It looks like we are on for a big whacking bubble to burst and this time it looks like it will hurt for a long time. What’s to blame this time? Not learning from our mistakes! If Ben Bernanke was one of the students sitting in Joseph Stiglitz class at Columbia Business School, either he would be bumped off the course or he would be re-sitting the exams. The Federal Reserve fell into the trap of doing exactly what got us into the crisis in the first place!
Now what? The result of that trap: we have been on an upper and now the markets are ready are 'feeling the burn'. What goes up always ends up coming down. This time you will hear the thud from Europe, from Japan and from the USA. It won’t just be in stereo, it’ll be in Dolby-surround and this time it’ll blast you out of your seats!
You only have to look at the charts for the Nikkei and the S&P 500. Quantitative Easing may have given a bit of respite. It may have given something for the markets to chew on. The trend of the market has been to the upside but in recent days that trend has been tested, the Nikkei has breached that trend line with strong volume. The S&P teeters on the edge, this line in the 'technical' sand will be broken by the fundamentals of economies facing the winds of economic change.
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Nikkei
The S&P 500 teeters on the edge of this 'line in the sand'.
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S&P 500
June 18th-19th will be the time of reckoning Mr. Bernanke when there will be a Federal Reserve meeting and a summary of economic projections. One hint, just one tint of easing Quantitative Easing and your bubble will burst right then. The markets gave you a taste of things to come. If you look at the chart, the downturn corresponds exactly to the first time it was mentioned that there would be a tapering of QE4. Did you fall into the trap of what Mr. Stiglitz predicted, the trap of what actually got us into this crisis in the first place?
Abenomics might have been going on for months, but household consumption hasn’t increased significantly and it doesn’t look like it will. 15-year deflationary pressure on the Japanese economy has yet to be reversed. Experts say that the consumer prices will only manage to get a 0.1% rise and at a push 2% in 2014. The economy has expanded in Japan more in the past quarter than in the last year put together.
But Joseph Stiglitz already predicted that too. Quantitative Easing wasn’t going to lead to inflation or growth at all. How come Mr. Stiglitz got given the Nobel Prize, that he is a renowned professor and economist and yet the people that have the decision-making power don’t listen to what he has to say? Shout as he might, the Federal Reserve, theEuropean Central Bank, the rest of the monetary authorities around the western world and in Asia have gone against his advice.
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Ben Bernanke
Demand isn’t there at the moment in the economy. Production isn’t being utilized. Any monetary policy will only be temporarily of benefit to the market and keep them happy (as it has done for six months). But, it hasn’t stimulated growth and Stiglitz said that it wouldn’t. It was a trap to believe that it would. Inject as much money into the economy as you like, it won’t incite the banking system to lend more money to people, and people won’t be borrowing anyhow because they are not confident enough to do so. Create confidence and create production, then injecting money might make a difference. It’s the fiscal-side of things that needs changing. Divert the money that is being created into small banks that lend to small businesses and you will create an upturn. The big companies and the big banks are already doing well. But, it’s the big fish that are getting the largest maggots. Not the small-fry.
Stiglitz already predicted that the downside of Quantitative Easing was going to be a weak dollar [21]. That’s what we have. The Federal Reserve fell into that trap too. The downside is that stocks also rise. That’s what we have right now and it’s as plain as the nose on your face: maintaining the prices of shares artificially, means that the bubble will burst. You can see it throughout history time [22]and time [23]again.
Conclusions?
There’re some out there (quite a few) that think that we are set for a crash and a big one to boot. There’re some out there (admittedly there will be more of these when it all goes horribly wrong!) that will be telling you “I told you so and long ago”. As far back as 2010 Joseph Stiglitz was saying that Quantitative Easing wouldn’t do any good (but temporary short-term gains) to the economy and that it could “only hurt”. He suggested that fiscal policy should be tackled first and only use buying bonds as a means of last resort to bring interest rates back down to acceptable levels if they were to rise. Quantitative Easing is nothing more than flash, showy injection, flesh on the bones, but very little to actually dig your teeth into.
Nobody ever listens to the people that stand alone and say it won’t work. Bernanke, the Federal Reserve, The ECB, Abe, they all have just one thing in common apart from the fact that they are together in this one. United we stand? The only thing that keeps them on track is that they are too far into it now to get themselves out. United we stand, yes. But, divided we fall. They won’t be sticking together as the scramble for the exit door when the bubble pops. Then, they will become just case studies at business schools in Economics Majors and Abenomics and Bernankonomics will be the things we shouldn’t do. Let’s try not to forget that!
Also read: Stiglitz Was Right: Suicide! [24]
Originally posted Stiglitz: Fed Fell into Trap of QE [25]
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