By The Automatic Earth
Arthur Rothstein Planting beans near Belle Glade, Florida January 1937
A lot of words are being spent again these days on deflation and the QE measures that are supposed to “cure” it. Paul Krugman, who when it comes to stimulus is a hammer seeing nails only, now has it in for Sweden’s central bank, which he labels monetary sadists for not opening the spigots. But it’s all a hugely deceptive false flag; it’s not an issue of whether you launch QE or not. There’s a third, and much more valid, way of looking at this.
First of all, one should wonder if QE is the right kind of stimulus, if growth and recovery in the real economy is the objective. Which in present circumstances is a very big IF ,that is surprisingly, hardly ever questioned. But if the real economy is the target area, it’s highly likely that something like Steve Keen’s version of a debt jubilee, where every citizen receives an X amount, first to be used to pay off any debts, would be far more effective. Or the Positive Money ideal, in which central banks, not commercial banks, have the ability to create fresh credit.
However that may be, what everybody should realize is that QE or another form of stimulus MIGHT work, but only if they’re executed in the proper fashion, that is, if debts are restructured at the same time stimulus is unleashed, i.e. the financial system is purged, which is the only way to restore trust and confidence. Debt restructuring must be a core element of any stimulus, and if it’s not, wherever you live, you know you’re being screwed.
In essence, what central banks have done so far, first in Japan, then in the US and EU, is to cordon off the debts residing in their banks (e.g. in the form of swaps and not-so-securities), and then flood these same banks with money/credit, in order to make them look healthy. Since all these nations’ banks have the same debt issues, they all agreed to ignore each other’s obvious sleight of hand. And anyone can understand that if these banks are still sitting on huge amounts of debt, any and all stimulus must and will at some point disappear into a bottomless black hole, albeit only after first having pumped up asset markets to new bubble heights and creating a temporary and entirely false impression of growth and recovery, with one more round of fat profits for the zombified financial system, and eventually leaving behind an economic landscape for which the term scorched earth would be sheer flattery.
If one thing should be clear, it’s that this does nothing to either fight deflation, induce growth or launch a recovery. It paints rosy pictures on a shiny and alluring screen, behind which present and future generations are being robbed blind. And even if it might be too much to ask, it would be good if it also became clear that QE has never been intended to heal the real economy, other than perhaps as a secondary side-effect. The purpose of QE is, and always has been, to keep banking systems standing as long as is deemed desirable, after which point the insiders clear out with their gains and the public at large will be left with the losses. QE is merely another way to transfer losses from “them” to you.
A stinging rebuttal of Krugman and his ilk comes, via Tyler Durden, from Phoenix Capital Research, where Kool-Aid is not a favorite in the vending machine.
The Keynesian economists managing or advising the world’s Central Banks have always averred that they could pull us out of the weakest recovery in the post-WWII era if they were allowed to have their way. Their “way” involves rampant debt monetization, also called Quantitative Easing or QE. Indeed, the primary argument from the Keynesians as to why QE has thus far failed to generate a rip-roaring recovery is that none of the QE programs in place were large enough. Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program. In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective… $1.4 trillion is…
- The equivalent of 24% of Japan’s total annual economic output.
- Enough to fly every human being in Japan to California for a 2-week vacation.
- The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.
Moreover, with $1.4 trillion, you could…
- Buy Australia’s entire economy for a year.
- Fund NASA for the next 82 years.
- Treat every person on the planet to a $200 five star dinner at one of New York’s top restaurants.
For the US to engage in an equivalent amount of QE, it would have to announce a $3.7 trillion QE program. If Europe engaged in a QE program of this magnitude, it could buy back ALL of Spain and Greece’s debt outstanding. Suffice to say, Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.
[..] Abenomics has failed to revitalize Japan. Just as importantly, this failure [..] is costing Abe his popularity (his ratings have fallen from 75% at re-election to roughly 50% now). Thus, the Bank of Japan’s massive QE campaign has revealed:
- That QE does not generate economic growth
- There will be political consequences for its failure
As much as I appreciate Phoenix Capital’s input, I also find some crucial points missing in this analysis. While I’m no fan of either Krugman or his Keynesianism on steroids, I don’t think they irrevocably refute the potential of QE as a ways to stimulate an economy. I’ve already said that I don’t think QE is the best way to accomplish that, but I think it’s more important to note that QE without debt restructuring cannot possibly work, because A) the debt is likely to swallow up all QE and more, and B) no confidence is restored. And what I find yet more important than that is that QE as it has been executed thus far is not a failure, as Phoenix contends, but a multi-trillion dollar fraud. Because central bankers are very aware of both points A) and B).
Racking up deficits and balance sheets for governments and central banks in order to prop up the zombified corpses of financial institutions that have wagered big and lost bigger, without making sure the debts and losses are purged that made them need the stimulus in the first place, is nothing but the biggest heist in human history. Moreover, if you could fight deflation with stimulus, this certainly wouldn’t be the way to go. If Japan, instead of handing it to its banks, would simply actually have given $11,200 to every man, woman, and child in Japan, the chances of raising the velocity of money, a crucial element of in/deflation, would have been much higher.
And I’m supposed to think that central bankers don’t understand this? I’m sorry, but that’s something I can’t get through my head. From where I’m sitting, people like Greenspan and Bernanke and Kuroda look far more like wise guys or made men than they look like oracles or wise old academic types who unfortunately got things wrong on occasion.
And before I forget, the fact that QE has been implemented as it has doesn’t only tell us something about the political power of the financial system, which can do this simply because they can, it also gives an indication of how vast the losses truly are, how foul the smell emanating from the paper hidden in the bank vaults truly is by now, 7-odd years into this Kabuki meets ancient tragedy performance for which ticket prices keep rising exponentially.
TLB recommends you visit http://www.theautomaticearth.com for more great articles and pertinent information.
See original article here: http://www.theautomaticearth.com/debt-rattle-apr-23-2014-qe-is-a-fraud-perpetrated-by-made-men/