How the Great Global Rig of Post-2009 Will End


The Central Bank rig of the last five years appears to finally be ending.


Since the Great Crisis erupted in 2007-2008, Central Banks around the world have resorted to two primary tools in their efforts to reflate the system:


1)   Lowering interest rates

2)   Quantitative Easing or QE


Regarding #1, since 2007, Central Banks have cut interest rates an incredible 511 times. One could write a multi-volume book on the consequences of this, however, painting in broad strokes, lower rates do the following:


1)   Punish savers and others whom depend on fixed income for retirement

2)   Concentrate asset ownership in the hands of the elite who can leverage up at near zero rates to acquire more

3)   Continue to encourage poor investment in unproductive assets

4)   Results in the mispricing of assets across the board as rates no longer reflect true market risk/reward


In the US, the Fed has now kept interest rates at or near zero since late 2008. The end result is that housing is once again in a bubble (home prices relative to disposable income are in fact higher than in 2007) while economic growth remains anemic (GDP has not expanded at 3%+ for a single year since 2007) and employment continues to fall (the employment ratio or percentage of Americans of working age who are gainfully employed remains at levels last seen in the early ‘80s… see Figure 1 below).


Indeed, looking at the employment ratio (as opposed to the official unemployment number which is massaged to the point of no longer resembling reality), I find it very difficult to argue that we’re in any kind of meaningful “recovery” (see Figure 2 on the next page).


The second most popular monetary tool employed by the world’s Central Banks is Quantitative Easing or QE.


If you’re unfamiliar with this concept, it works as follows:


1)   Central Banks print money

2)   They use this money to buy assets (usually sovereign bonds or mortgage backed securities)


Doing this provides liquidity to those financial institutions that own the assets the Central Bank buys. QE also allows the Government to run a massive deficit as the Central Bank becomes the de facto buyer of sovereign debt.


The entire concept of QE is based on the idea that the best means of fighting an economic contraction is monetary easing. Historically, the Fed has done this to attempt to minimize the economic troughs during contractions.


The only problem is that QE doesn’t work. In fact, I cannot find a single instance in history in which it has.


Over the last five years, the UK has announced QE plans equal to an amount greater than 20% of UK GDP and has not seen any meaningful job or GDP growth (see Figures 3 and 4 on the next page).


However, Japan has outdone even the UK in terms of monetary madness. Over the last 20 years the Bank of Japan (BoJ) has announced nine rounds of QE for a combined effort equal to 20% of Japan’s GDP. During that period Japan’s GDP growth has actually slowed while unemployment has failed to fall.


Convinced that the answer to its problems is more QE, Japan just launched a $1.4 trillion QE effort last month.


To put this amount into perspective, Japan’s entire GDP is $5.8 trillion. So the country effectively launched a QE program equal to 24% of its GDP in a SINGLE PROGRAM.


The end result is that by the time this program is completed, Japan will have spent QE equal to well over 40% of its GDP.


That is assuming that Japan can finish this program without blowing up its bond market… which is looking increasingly unlikely.


The only way QE “works” on any level is if the bond markets continue to believe that the country/ Central Bank engaging in it will be able to pay back its debts.


Put another way, the minute the bond markets begin to believe that a country will not be able to pay its debts back, its bonds collapse, and QE blows up in the Central Banks face.


At this point the Central Bank has one of two options:


1)   Monetize everything.

2)   Let the bond market fall to where it deems rates are appropriate given the new default risk.


Both of these options end up in default. Option #1 leads to hyperinflation, which is default by another name as the underlying currency becomes worthless.


Option #2 usually results in default too because once bonds begin to fall due to a loss of credibility in the underlying country’s finances, there’s usually a selling panic which results in the bonds losing 50% of their value if not more.


This is the final outcome of the path that global Central Banks are pursuing. If you have not taken steps to prepare for a market collapse, we have a FREE Special Report that outlines how to prepare your portfolio. To pick up a copy, swing by:


Best Regards

Graham Summers