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Breaking Bad (Habits)
Authored by Stephen Roach, originally posted at Project Syndicate,
It was never going to be easy, but central banks in the world’s two largest economies – the United States and China – finally appear to be embarking on a path to policy normalization. Addicted to an open-ended strain of über monetary accommodation that was established in the depths of the Great Crisis of 2008-2009, financial markets are now gasping for breath. Ironically, because the traction of unconventional policies has always been limited, the fallout on real economies is likely to be muted.
The Federal Reserve and the People’s Bank of China are on the same path, but for very different reasons. For Fed Chairman Ben Bernanke and his colleagues, there seems to be a growing sense that the economic emergency has passed, implying that extraordinary action – namely, a zero-interest-rate policy and a near-quadrupling of its balance sheet – is no longer appropriate. Conversely, the PBOC is engaged in a more pre-emptive strike – attempting to ensure stability by reducing the excess leverage that has long underpinned the real side of an increasingly credit-dependent Chinese economy.
Both actions are correct and long overdue. While the Fed’s first round of quantitative easing helped to end the financial-market turmoil that occurred in the depths of the recent crisis, two subsequent rounds – including the current, open-ended QE3 – have done little to alleviate the lingering pressure on over-extended American consumers. Indeed, household-sector debt is still in excess of 110% of disposable personal income and the personal saving rate remains below 3%, averages that compare unfavorably with the 75% and 7.9% norms that prevailed, respectively, in the final three decades of the twentieth century.
With American consumers responding by hunkering down as never before, inflation-adjusted consumer demand has remained stuck on an anemic 0.9% annualized growth trajectory since early 2008, keeping the US economy mired in a decidedly subpar recovery. Unable to facilitate balance-sheet repair or stimulate real economic activity, QE has, instead, become a dangerous source of instability in global financial markets.
With the drip-feed of QE-induced liquidity now at risk, the recent spasms in financial markets leave little doubt about the growing dangers of speculative excesses that had been building. Fortunately, the Fed is finally facing up to the downside of its grandiose experiment.
Recent developments in China tell a different story – but one with equally powerful implications. There, credit tightening does not follow from determined action by an independent central bank; rather, it reflects an important shift in the basic thrust of the state’s economic policies. China’s new leadership, headed by President Xi Jinping and Premier Li Keqiang, seems determined to end its predecessors’ fixation on maintaining a rapid pace of economic growth and to refocus policy on the quality of growth.
This shift not only elevates the importance of the pro-consumption agenda of China’s 12th Five-Year Plan; it also calls into question the longstanding proactive tactics of the country’s fiscal and monetary authorities. The policy response – or, more accurately, the policy non-response – to the current slowdown is an important validation of this new approach.
The absence of a new round of fiscal stimulus indicates that the Chinese government is satisfied with a 7.5-8% GDP growth rate – a far cry from the earlier addiction to growth rates around 10%. But slower growth in China can continue to sustain development only if the economy’s structure shifts from external toward internal demand, from manufacturing toward services, and from resource-intensive to resource-light growth. China’s new leadership has not just lowered its growth target; it has upped the ante on the economy’s rebalancing imperatives.
Consistent with this new mindset, the PBOC’s unwillingness to put a quick end to the June liquidity crunch in short-term markets for bank financing sends a strong signal that the days of open-ended credit expansion are over. That is a welcome development. China’s private-sector debt rose from around 140% of GDP in 2009 to more than 200% in early 2013, according to estimates from Bernstein Research – a surge that may well have exacerbated the imbalances of an already unbalanced Chinese economy.
There is good reason to believe that China’s new leaders are now determined to wean the economy off ever-mounting (and destabilizing) debt – especially in its rapidly expanding “shadow banking” system. This stance appears to be closely aligned with Xi’s rather cryptic recent comments about a “mass line” education campaign aimed at addressing problems arising from the “four winds” of formalism, bureaucracy, hedonism, and extravagance.
Financial markets are having a hard time coming to grips with the new policy mindset in the world’s two largest economies. At the same time, investors have raised serious and legitimate questions about Japan’s economic-policy regime under Prime Minister Shinzo Abe, which unfortunately relies far more on financial engineering – quantitative easing and yen depreciation – than on a new structural-reform agenda.
