<blockquote>' “Congratulations Mr. Bernanke. I’m happy, my assets’ values go up. But as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world.” Marc Faber, investor, analyst and writer extraordinaire, September 14, 2012, Bloomberg Television'
- Doug Noland,
'..from radical to virtual rogue central banking..' September 14, 2012</blockquote>
'..Bernanke and Draghi have vowed to keep doing what they are doing until it works, and economists are hoping it will. It's pure insanity.'<blockquote>'Not only are such economists unable to think, they cannot even see what 20 years of monetary and fiscal stimulus did for Japanese "confidence", which is to say nothing at all. However, lower interest rates and fiscal stimulus did leave Japan a confidence-eroding mountain of debt in its wake.
Japan is now hooked on low interest rates, a mere rise of one percentage point would consume all revenues. Is that supposed to inspire confidence?
Nonetheless, Bernanke and Draghi have vowed to keep doing what they are doing until it works, and economists are hoping it will. It's pure insanity.'
- Mike "Mish" Shedlock,
'..Economists Can Neither Think Nor See', September 20, 2012</blockquote>
'The pool of malinvestment is a large multiple of those in 2000 or 2008, and it is increasing in size at an exponential pace. In comparison, that of 1929 was a benign puddle. Yet if the 1929 malinvestment took more than a decade to overcome, surely the current gigantic swamp will doom the global economy for a generation..'<blockquote>
'In the long run, once they have embarked on their bond purchase policy and seen their economies suffering the sluggish growth that results, the ECB and the Fed are compelled to repeat the bond purchase treatment in successively larger doses until the patient finally expires in a burst of Weimarean hyper-inflation. At that point, the malinvestment comes home to roost with a vengeance – with a gigantic rise in interest rates that causes even the government bonds that remain solvent to trade at huge discounts as in 1980-82.
In case the bond market malinvestment in the U.S. and Europe is not sufficient, there’s additional malinvestment caused by misguided government policy in Japanese government bonds, in the Chinese banking system, in the gigantic pools of stagnant money (now more than $10 trillion) in the world’s central banks and in the hopelessly badly designed Target-2 euro payments system. That’s before we have even considered the foolish Facebooks of the world.
The pool of malinvestment is a large multiple of those in 2000 or 2008, and it is increasing in size at an exponential pace. In comparison, that of 1929 was a benign puddle. Yet if the 1929 malinvestment took more than a decade to overcome, surely the current gigantic swamp will doom the global economy for a generation. Yes, the misguided policies of the 1930s were partly responsible for the depth and length of that trauma. But do we really think that government policy, on the evidence of the last decade, has improved in any significant way in the past 80 years?'</blockquote>
Tsunami of MalinvestmentBy Martin Hutchinson
September 17, 2012
SourceAustrian economists’ explanation of the 2007-08 financial crisis, that it resulted from a mountain of “malinvestment” in housing and the debt related thereto, in the United States, Britain, Spain and several other countries, is now generally accepted as correct. Unfortunately the actions, monetary, fiscal and regulatory, taken to resolve that crisis have had the effect of crisis of creating a new tsunami of malinvestment, more widespread and far larger than the original problem. We will be paying the cost of working off the new mistakes for a very long time indeed, probably for a generation. Those awaiting a return of satisfactory global economic growth had better swallow the Sleeping Beauty’s potion, and set their alarm clocks for 2035.
When I started writing this column in October 2000 there was only one glaring example of U.S. policy mismanagement, Alan Greenspan’s Fed, which had already let the money supply grow excessively for the previous five years. U.S. fiscal policy was impeccable; the country was running a substantial budget surplus and although one knew that much of that surplus was the effect of the dot-com bubble, nevertheless even deflated to a reasonable economic activity level the budget deficit was minimal – only 1-2% of GDP. The trade deficit was mildly worrying, but again it had obviously been inflated by the bubble and seemed sure to shrink back once the bubble burst, as it was apparently in the process of doing.
International trade policy seemed to have gone off track, with the protests against the 1999 World Trade Organization meeting in Seattle, but it seemed likely that this was a minority enthusiasm that would not prove lasting, whichever candidate won the forthcoming election. As for global warming, that was thankfully a distant problem; there was no chance whatever of the U.S. Senate ratifying the Kyoto Protocol, whatever the wishes of even a President Gore.
Austrian economists would say that the 2001-03 recession was necessary to remove the “malinvestment” – misguided investment into entities that could never be profitable – of the dot-com bubble, while the 2008-09 recession was necessary to remove the malinvestment of the housing bubble. For those generally subscribing to Austrian economic tenets, that raises the question of why the latter recession was so much worse than the former. The housing bubble, apart from a fairly limited amount of subprime mortgage debt, involved the building of homes that almost all had value, generally at least half of their building cost. The dot-com bubble, on the other hand, not only resulted in the Nasdaq share index rising to a height that is still nearly double the current (itself inflated) level, but also the construction of telecom capacity sufficient for the next three or four decades, as well as business enterprises like Pets.com of no value whatever.
When I started this column in 2000, I expected a deep, lengthy recession to follow the collapse of the 1995-2000 bull market, but the recession turned out to be one of the shortest and mildest on record. Greenspan is popularly supposed to have shortened it artificially by lowering interest rates rapidly, but believing Greenspan’s actions alone shortened it requires monetary easing to have had an efficacy maybe ten times that exhibited by the frantic exertions of Ben Bernanke.
