Auteur: Redactie

1. A year ago the Fed insisted there were no incipient bubbles, and it was not trying to blow more bubbles. Unusual equity market strength was supposedly based entirely on the existence of a powerful “V” shaped economic recovery. 

2. Well, as the months and quarters passed, it became clear there was no “V” shaped economic recovery. And by mid-summer the economy seemed to be faltering. 

3. Then the talk of a second round of QE emerged. It was then understood the market remained aloft because investors believed the Fed wanted high stock prices. Furthermore, it was hoped the Fed would engage in a second round of QE to ensure against a further relapse in the economy and the stock market. 

4. Initially the debate was whether the Fed would have to see the whites of the eyes of a double dip or price deflation or see a collapsing stock market before it launched QE-II. 

5. By mid-September the U.S. economic data had improved somewhat and the stock market had rallied. Nonetheless, the QE talk heated up. Why? 

6. Because the Fed through its September statement as well as through various spokesmen indicated it was targeting a higher rate of inflation and a much lower rate of unemployment, and it wanted to get there fast. 

7. According to the Fed the credit channels of the transmission mechanism of monetary policy are broken. Hence the need for QE. QE works through a “portfolio balance channel” to get asset prices up. 

8. The asset class most likely to be affected and prove beneficial for aggregate demand is equities. 

9. By all econometric estimations it takes big increases in equity prices to achieve modest increases in consumer demand. 

10. Therefore, it follows that to get unemployment down a lot so as to get inflation up to the Fed’s target will require economic growth well above trend. If this is to be done by way of QE’s impact on equity prices, the targeted rise in equity prices must be large. In other words, the formerly mendacious Fed admits it is in the business of blowing stock market bubbles once again. 

11. The moral hazard market has been aware of the Fed’s policy put. Market participants are now catching on to more aggressive Fed objectives. They are acting – and will be acting – accordingly

Een visie op de marktontwikkelingen is natuurlijk altijd leuk, maar wat ook goed is is om de ideeën van Keynes eens tegen het licht te houden. Dat doet Bill Bonner.

What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this:

There is no subtler, surer means of overtuing society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.

And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913…when America's central bank was formed…then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all. 

Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns. 

But what else can the managers do? After increasing for 61 years, the volume of credit in the US – and hence, the volume of sales – is no longer expanding. This leaves householders with debt to pay down and exporters with no alteative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch. 

The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves. 

And now they're looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early '80s…and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world's leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan's GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record – 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don't need to be reminded of what happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered. 

No one wants to follow the Japanese down that road. Ben Beanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be “a disaster for the world” if Weste nations tried to force China in that direction. He's right. But he needn't worry about it. Disaster is coming anyway. The managers will make sure of it.