Interesting article in the Financial Times about Quantitative Easy and it's effects.
"Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity.
"Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product ('GDP'), an increase of more than 20 percentage points…
"If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest."
Just reread those sentences to see what a horrendous predicament "policymakers" have created for themselves -- and us. He goes on to write:
"Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.
"Attempts to increase growth and inflation to manage borrowing levels have had limited success. The recovery has been muted."
Das goes on to discuss said "recovery" before delivering some hard truths:
"In the absence of growth and inflation, the only real alternative is debt forgiveness or default Savings designed to finance future needs, such as retirement, are lost…
"Unable to grow, inflate, default or restructure their way out of debt, policymakers are trying to reduce borrowings by stealth. Official rates are below the true inflation rate to allow over-indebted borrowers to maintain unsustainably high levels of debt…
"Debt monetisation and artificially suppressed or negative interest rates are a de facto tax on holders of money and sovereign debt. It redistributes wealth over time from savers to borrowers and to the issuer of the currency, feeding social and political discontent as the Great Depression highlights."
He then lays out the "trap:"
"If the economy responds [to all the stimulus], then the side effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
"If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control."
He sums up by citing Ludwig von Mises' assessment of these sorts of policies, who predicted that the only "choice" policymakers will have is, "'…whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.'"
So there you have it. The vicious cycle that we have been involved in continues. IMO it will end not necessarily with a collapse of currencies, but a breaking of the world's bond markets. We would more likely see a currency collapse if only one country were pursuing these policies. When they are all doing it, a bond market collapse is more likely.
"Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity.
"Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product ('GDP'), an increase of more than 20 percentage points…
"If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest."
Just reread those sentences to see what a horrendous predicament "policymakers" have created for themselves -- and us. He goes on to write:
"Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.
"Attempts to increase growth and inflation to manage borrowing levels have had limited success. The recovery has been muted."
Das goes on to discuss said "recovery" before delivering some hard truths:
"In the absence of growth and inflation, the only real alternative is debt forgiveness or default Savings designed to finance future needs, such as retirement, are lost…
"Unable to grow, inflate, default or restructure their way out of debt, policymakers are trying to reduce borrowings by stealth. Official rates are below the true inflation rate to allow over-indebted borrowers to maintain unsustainably high levels of debt…
"Debt monetisation and artificially suppressed or negative interest rates are a de facto tax on holders of money and sovereign debt. It redistributes wealth over time from savers to borrowers and to the issuer of the currency, feeding social and political discontent as the Great Depression highlights."
He then lays out the "trap:"
"If the economy responds [to all the stimulus], then the side effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
"If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control."
He sums up by citing Ludwig von Mises' assessment of these sorts of policies, who predicted that the only "choice" policymakers will have is, "'…whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.'"
So there you have it. The vicious cycle that we have been involved in continues. IMO it will end not necessarily with a collapse of currencies, but a breaking of the world's bond markets. We would more likely see a currency collapse if only one country were pursuing these policies. When they are all doing it, a bond market collapse is more likely.
