Friday, October 31, 2014

Making Lemons Out of…Lemons

… let us give due credit to the heroes of our time - Ben Bernanke, Mervyn King and those who stood by them against the mob of howling critics.

According to Ambrose Evans-Pritchard, QE central bankers deserve a medal for saving society.  Saving society from the mess they made.  Talk about job-security.  Where to begin?

The final word on quantitative easing will have to wait for historians. As the US Federal Reserve winds down QE3 we can at least conclude that the experiment was a huge success for those countries that acted quickly and with decisive force.

How can the “final word…have to wait for historians” and at the same time AEP can “conclude that the experiment was a huge success”?  Ambrose contradicts this “success” call again later in his piece:

It is too early to judge whether even the Anglosphere can really throw away its QE crutches. The risk of a relapse is obvious as the commodity nexus flashes global stress warnings. We may need QE4 after all.

And he already knows how to spend it:

…let us inject the stimulus directly into veins of the economy money next time, using it to build roads, houses and an infrastructure fit for the 21st century.

Is it now deemed a success to continuously print money?  On what planet?  Under what economic theory?

But, let’s pretend that it has been a success, as Ambrose states (while somehow being able to leave the final judgment for historians, as Ambrose also states).  How is this success defined?

What we can conclude is that extreme QE enabled the US to weather the most drastic fiscal tightening since demobilisation after the Korean War, without falling back into recession. Much the same was true for Britain.

What fiscal tightening?  In 2007, the US federal government spent $2.7 trillion; in 2013, $3.5 trillion.  In 2007, the deficit (not the increase in total debt, but the deficit…I know, only the government can keep books this way) was $160 billion; in 2013, $680 billion.

The total Federal debt at the end of fiscal 2007 was $9 trillion; at the end of 2013, $16.7 trillion – almost $8 trillion in six years.  As a percent of GDP, in 2007 the debt was 62.5%; in 2013, 100.6%.

You want to see fiscal tightening?  How about after WWII: in 1945, total spending was $92.7 billion with a deficit of $47.6 billion.  By 1948, the spending was $29.8 billion, with a surplus of $11.8 billion.  From what I recall, the economy did OK.

[The US] unemployment rate has since tumbled to 5.9pc.

What about number employed?  At the end of 2007, it was 138.4 million; end of 2013 it was 137.4 million.  This while the “Civilian non-institutional population” has grown from 231.9 million to 245.7 million.  Average hours work at the end of 2007 was 34.6; at the end of 2013, 34.4.  The U-6 unemployment rate went from 8.8% at the end of 2007 to 11.8% today.

This next one is a whopper:

You can argue that zero rates robbed savers, and that QE robbed them a fraction more, but let it never be forgotten that the state rescued the banking system across much of the industrial world in 2008.

To suggest somehow savers owe the government a word of thanks for “saving” them from the monster the government itself created is…very government-perpetuating.  Ambrose is suffering from some form of Stockholm Syndrome.

What QE has done is to distribute the costs of crisis evenly between creditors and debtors, a matter of natural justice.

To the extent “natural justice” means anything when it comes to economic actors, it can only mean let the chips fall where they may.  Anything outside of market forces introduces artificial winners and losers.

We will never know whether extreme monetary stimulus averted social and political breakdown, a slide into beer-hall thuggery and street militias, but would you ever wish to put the matter to a test?

There is no doubt we will, sooner or later, put this matter to a test – Ambrose himself points out that more QE is to come.  Does he suggest that perpetually printing money is possible?  If not, this matter will be put to the test.

Somehow, after all of this glory, laud and honor to his redeemer-kings, Ambrose seems to recall that there are a few problems…even now:

And yet, there is a problem. The Bank for International Settlements and others such as India's central bank governor Raghuram Rajan argue that QE is in essence a beggar-thy-neighbour ploy that shifts the burden onto others in a "Pareto sub-optimal" for the world as a whole.

They argue it led to a flood of liquidity into emerging economies and that they were not able to neutralise the effects. Most of the world has now been drawn into an all-engulfing debt trap that has left the international system more vulnerable than ever.

Debt has risen by 20 percentage points to a record 175pc of GDP in emerging markets, with China already around 250pc, according to Standard Chartered. These are unprecedented levels for countries without mature financial markets and deep layers of wealth. Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. The BIS says the world is on a hair-trigger, at risk of "violent" effects if there is slightest loss of liquidity.

Ambrose should have just stuck to the idea that “the final word on quantitative easing will have to wait for historians.”  Coming from a Keynesian/monetarist/regime-apologist, this would be the most one might hope for.

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