Such doubts are understandable. After all, if four years of unconventional monetary easing by the Fed could not end America’s balance-sheet recession, why should anyone believe that the Bank of Japan’s aggressive asset purchases will quickly end that country’s two lost decades of stagnation and deflation?
As financial markets come to terms with the normalization of monetary policy in the US and China, while facing up to the shortcomings of the BOJ’s copycat efforts, the real side of the global economy is less at risk than are asset prices. In large part, that is because unconventional monetary policies were never the miracle drug that they were supposed to be. They added froth to financial markets but did next to nothing to foster vigorous recovery and redress deep-rooted problems in the real economy.
Breaking bad habits is hardly a painless experience for liquidity-addicted investors. But better now than later, when excesses in asset and credit markets would spawn new and dangerous distortions on the real side of the global economy. That is exactly what pushed the world to the brink in 2008-2009, and there is no reason why it could not happen again.
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Discipline. There is no substitute.
I'm not so sure about that....
A whole raft of uninterconnected disassociated and merely inconvenient shit packed together as tightly and as fast as possible, thrown willy nilly at the peasantry after the wee hours on Friday night, never to be heard again except when absolutely necessary for an official "I tidja so", renamed as policy from its original proper classification as clusterfuck deluxe, especially when engaged as if the heavens themselves opened up devouring the entire self absorbed moment of the planet playing with itself, seems to have worked pretty well to date, no?
staring over top of bifocals at nothing in particular wondering why that sounds scarily, ever too true
Yup, an unpleasant banking event will occur late on a Friday. Those in the know will be getting out of Dodge/making final preparations while the rest will sleep comfortably basking in the glow of the pretty msm talking heads' reassurance that the heroes at the Fed have it all under control....
Here are three points most arm chair economists are not looking at :-
1) The fed manipulate the market no matter what anyone thinks. Just look at the SPX since the fed announement in may ==> http://bit.ly/14Ey1Xa this shows the market has been down since their alleged tapering.
2) The fed has done nothing, but tell people they could taper. Nothing has been physically done yet at all, they are just spreading the usual rumours to move the market.
3) the market was heavily overbought, and they needed an excuse to bring the market down, without doing anything physically so that the smart money can enter long positions on the market as we bounce soon, and make off like bandits.
See how it works now people!!! The FED can manipulate the market with a few words and wtihout doing anything...and I mean ZERO monetarily wise. Sit back and ask yourself with this big sell off on the S&P, has there been anything done yet, nope...only words my dear friends. I think you are now seeing my point yes????
No way they tighten.. if they do go long RIOT gear! http://tinyurl.com/pp588mj
"the United States and China – finally appear to be embarking on a path to policy normalization. Addicted to an open-ended strain of über monetary accommodation that was established in the depths of the Great Crisis of 2008-2009"
ROFL
<stopped reading there>
I double dog dare Bernank to reduce, let alone stop, the QEaaasing Love the Fed's been shoveling Wall Street's way for 4 looong years now.
Let's see what these markets are really "made of."
Ben Bernanke's Grand "Virtuous Circle" macroeconomic experiment, indeed...a 4+ year accretion of phantom, illusory & debt-saturated "wealth," subject to evaporation at the slightest disturbance and at the speed of light.
He won't. He can't. Reviving the economy was never the objective of QE, so a revived economy (which is neither present nor imminent) would not give cause to stop QE. Worthless article.
Yep. Reading from a script.
This guy is smoking crack.
Sometimes I think its us that is smoking the bad stuff......
The Fed is going to tighten?
Riiiiiiiight. Suddenly Bernanke thinks he's Volker, and that interest payments don't matter, I guess.
It's a different situation. I'm going to KISS.
The banks are essentially beholden to the FED at this point.
The banks have the money to lend but won't, my guess is because Bernanke is ordering them not to. If you understand fractional reserve banking, money is created as it is lent out. So what Bernanke did was said "hey, I'm gona' recapitalize you (banks) but you can't lend that money out because it would cause hyperinflation. So you're now left with the situation that "banks got bailed out we got thrown out" which is true, but better than hyperinflation.
I'm guessing the FED is trying to provide banks with a cushion so that the FED can TRY to exit via tapering. So instead of POMO it will be the banks executing the trades but with previously FED provided liquidity (why aren't banks lending....yet?)