The explanation, I think is that the good policy of 2000 produced the mildness of the 2001-02 recession. The budget surplus swung into only a modest deficit, so Bush’s 2001 and 2003 tax cuts had a genuine stimulus effect without producing pathological side-effects. (Tax cuts generally have more “stimulus” effect than spending increases, because the money is spent optimally, at least for the recipients of the tax cuts, rather than being wasted by bureaucrats and politicians.) Monetary policy was too loose, but interest rates were still above the inflation rate, so loosening it further also produced stimulus without de-capitalizing the economy. The international balance was only mildly in deficit in spite of a strong dollar, so dollar weakening after 2002 was also helpfully stimulative.
By 2008, those good policy elements had been removed, so a malinvestment bubble that should have been no larger or more damaging than that of 2000 proved much more harmful. Monetary policy was more out of kilter, with interest rates at a level that seriously depressed saving. The balance of payments deficit was much larger, and had built up destabilizing overseas liabilities. Fiscal policy during the 2000s had been appalling, so the budget deficit was completely out of control. In this area I agree with the Democrats in blaming President Bush and the 2001-08 Congresses of both parties much more than I blame President Obama, though I would suggest that after 2010 Obama would have pursued much more damaging policies if he could have, being restrained by a Republican Congress that repented of its predecessors’ misdeeds. Finally, the tendencies towards protectionism in international trade were much stronger after 2008 than in the 1990s, further slowing economic recovery.
Currently, gold, oil and the world’s stock markets seem to have embarked on another bull run, in spite of the anemic position of the U.S. and global economies. All three are closing in on full malinvestment mode. In the whole of its history, the gold price has spent only a few months in 1980 higher than its current inflation-adjusted level. Oil is also well above its likely long-term average cost, especially as its supply has been increased by the discovery of “fracking,” which seems feasible at production costs in the $70-80 range, well below the current level. As for stocks, if they were at the solid middle-of-the-road value in relation to GDP that they were when Greenspan took the leash off monetary policy in February 1995, the Dow Jones index would today be at 8,800 instead of over 13,000.
However the areas of malinvestment stretch far beyond gold, oil and stocks. Government bonds at today’s levels represent a pool of malinvestment unequalled in global history. The problems this causes have already begun to appear in southern Europe, where Spain and Italy have gone from having an excessively easy monetary policy to having an unduly restrictive one, as lending costs in those countries include a healthy allowance for the national credit risk.
Last week’s decision by the European Central Bank to allow unlimited purchases of southern European government bonds has alleviated the problem for a time, and in the case of Spain, where the problem was a housing malinvestment similar to that in the United States, may eventually allow the country to pull through. In Italy however there is no evidence that the government is undertaking the austerity needed to get government spending down to a reasonable level and begin to pay off the country’s excessive debt. And then there’s France, where the government is determined to pursue policies of soaking the rich and excessive public spending that could be expressly designed to worsen the country’s fiscal position at the maximum possible speed.
The ECB may think it can prevent default by the wayward France and Italy through bond purchases, in the same way that Ben Bernanke thinks he has achieved miracles through his quantitative easing purchases of Treasury bonds. But in the short run this imposes enormous costs on the economy. A recent study by the American Institute of Economic Research has estimated the costs of Bernanke’s current policies as an annual $347 billion in spending, 3.5 million jobs and 2.53% of GDP – in other words, much of the difference between the current feeble economic recovery and the robust one we could reasonably have expected after the deep 2008-09 decline.
In the long run, once they have embarked on their bond purchase policy and seen their economies suffering the sluggish growth that results, the ECB and the Fed are compelled to repeat the bond purchase treatment in successively larger doses until the patient finally expires in a burst of Weimarean hyper-inflation. At that point, the malinvestment comes home to roost with a vengeance – with a gigantic rise in interest rates that causes even the government bonds that remain solvent to trade at huge discounts as in 1980-82.
In case the bond market malinvestment in the U.S. and Europe is not sufficient, there’s additional malinvestment caused by misguided government policy in Japanese government bonds, in the Chinese banking system, in the gigantic pools of stagnant money (now more than $10 trillion) in the world’s central banks and in the hopelessly badly designed Target-2 euro payments system. That’s before we have even considered the foolish Facebooks of the world.
The pool of malinvestment is a large multiple of those in 2000 or 2008, and it is increasing in size at an exponential pace. In comparison, that of 1929 was a benign puddle. Yet if the 1929 malinvestment took more than a decade to overcome, surely the current gigantic swamp will doom the global economy for a generation. Yes, the misguided policies of the 1930s were partly responsible for the depth and length of that trauma. But do we really think that government policy, on the evidence of the last decade, has improved in any significant way in the past 80 years?
2035, I tell you. I hope I shall still be around to see the beginning of true recovery. The only consolation is that it gives me another couple of decades before this column becomes obsolete!
Context<blockquote>
Pattern recognition (Complex Phenomena) - '..a widespread economic depression.''..real people who use their minds to make exchanges in the real world..''..Like monetarists, Keynes held no capital theory .. the role time plays..' - Jesús Huerta de Soto
(Monetary) bureaucracy - '..our organizations are .. hostages to an ideology that is, in a real sense, inhuman.''Why ECB Bond-Buying Plans Undermine Democracy' - '..Credit expansion is fundamentally really a problem of civil rights..'