The economic death spiral worsens

Two very powerful articles have just nailed down the points I’ve been making for years about government deficit spending and the Fed’s disastrous QE (quantitative easing) program, which is the only thing that’s allowed the US government to borrow endlessly to fund its deficits.

First, Reuters reports that the Bank for International Settlements has restated the orthodox perspective on debt, and pointed out how urgently governments need to get their financial house in order.  Since central banks make up the BIS to begin with, this is a stinging rebuke to the Fed and the Eurozone financial institutions in particular.

The Basel-based BIS lambasted firms and households as well as the public sector for not making good use of the time bought by ultra-loose monetary policy, which it said had ended up creating new financial strains and delaying rather than encouraging necessary economic adjustments.

The BIS, a grouping of central banks, was one of the few organisations to foresee the global financial crisis that erupted in 2008.

Since then, government bond yields have sunk as investors seek a traditionally safe place to park funds, regulators tell banks to hold more bonds and central banks buy bonds as a means of pumping money into vulnerable economies.

The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors – excluding the Federal Reserve – of more than $1 trillion, or 8 percent of U.S. gross domestic product.

. . .

Brushing aside the contention that austerity is counterproductive, the BIS said countries must redouble their efforts to make their debt manageable because growth alone will not do the job.

“Over indebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure,” the report said.

The fiscal adjustments required in rich countries are especially sizeable when projected increases in age-related spending are taken into account. Indeed, the adjustments are so large that governments are likely instead to water down entitlements such as pensions, the report said.

There’s more at the link.

Karl Denninger says of this report:

I have said since 2007 that the path of “bailout and lowering rates” in all of its forms could not possibly work.  It cannot work because a person who has too much debt cannot make themselves financially healthy by borrowing more money any more than you can drink yourself sober.

. . .

Lowering interest rates and injecting more and more credit into the system simply makes each unit of it worth less.  But since you cannot print “money”, that is, economic surplus — you can only print credit — you have no capacity to actually generate economic growth by expanding credit directly.

Your only hope is that by making borrowing cheaper you will entice people to take those loans and produce with them.  They must produce more than the loan costs, principal and interest. If those loans are instead consumed or used to pay entitlement handouts then you are further distorting both credit and cash markets by sending false signals as to actual demand that does not in fact exist.

. . .

We are now collectively in worse shape than we were in 2008 because we have issued trillions of additional credit into the system for which there is no matching production.

Exponents are a bitch.  The longer you wait to deal with any problem that has a compound factor (that is, “X% per year”) the worse it gets and the damage increase is not linear it becomes exponentially worse over time.  A 10% fiscal deficit that is “counteracted” with something like QE (which is what we’ve run, more or less, since 2007) doubles in 7 years — not 10 — and then it doubles again in another 7.  In 21 years it is not three times the original problem’s size it’s eight times larger!

We’ve already doubled down — and doubled — the pain we needed to take in 2007.  It will be four times as bad, and we will not survive it as a nation or society, if we let this go on for another seven years.

Again, more at the link.

Second, Grant Williams analyzes the disastrous effects of several years of quantitative easing on world markets, and comes to a sobering conclusion.

There is one reason and one reason only why the world’s major equity markets are, for the most part, floating around their all-time highs: QE.


It has absolutely nothing to do with the strength of the underlying economy and everything to do with the corruption of traditional price signals that central banks have, in their desperation wisdom felt happy to allow in pursuit of rainbows and unicorns for everybody.

Now … the Fed finds itself confronting the realities of market confidence.

As they have striven to generate confidence in a moribund economy by continually talking in the most optimistic language they can feasibly muster, markets have been blithely ignoring the jawboning and focusing solely on the free money being handed out by a generous but thoroughly misguided Fed.

Now, however, the Fed is going to have to face reality in the world it has created, and it will not be pretty.

Their choice is a stark one:

Pull back on the monetary lever as they continue to threaten to do (and watch as markets crumble in front of their eyes) or be forced into continuing (perhaps even expanding) the purchase of both treasuries and mortgage-backed securities in order to avert disaster.

Already, as they overplay their hand and people genuinely begin to fear that they will be as good as their word and begin “tapering” as soon as this fall, wheels are coming off the clown car all over the place.

. . .

Which brings us to the $64,000 question:

When push comes to shove and instability slithers across multiple asset classes, will the Fed actually go ahead and taper? Can it afford to?

A complex question, but fortunately one with a simple answer:


More at the link.  It’s well worth your time to go and read his whole article.

I believe Mr. Williams is correct.  By issuing trillions upon trillions of dollars of fiat currency (with nothing backing or supporting it) through its quantitative easing policies, the Fed has bamboozled the markets for five years.  As soon as it mentions even the possibility of cutting back on this cornucopia of ‘free money’, the markets panic, threatening to bring down global economies with them.  Ergo, the Fed has painted itself into a corner.  It has no choice but to go on funding deficit spending by government, in direct contradiction to everything the BIS has just said, because if it doesn’t the panic that will result will cripple that same government’s ability to cope.  On the other hand, if it does that, the resultant inevitable rise in bond interest rates will eventually cripple the US economy too.

I’ve said it before, and I’ll say it again.  With clowns like the present Administration in charge of the nation, and Ben Bernanke and his ilk in control of the US economy . . . we’re screwed.



  1. It is pretty obvious too, where all that extra money is going, straight into the stock market. Stocks shooting up while the rest of the economy goes basically nowhere. The inflation is happening, it just isn't visible in all economic sectors equally yet.
    Bubbles pop. Housing is starting back up too, recently. Either the stock bubble will pop soon, or we'll start seeing a wider-based inflation.

  2. Quantitative Easing. Hmmm, two very new words.
    A very old, but still dimly remembered aweful word.
    Between WW1 and WWII, Germany knew all about those words, they described a brutal time.
    Are they lurking on the horizon?.
    I shrink from answering my own question.

  3. Lurking on the horizon is Obamacare. More of a micro than macro economic impact. Reason? Many people count on a tax refund. For many, it is the only "savings" program they have. It boosts the consumer spending during the 1st quarter each year. Owe a penalty for Obamacare? Watch the IRS snap up that refund like they do now with student loans.

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