Marching In The Wrong Direction

Excerpted from Paul Singer's letter to investors,


ZIRP and QE have levitated a number of asset classes without generating sustainable, powerful economic and employment growth in the developed world. The asset price appreciation has delighted investors, and even those who are queasy and concerned about the unsoundness of the post-crisis policy landscape have been coaxed into believing that the low volatility and high asset prices actually have predictive power in suggesting positive economic and financial outcomes for the global economy and financial system. After all, the thinking goes, if ZIRP and QE were going to cause serious generalized consumer price inflation, then it certainly would have appeared by now. The very “discrediting” of the “serious inflation” crowd gives most investors comfort that policymakers are correct and the skeptics are just dyspeptics or partisans.

We cannot possibly make the following statement any more clearly or strongly: Policymakers and pundits, with rare and courageous exceptions, are marching (and looking) in precisely the wrong direction. After the 2008 financial crisis, the developed world has barely experienced positive growth despite six years of zero-percent short-term interest rates and multiple bouts of money-printing that have taken a variety of forms and that have been announced with a plethora of rhetoric and obfuscation. At the start of the crisis, there was also a massive amount of government spending, but it was dominated by political payback and an attempt to maintain the kinds of jobs that had made sense only during the distortionary boom. Of course, the government spending had a supportive effect on the economy (as all spending programs do), but as designed it did not and could not create lasting and catalytic effects on growth.

Over the entire post-crisis period, there have been effectively no significant structural improvements in the basic ability of the developed world to grow faster. We have described pro-growth policies at length and in depth, but sadly they are nowhere to be found.

Thus six years of QE and ZIRP and a few rounds of make-work and benefit payments have failed. At present, only the U.S. can claim something that looks like decent growth, but that is only in comparison with its “peers.” We have argued above that the appearance of growth is fake and delusionary. But globally, it should be beyond debate that the policy mix has failed. Many (if not most) politicians and “experts” refuse to acknowledge this, and en masse seem to believe that the failure of inflation to reach its “targets” is the problem – as if it is inflation, and not growth, that societies need. The mantra they repeat incessantly is that money-printing, ZIRP and stimulus spending have succeeded, and that things would be much worse without those policies, and that the real problem is that governments have not done enough radical monetary easing and deficit spending!

Historically, as monetary debasement gets underway, its superficially-positive effects erode over time. Investors and citizens learn the game and front-run the debasement, bidding up asset prices. The distortions caused by debasement erode the citizenry’s motivation to engage in real sustainable business and consuming activity. The difference between winners and losers gets exacerbated, as speculators increasingly take the prize at the expense of savers and salaried people. Monetary manipulations lead to bad investment decisions, which in turn causes hidden shortfalls in the standard of living, which in turn engenders public resentment, especially because the reported statistics on jobs and income paint too rosy a picture.

At present, the situation in developed countries can be characterized as follows: Asset inflation is roaring, but it is sectoral and skewed. Consumer inflation is understated, and thus growth is overstated. Employment data is misleading. This combination of factors means that ordinary citizens are not doing well, but the owners of high-end everything are doing just fine, with few concerns for the middle-class people who know things are not “all right,” but cannot put their finger on why.

At or near this stage, either because of citizen resentment and distrust or (in the case of Europe) a pronounced weakening of economic activity despite all their efforts and experimentation, monetary authorities may decide that the real problem is that they just haven’t done enough. Historically, this is the point at which the risk rises that central bankers will take monetary actions that destroy their societies. Once the “tiger by the tail” phase of monetary debasement has gotten started, there has never been a good exit. Past that point of no return, the collapse of money and/or asset prices becomes the inevitable denouement, with the only questions being the timing and the severity of the collapse. Our views are formed by an examination of historical episodes of societal monetary collapse. The script is not “baked,” but the common elements are clear and present.

Given that the authorities are so far behind the curve in their understanding of the modern financial system, we have little hope that they can revert in time to the correct mix of policies, preserve the fiat money regime and also get the developed world growing again while whipping into shape the long-term entitlement obligations which are obviously unpayable in their present form. We wish we could report that a counter-movement is afoot, with some cadre of truth-tellers who are making the case for marching in a different direction, but sadly we cannot. The argument for “doing more” or “doing more of the same” is universal. The “risk” case is only being made circumspectly by people who are being ridiculed as clueless Cassandras.

Cassandra was proven right, of course, but we have no need or desire to be right about these views. Societal stability is a good thing for all, including skeptics and pessimists. Societal breakdown and uncontrollable inflation or financial crises are massively destructive, and typically accompanied by very bad policies. No disciplined investment approach can “work” in such an environment, in which preserving the real value of capital becomes difficult if not impossible. In extremis, political governance drifts toward totalitarianism, scapegoating and violence. Let us hope that leaders emerge who understand these realities and have the courage and political skills to reorient their societies toward growth, stability and soundness.

Our belief is that the global economy and financial system are in a kind of artificial stupor in which nobody (including ourselves) has a good picture of what the next environment will look like. The difference between “them” and “us” is that they mostly think that policymakers will muddle through, but we assume that a very surprising and scary environment lies in wait.