<blockquote>'..My sense is that if the European and Japanese public had a better sense of this, they would tear down both central banks brick-by-brick.'
- John P. Hussman, Ph.D.
Speculative Extremes and Historically-Informed Optimism, July 25, 2016</blockquote>
<blockquote>'“Understand that
securities are not net economic wealth..'
- John P. Hussman, Ph.D.
Head of the Snake - The Poisonous Gap Between Paper Wealth and Real Wealth, July 4, 2016</blockquote>
<blockquote>'With their egos distended by delusions of grandeur, central bankers have become frantic to sustain the belief of investors that QE “works,” because only then can those beliefs be self-fulfilling. That’s why Haruhiko Kuroda, the head of the Bank of Japan, openly observed in early-June, “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’” It’s also why the world was subjected last week to the narcissistic spectacle of 14 separate speeches from Federal Reserve members. A con-game doesn’t work without confidence.'
- John P. Hussman, Ph.D.
Scrounging Through the Dumpster, July 18, 2016</blockquote>
<blockquote>'Imagine that all of this could be demonstrated with a century of reliable evidence, but that hardly anyone, particularly in the investment profession, gave it any more attention than the empty lip-service they offered during the tech and housing bubbles. Imagine that central bankers were focused instead on toy models that had weak theoretical and empirical foundations, inadequate transmission mechanisms, and an inability to explain more than a tiny fraction of economic variation over-and-above what could be explained in the absence of their deranged monetary activism. Imagine that they ignored real data in preference for the comfort and bizarre allegiance to a “Phillips Curve” that does not exist (Phillips’ work actually demonstrated a relationship between unemployment and wage inflation - and
real wage inflation at that, given that he studied a century of British data when the U.K. was under the gold standard).
Imagine that a divided Congress, incapable of agreeing on fiscal policies to encourage productive investment in the public and private sectors, instead allowed a handful of unelected bankers and college professors to become the untethered de-facto overlords of the financial markets, repeatedly promoting destructive speculative bubbles. Imagine that nobody cared to recognize the role of financial speculation and malinvestment as the primary source of repeated economic dislocations and crises, because they were, nearly to a person, too lazy, uninformed, or dogmatic to actually get their hands dirty by questioning their assumptions or carefully examining the historical data.
- John P. Hussman, Ph.D.
Imagine, June 20, 2016</blockquote>
'A lot of future misery could be avoided if the Congress and the general public recognized the risks the Fed has created, and abandoned the ridiculous concept that it is somehow a third rail of “political influence” to place boundaries on the recklessness of the Federal Reserve. These boundaries are essential for the public good, and perhaps even the economic survival of the nation..'<blockquote>'What’s happened in recent years is that central banks have insisted on extending this process. With every extension of quantitative easing, the public is left with a lower-quality stock of speculative assets. Indeed, the ECB and the Bank of England have purchased so much government debt that they have recently reached even further down the credit ladder, with the ECB buying corporate bonds, and the Bank of England announcing purchases of “Tier C” assets, which include assets “backed by credit cards; student loans; and consumer debt.” Unfortunately, this isn’t backing at all, as comforting it may be to Jimmy the Weasel to know that his mountain of credit card debt is “backed” by his credit card.
Ultimately, all that quantitative easing does is to remove higher-quality interest-bearing securities from public hands, replace them with zero-interest cash, and leave a remaining stock of lower-quality speculative assets that then have to compete with that cash. To increase the discomfort of investors, the Bank of Japan and the European Central Bank have also begun charging banks on their reserve balances, which has driven interest rates to
negative levels across Japan and Europe.
..
I have little doubt that future generations will look at the reckless arrogance of today’s central bankers no differently than we view speculators in the South Sea Bubble and the Dutch Tulip-mania. Unfortunately, there is no mechanism by which historically-informed pleas of “no, stop, don’t!” will penetrate their dogmatic conceit. Nor can we change the psychology of investors. The best we can do is to monitor the best measures we can identify of risk-seeking or risk-aversion.
..
In a healthy economy, savings are channeled to productive investment, and the new securities that are issued in the process are evidence of that transfer. In an unhealthy economy, and particularly one with very large wealth disparities, a large volume of securities may be created, but they are often simply a way of supporting debt-financed consumption. As a result, no productive investment occurs, and no national “wealth” is created. All that occurs is a wealth transfer from savers to dis-savers. Over the past 16 years, U.S. real gross domestic investment has crawled at a growth rate of just 1.0% annually, compared with a growth rate of 4.6% annually over the preceding half-century. There’s your trouble.
..
Simply put, the only thing QE really does is to distort the financial side of the economy, enabling and encouraging yield-seeking speculation and massive sectoral imbalances that we observe as wealth disparities and bizarrely distorted securities markets. The proper course of economic policy is to expand productive investment at every level of the economy through the action of Congress (including infrastructure investment, corporate investment tax incentives, workforce development credits, and other measures ideally tied to the creation of new jobs). The Federal Reserve is not a source of prosperity. It is the single most dangerous and unregulated risk factor in the U.S. economy. We should have learned that during the yield-seeking mortgage bubble and the collapse that followed. We have not, so we now face the equivalent prospect again.