In addition the Federal government has volunteered itself as the creditor to citizens in the form of student and car loans which HAS in many respects kept the economy on it's footing... WHICH has been FED enabled as well.
There's an even simpler way to analyze the reason why Bernank rained fiat down on the banking sector.
With as many as 35% of banks being de facto insolvent (and de jure insolvent, if they were forced to mark/sell assets, especially at non-marked to unicorn values that they now can, to try and stave off functional insolvency), Bernank flooded them with fiat, and then coordinated ways (with CONgress and bad asset dumpsters like Fannie/Freddie) to keep them from having to unload their bad assets at true FMV (unless Maiden Lane or said shit dumpsters such as Freddie/Fannie were buying said assets, at multiples over FMV, of course), meaning that...
...the banks aren't lending because
a) they have to have & hold fiat liquidity in order to offset what is still a massive portion of their portfolios that are toxic,
b) there's not even significant demand for loans from qualified borrowers given the very low aggregate demand for goods and services that central bank interventionism has actually helped foster,
c) the PTB know there are future shocks in store (think of these shocks as massive reverberations from the tightly wound coil the Fed has created as that coil ultimately starts and proceeds to unwind) that will cause these "banking" entities to need a large stash of fiat to try and weather these future shocks.
Mass fiat extinction events lay ahead.
IMHO banks aren't lending because they don't think they will get it back. The "recovery" is all smoke and mirrors. It's tough to make a buck with big govs' big hands in the till.
O-and-O...
The banks will not buy treasurys for any period of time at current yields without the backstop of the liquidity injections. In turn, absent a bid under any and all instruments of US Govt debt, yields will continue to rise (rather markedly). That is the death knell for the unrepayable (and still accumulating) debts. QE will not and cannot stop. The risk the FED faces now is one of confidence - that the world will not "buy" the reversal of the taper meme.
The banks are not beholden to the FED - they ARE the FED.
Did the Federal Government just get a new funding source? How exactly are you going to taper Medicare, Medicaid, Social Security and our Stazi Police State?
Ah hem....
Details...
How come every fucking person telling me that everything's A-hunkie-dorie-OK can't give me a single detail about how this shit's gonna get fixed?
Why, Knukies, why?
Because the only people that would take responsibility(state positive opinion) for this mess are either masochists or idiots?
Or vying for power, i see that allot too, dipshits supporting the counter counter, because they know they can get donors, its funny in a sad way.
"I'm gonna stir the pot because money and pussy, assholes."
Or instead you could just not openly advocate limits on peoples free will.
And because of the climate, caveat: as long as their free will doesn't harm any one, because people are retarded and don't understand the constitution, natural rights, or basic forms of justice and rule of law.
You know full well that the "fix" is in.
Lemme get this straight.
The Bernak is starting along the path of tempering (Tapering has very bad visuals for me) the level of monetary ease. Because...
It's the right thing to do... so's not manipulating rates, stawks or precious metals
The economic recovery is starting to be able to stand on its own two feet without fiscal or monetary help... sure...
Employment is great. ....Ah hem.... sure....
There is now a great clarity with respect to leadership at all levels of government and policy making... Ha ha ha ha ha ... right
Laws are applied equally and fairly to all members of society... Uh huh...
There is no governmental media manipulation of the peasantry... Of course not...
What else? I forgot... Conveniently forgot because its otherwise painful...
So what the fuck is gonna happen?
Nothing.
Fuck
All
Nothing
Q4Evah!
We are still caught in a Liquidity trap which is a monetary phenomenon caused by non-monetary events, meaning nuffing gonna happen.
Nuffing.
Welcome to Japan 25 years ago.
Proceed accordingly.
Nuffin's changed.
Just like Alex and the Ludovico technique.
Too late now, detox is painful and costly.
What the hell is this garbage? Saturday humor? It must be because the whole article is a joke.
I felt the same about this pulp article, Doc. My thoughts were:
O.p.i.n.i.o.n. and B.S. at that.
"As financial markets come to terms with the normalization of monetary policy in the US and China,..."
In other words, instead of stealing everything not nailed down, like we have for the past five years, we are going to return to the good old days when we just stole you blind.
"there is no reason why it could not happen again"
This phrase relies on several assumptions that do not appear to be correct. For example, "There is a precedent for what is taking place in financial markets today."
Hello. My Name is Ben and i am an addict.
