During the last five years, monetary policy has been at the centre of everyone’s attention with the general populace nervously waiting for central banks to solve the huge mess that was created by… yes, them! The irony is that after putting in place the base ingredients which allowed the crisis to build in the first place, the very same central banks and in particular the Fed has, in the eyes of many eminent commentators and respected money managers, baked an even bigger bubble into the economic cake now.
In a master stroke of obfuscation, many of these central banks have created the impression that they are beyond political interference that has historically bedevilled monetary policy, in the UK in particular. Through the veneer of “independence” monetary policy, central bank officers are not directly elected by the population. The problem however is that their mandate allows for much more than financial stabilisation, and they have been able to impart huge losses in the economy and massively redistribute income in recent years to the already very wealthy.
Central banks have been keeping the price of money artificially low in order to push investors into equities, a measure that it has to be said that they have achieved with some distinction. Sadly, the “trickle down” effect has not really occurred to the wider population. The global economy continues to struggle to grow, quite unlike what happened after many of the crises of the past.
In the aftermath of previous crises, economic activity often surpassed 5% per year coming out of the recessions as the chart above shows but, intriguingly given the massive stimulus that we have seen in recent years and that is far beyond other prior recessionary fighting measures, this level of economic growth has not happened on this occasion. The frustration with the recent results has led central banks to unfold quantitative easing programs on an unprecedented scale as a complement to the low interest rates in a desperate attempt to push the economy higher. This very failure in the money multiplier effect has led them to prolong the asset purchase programs for indefinite periods of time without acknowledging the problems that it now also creating. These attempts to ignite economic prosperity are failing because they are aimed at fighting the symptoms, not the disease, and come with several side effects as is the case with the redistribution of income from the poor to the rich. Exploding equity prices benefit the rich disproportionately more than other sections of the population.
Policy makers have been claiming victory in the both the US and in Europe on the economic renaissance front, but their claims are supported with indicators that are nothing more than relieved symptoms rather than clear signs of cure. Just look at Europe for example. Portugal is, at face value, delivering positive news by coming out of the bailout program. It seems that the austerity measures here have worked. But all they really show is a decreased sovereign yield while in contrast, the bailout actually failed at decreasing overall Government debt levels and all the while having the side effect of undermining growth and employment levels.
In the US, Bernanke also claimed victory in December and so started tapering on the current asset purchasing program. But if you look at the chart above, growth is mild at most and so the central bankers and politicians point us to the record-breaking equity market as the proof of the success of the current policies. A virtuous circle indeed!
In almost every case, what we see as a consequence of current economic policy is anything but real economic improvement. While there is seemingly only one direction for the equity market, we need to massage the data in order to point to an uptrend in the major economic indicators, if one can be found at all.
A soaring stock market, decreasing sovereign yields, stable gold prices etc.. these are all signs of good and healthy economic prosperity. Something must be wrong however. The policy making process shouldn’t be simply predicated on money printing. With the quantity of money increasing while the gold supply is stable, the relative prices of the metal should have increased quite materially over the last years in particular. But we have not seen this, in fact gold fell the most in over 30 years last year and seems to be signalling deflation (either that or it is, horror of horrors, being manipulated…)
Equity markets are also moving in a curious manner. Most bears have been carried out and hedge funds en masse simply cannot make money. The sh*t quote simply continues to float. Even when news is negative the market always finds a way back to the green side. I know that the “animal spirits” Keynes spoke about in 1936 play an important role in the markets, but I’m certain that certain other “big beasts” play an even more important one in assuring there’s only one direction for this market.
The same applies in Europe and its sovereign debt yields. A still high debt pile mixed with the lack of economic growth are ingredients for reduced risk taking, something which should of course press yields higher not lower. But then, if you believe that the central bank always comes to the rescue then there’s no risk at all…
There seems to me to be so many incongruences, so many cracks in the system that sooner or later it will break and the real crisis be upon us. At some point people will “distrust” money and start buying tangible assets instead of financial assets (it could be said that the real smart money has already done this with art, London property, fine wine etc bid to crazy levels…). Paper money will then be devalued, which is the same thing as saying that inflation will pick up. With more than 25% of the US economy now held by the FED, the aftermath will be interesting to witness its unfolding…