A Fundamental Reason Why QE Did Not Work

Debt does not equal growth. It’s the hindrance of growth.

Bullion.Directory precious metals analysis 22 November, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

While listening to a MoneyWeek interview of Electica fund manager Hugh Hendry, something he said stood out and made much sense.

In reply to what Hendry thought made him a good money manager, he finished with:

With regard to language the notion of “bullish” and “bearish,” I think, does an injustice to the complexity of arguments that are necessary to construct a global hedge fund. I think if I had my time again, I would have been saying that we’re actually, perhaps, guilty of the misconstruing of a bull market in equities, for what is actually the ongoing degradation in the soundness of the fiat monetary system…

Hendry, also, reflected that QE did not create wealth, just merely redistributed it. The rich got richer, the poor got poorer. Quantitative easing did not work, and a lot of it has to due with the massive debt loads by QE nations.

The whole theory behind the mad scientist-like monetary policy was to increase aggregate demand after the financial crisis. That is to increase demand for final products and services, but that has not happened. Why? Because governments and consumers already overextended themselves in previous years. They borrowed from future in order to consume today. Eventually, it just becomes unsustainable.

In today’s world, credit (debt for the consumer) is the only means of growth, or at least the idea of growth. When credit slows down, growth will slow down, accordingly.

Hendry on debt and QE:

Well, desperate times breed desperate measures and the fatal policy errors are I believe, all in the past. Economies across the world were allowed to take on so much debt, and taking on debt, you’re borrowing from the future. You’re borrowing consumption to spend it today. So we overinflated the GDP growth rate. There’s no surprise to me when people are disappointed by today’s growth rate. Because it’s like “I ate your sandwich yesterday.” It’s not there. So I don’t see this as a clean solution.

I see this is a grubby solution, but it’s closer to being a solution than anything else that I conceive of. With QE, again, I say I think we barely scratched the surface in terms of what will happen. I think it will spread into central banks essentially having to endorse higher government budget deficits to sponsor public work projects or favourably to sponsor tax cuts. I think that is in the future, because we have not resolved that deficiency of demand. Which, of course, is a function of having over-borrowed from the future to spend yesterday.

The so-called favorably sponsored tax cuts is a form of QE, and it will likely be the next play in the Fed’s playbook. With rates at the lower bound, the Fed is trapped and has no defense against an economic downturn. Money in the consumer’s hand may be the last resort. Markets can believe that the Fed will stop at QE3 (after stopping QE1 and QE2), but the system is broken within a QE-trap.

Economist Jim Rickards, author of best selling “Currency Wars” and “Death of Money,” believes once hawks – Philly Fed’s Charles Plosser and Dallas Fed’s Richard Fisher – leave the board in 2015, the doves will fly into Q4 in the form of tax cuts or outright tax rebates.

It’s also going to fail because people don’t want to spend it.

These tax rebates were seen during the end of the Bush years, and the result was humdrum. Individuals chose to hoard the cash opposed to spending it.

And, the only currency left standing in the degradation of the fiat system will be gold. The Council on Foreign Affairs was caught adulterating transcript and video of Former Fed Chair Alan Greenspan’s speaking engagement in late October, where positive light was shed on gold’s purpose. Along with raising the question, if gold is just some lump of metal, why dose almost every central bank in the developed world own it? Greenspan said during the engagement:

Yes, remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.

 Previous Post

Gold Remains Relevant, Jumps on Chinese Rate Cut

Next Post  

Gold Price Support Resistance Next Week (11-24-14)