupid about the USA, but he tends to be very right on the EU, and he himself has quite advanced from the Austrian-type perspective to the pro-monetarist (in the better sense) point of view

Always good reading as well

Seer's picture

The fundamental problem still exists: debt obligations cannot be resolved with more debt obligations.

"If they would have handed the people the money instead of bailing out the rich and corporations they may have indeed had some growth"

Who is "they?"  Are we talking "we the people?"  And even then it doesn't matter because corporations (the banks) are "people" too; and even if they were not recognized as such they would still be able to write off losses, and writing of losses means a loss of govt revenue; end result is that it comes back on the shoulders of the people.

Given that the US has a HUGE negative trade balance I see no way that more consumerism (money directly to the people) is going to help this.

The analogy that I've used in the past is that I have a home loan and I go to the bank and tell them I'm not repaying it right now and that I want another loan to remodel. Sure, the house might end up better, and I would have been active, but now I've for more money owed and I'll unlikely be able to sell my house to repay the loans because everyone else is trying to do the very same thing!

We spent our future.

Notarocketscientist's picture

The problem is there are no answers

Just remember bad is now good.  Excellence is unacceptable.  Illogic is Logic.


War is Peace

GCT's picture

Thanks to all of you for the replies.  Seer I tend to agree with your comments about more debt on top of debt will not solve the problem.  They I was referring to the GDP sorry for not being clear on this.

Bank guy I do indeed follow Pritchard he is a good writer on the EU.

Seer I do not conumse unless I have too and I agree consumerism (keeping up with the jones) is what got us here.  Oftertimes we blame just the banks and forget to look in the mirror!

Dollar Bill Hiccup's picture

But it can buy Love ! ... er, well, s-x at least ...

alfbell's picture

The business cycle (boom and bust cycle) came into existence when government allowed central banks to exist and control banking and the currency and credit. This intervention has thrown free markets into total confusion and they are now circling the bowl.

This is where it all started (intervention and inflation). It is easy to correct and terminate.

But the population will never understand this, thus they will never take action to reverse it.

Game over.

earleflorida's picture

Great Read,  Thankyou Mr. Xie  


AgAu_man's picture

Dear Mr. Xie:  You still 'believe'?  You still believe that it's about economic "growth"?  LOL, tears... sorry.  Take a shot of Hopium and keep hoping.  And didn't another world empire (the Brits!) already ruin China once with 'opium?  Then launch a war, when the opium game was derailed by the Chinese?  Funny how the victims are stereotyped as the 'aggressors'.  What's new!?

It's about keeping the fiat-FRN as the GRC.  And yellow + black gold.  The DOD/MIC is a means to an end:  NWO.  Pure and simple. 

All else is smoke & mirrors, bread &  circus.  Got in now?

Seer's picture

Glad to see that someone else spots the glaring fault in these sort of presentations.  Just speed the premise by (that we can have perpetual growth on a finite planet) and everything can be made to look sensible.

NWO is a failure from the start.  There aren't enough resources to support it.  This isn't to say that some/many are trying to push it: but if you look at the EU leaders you can see the cracks forming.

Accounting101's picture

How many god damn times do we have to read the same article written by another cartoon character about the imminent end? How many times does an idea need to be wrong before it is finally given up on?

You are wrong today, you will be wrong tomorrow and you certainly be wrong next year. $16 trillion of government debt equals $16 trillion of private sector assets. That is just a basic economic fact and Hayek ghost can't change it.

Accounting101's picture

How many god damn times do we have to read the same article written by another cartoon character about the imminent end? How many times does an idea need to be wrong before it is finally given up on?

You are wrong today, you will be wrong tomorrow and you will certainly be wrong next year. $16 trillion of government debt equals $16 trillion of private sector assets. That is just a basic economic fact and Hayek's ghost can't change it.

Herdee's picture

How can you raise interest rates on the size of the overall debt that the United States has?There's not the tax base to support it.It's a demographic problem.The baby boomers are hitting the system now.