So i just encountered my first half ounce lays (tm) brand bag of chips, there were seven of them, maybe eight if you count the crumbs and partials..
For Fed Chairman Ben Bernanke and his colleagues, there seems to be a growing sense that the economic emergency has passed, implying that extraordinary action – namely, a zero-interest-rate policy and a near-quadrupling of its balance sheet – is no longer appropriate...
WRONG!! WRONG!! WRONG!! COULDN'T BE MORE WRONG. stopped reading right there. utter hogwash! zirp 4 evah, qe 4 evah. wrong bitchez, wrong wrong wrong
Once I began reading the article I couldn't wait to see the comments. Anyone that knows anything knows that when the FED says they are going to taper what they really mean is that they are getting ready to double down.
They need a reason to make the stock index charts look the same as they do every year. That is it. Markets are run by FED computers now and have nothing to do with nothing so the FED and the traitors in Washington make shit up each year to cause the sheeple to say, "Those economists at CNBC sure are smart." Meanwhile the whole thing is a game played by the grifters over at the Goldman Sach.
These articles are written for the immigrants coming in from Asia with the hot money. Nothing to see here. Move along.
Eh? You know what? I wish Bernanke would turn off the liquidity tap like he threatens to do every other week. Then I can watch the entire financial system collapse as the leveraged assholes waiting in the wings to btfd get their houses in the Hamptons repossessed by the bailiffs. Does this joker seriously think the flipping trillions (notional) in derivatives and insurance will be honoured by the martians once the related equities markets lose all their robots?
It's already a slow motion car crash. Nothing can change that fate. Once Ben's shower gets turned off, it will be price discovery time, and all the masters of the universe from every finance house on Wall St will be standing buck naked without their cloak of wealth to hide their ugliness. They are trying to delay the inevitable, not hasten it.
That would be great, finance as just an epiphenomenon: In 2008-2009 a lot of people starved because of the food prices (not in the western world). The idea that our complex globalized economies would just keep cranking out and distributing goodies without a functioning money system is completely crazy. In the depression in the thirties (and previous depressions), people survived by going back to the family farm -- and a whole lot didn't really make it through. In our urbanized global world similar levels of disruption would create unspeakable hardship and death. There are a lot of historical precedents for social and economic collapse and extinction.
Get real
September for a taper isn't just an arbitrary coincidence.
Washington runs out of money on 9/2/13.
Remember? We punted the debt ceiling until September.
Given the carnivorous rage momo that Republicans have amidst all of Barry's present scandals, a large economic hiccup is the last thing he needs on his watch going into midterms.
They couldn't beat him with a fundamentally shit economy that had an aestically pleasing stock market in 2012. Can't really beat him on market performance now either.
Maybe they say "stick 'em up," on the debt ceiling issue, cut a deal that the scaling back of QE can help pay some bills & take down the market on Barry's watch for political advantage going into 2014-16.
It's not the most unimaginable scenario. Take it down a bit, blame it on Dodd-Frank, get Team Red back in the game in 2014 & start a fucking war to kick start this bitch to S&P 2000.
Lest I forget, just for comedic value- BTFD bitchez!!!
Come on Ben, take one for the team. You'll be immortalized.
I vote for less articles on zh rather than mindless filler crap like this....
You look pissed Kito.
http://rt.com/news/ecuador-correa-us-snowden-306/
That's right.....tired of being the lab rats of the American government......you know what they say about standing up to a bully......that's the end of the bully......seems now Obama has softened his tone with correa after the u.s. threatened trade sanctions.....correa told him to fuck off and keep his trade preferences.......
I was going to comment on this BS article but so many ZHers that know more than I do beat me to it. I wish I could write BS that sounds like I know something when I don't know anything like Stephen Roach does. I agree with Kito. I wasted my time reading it. Less of this type article would be good.
No Jobs...It is Clear...Not Rocketry
"Addicted to an open-ended strain of über monetary accommodation that was established in the depths of the Great Crisis of 2008-2009, financial markets are now gasping for breath."
Same BS analysis, different day. I'll believe it when it happens. Until then, business as usual.
Repeat after me: There is no voluntary exit from ZIRP. Every Central Bank eventually panics and prints. Until the bond market is in full revolt, the pattern will remain the same.
The question that needs to be asked is: Is the next itme the last time?