There is a saying: "The rich just keep getting richer". And by all accounts,
since the 2008 financial crisis, they have. Unfortunately, for the struggling
poor and middle class, wealthy asset holders have been the only beneficiary
of six years of Federal Reserve easy-money policies. Under the tutelage of
Ben Bernanke, the Fed introduced QE in March of 2009 with the hope it would
save the economy from economic collapse. The goal was to create a new vibrant
market for borrowing to replace the former vibrant market for borrowing that
had just blown up, taking the economy with it. I am sure Ben Bernanke began
this ruse with good intentions and the misplaced belief that real economic
prosperity could be manufactured from creating new money.
But as they say, hind sight is 20-20, and here we sit six years and 3.5 trillion
dollars later with the realization this money printing scheme did not work
as planned. Don't just take my word for it. According to Wall Street Journal,
Former Fed Chairman Alan Greenspan said the QE program had failed to achieve
its primary goals. As a means of boosting consumer demand, the asset purchase
program, he said, "has not worked," though it did a good job of increasing
asset prices.
Bond king Bill Gross agrees, noting that the roughly $7 trillion pumped into
the financial system since the financial crisis by the world's three biggest central
banks has succeeded mostly in lifting asset prices rather than workers'
wages: "Prices go up, but not the right prices."
And Hedge fund manager Paul Singer recently noted "The inflation that has
infected asset prices is not to be ignored just because the middle-class spending
bucket is not rising in price at the same rates as high-end real estate, stocks,
bonds, art and other things that benefit from quantitative easing."
Why QE Hasn't Worked
The U.S. Government has done a splendid job of continuing its borrowing spree,
as Federal debt has increased from $9.2 to $17.9 trillion. But if we learned
any lessons from these last few years, it should be that government borrowing
and spending in the form of transfer payments (such as food stamps) doesn't
grow an economy.
The Fed hoped that printing $3.5 trillion would encourage private companies
to borrow money and grow their business by investing in property, plant and
equipment. Unfortunately, growth doesn't happen in a vacuum. With the consumer
tapped out, business was more realistic about demand. The idea that low interest
rates and available credit would spur growth similar to what we saw in the
1990's with the technology boom did not manifest. Therefore, instead of borrowing
at low rates to grow their businesses, many companies just took on cheap debt
and bought back stock--growing their EPS but not the economy. This kept the "beat
the expectation" crowd on Wall Street happy but did nothing to encourage sustainable
growth.
Central banks have failed to realize that lasting economic growth only comes
from real savings and investment, which leads to an increase in labor hours
and productivity. The government's borrowing and printing scheme left the banking
system intact, but did nothing to help the average consumer. While the Fed
was frantically printing money to re-inflate asset prices, the majority of
American's incomes have decreased, as real after tax income has actually fallen
by -5.9%. In fact, in this recent election, we learned 65% of Americans are
still primarily concerned with the economy, and nearly the same amount believe
they are worse off since the great recession began. This is despite manipulated
data from the Federal Government meant to persuade them otherwise.
With the prospect of viable economic growth pushed further out of reach and
the Federal Reserve out of the QE game, deflationary forces should prevail
and equity prices should be falling. But, if there is one thing Central Banks
are famous for, it's not learning from past mistakes. Fittingly, taking a page
from the hyperinflationary playbook, Japan has gone on a kamikaze mission to
destroy its currency; announcing an escalation of its bond purchase rate to
$750 billion per year. In addition to this, Japan's state pension fund (the
GPIF), intends to dump massive amounts of Japanese government bonds (JCB's)
and double it allocation to equities, raising its investment in domestic and
international stocks to 24% each. The BOJ is also planning on tripling its
annual purchase of ETFs and other equity securities. Japan has taken the baton
from Yellen and will run with it until the nation achieves runaway inflation
and its currency is completely destroyed.
Central bankers across the globe have succeeded in hallowing out the middle
classes, but have failed miserably in achieving viable growth. This game will
continue until the inevitable currency collapse unfolds and investors lose
faith in government-manipulated asset prices. The tsunami resulting from currency,
sovereign debt and equity market destruction will soon begin rolling in Japan.
The problem is that Japan isn't some isolated banana republic -- it is the
world's third largest economy. When its currency collapses it will wipeout
worldwide markets and economies as well. And then, hopefully, investors will
insist on putting their faith and wealth in money that can't be destroyed by
a handful of unelected and unaccountable government hacks.