Illusory prosperity, cheap money, and the road to financial crisis"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."
Ludwig von Mises, The Causes of Economic Crisis (1931)
Historical note: The stock market would go on to lose two-thirds of its value over the following year, bringing the cumulative market loss from the 1929 peak to -89%.In the current cycle, the question of “sooner or later” has been answered by sequentially kicking the consequences further and further down the road, as global central banks initiate ever larger interventions at every turn. When will it end? Unfortunately, it’s unlikely to end by central bankers suddenly seeing the light, by recognizing the weak correlation between activist monetary policy and the real economy, or by recognizing that the race to the bottom of zero and even negative interest rates only brings financial distortion. Instead, it will end as credit defaults rise, bank bailouts become necessary, covenant lite debt proves to be, indeed, lite on covenants, and financial assets pushed to zero long-term yields prove, indeed, to yield zero returns over the long-term.
..
A lot of future misery could be avoided if the Congress and the general public recognized the risks the Fed has created, and abandoned the ridiculous concept that it is somehow a third rail of “political influence” to place boundaries on the recklessness of the Federal Reserve. These boundaries are essential for the public good, and perhaps even the economic survival of the nation.
The American public should never, never, abdicate the right to restrain the behavior and assert checks and balances on an unelected agency of the government. Yet even if this recklessness brings another global financial crisis or depression, my sense is that the Fed will again be called on to “save” the economy with exactly the same poison that has created recurrent bubbles and collapses in the first place. In the financial markets, we’ve learned our lessons from QE and made our adaptations, and I expect we’ll navigate the cycles ahead just fine. What I worry about is the human impact of the collapse of this speculative episode. Aside from the short-term prospect of even greater speculative yield-seeking (which will only make the ultimate consequences worse), I believe that such a collapse is now unavoidable.
The Austrian economist Ludwig von Mises (1881-1973) was virtually alone in anticipating the Great Depression. He never lived to witness the current episode of deranged experimental recklessness that central banks have unleashed on the global economy. He was spared the spectacle of watching the grotesque brainchild of Ben Bernanke’s warped misconceptions swelling to a foul monstrosity. But he instantly would have recognized and anticipated the ultimate consequences. He had already seen those consequences accurately played out in episodes across history, the worst being the Depression and the Weimar hyperinflation. In describing the economic consequences of cheap money, he may as well have been writing about today. Read slowly, and take in every sentence:
"If the market rate of interest is reduced by credit expansion, many projects which were previously deemed unprofitable get the appearance of profitability. The entrepreneur who embarks upon their execution must, however, very soon discover that his calculations were based on erroneous assumptions. However, as the banks do not stop expanding credit and providing business with 'easy money,' the entrepreneurs see no cause to worry. Everybody feels happy and is convinced that now finally mankind has overcome the gloomy state of scarcity and reached everlasting prosperity.
"In fact, all this amazing wealth is fragile, a castle built on the sands of illusion. The artificial prosperity cannot last because the lowering of the rate of interest, purely technical as it was and not corresponding to the real state of the market data, has misled entrepreneurial calculations. Deluded by false reckoning, businessmen have expanded their activities beyond the limits drawn by the state of society's wealth. In short, they have squandered scarce capital by malinvestment.
"The sooner one stops, the less grievous are the damages inflicted and the losses suffered. Public opinion is utterly wrong in its appraisal of the cycle. The artificial boom is not prosperity, but the deceptive appearance of good business. Its illusions lead people astray and cause malinvestment and the consumption of unreal apparent gains which amount to virtual consumption of capital. The depression is the necessary process of readjusting the structure of business activities to the real state of the market data, i.e., the supply of capital goods and the valuations of the public. The depression is the first step on the return to normal conditions, the beginning of recovery and the foundation of real prosperity based on the solid production of goods and not on the sands of credit expansion.
"It is vain to object that the public favors the policy of cheap money. The masses are misled by the assertions of pseudo-experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by savings. What counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes or by loans on the bank books.
"If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing, and by letting the market determine the height of interest rates, one chooses the German way of 1923."
Ludwig von Mises, The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money- John P. Hussman,
Ph.D. Race to the Bottom: Injuring the Real Economy with Paper "Wealth", July 11, 2016</blockquote>
Context<blockquote>
'..vastly underfunded its obligations .. It’s a .. global problem..''..inflation and unemployment .. that are the targets of central bank policy.''..the Federal Reserve’s deranged program of quantitative easing..''..recessions are not primarily driven by weakness in consumer spending..''..economic policies that focus on nothing but debt expansion and financial-market distortion..'</blockquote>