Aiken, South Carolina
But since 2008, we've lived with ambiguity, split personalities, and confusion. While households and businesses tried to de-leverage, the public sector leveraged up. The US government added nearly $7 trillion in new debt since '07. Overall, debt to GDP shrank...but not much, from 360% of GDP down to 345%.
Deleveraging was the market's natural reaction to excess debt. QE was the unnatural and monstrous response of the Fed. Three trillion was added to the Fed's holdings of debt, as the bankers tried desperately to keep the debt expansion going.
From a Bank of America/ Merrill Lynch research report:
In markets, QE was the name of the game, 2008-2014. But QE helped Wall Street, not Main Street. Just look at charts of shipping indices, real wages, and the velocity of money. You see lines that head down in 2008...and don't come back up.
In the last few reports, we've focused on the things that weigh heavily on the economy - debt and demography. We took note of a prediction, made by our secret-weapon analyst, that these things will drive US stocks down about 10% per year for the next 10 years...
But we also noticed a possible spoiler - no prediction based on history has ever included the effects of QE or Janet Yellen! Eventually, we caution, everything 'normalizes.' And eventually, our analyst will almost certainly be right about stock market performance. But eventually can still be a long way into the future.
Which brings us to our updated, revised, and improved outlook:
Remember our prediction 6 years ago? Tokyo...then Buenos Aires, we said. The idea was that the US economy would stay in de-leveraging mode for "7 to 10 years"...and then, it would be off to the races. We suspected that the feds would get tired of Tokyo. We figured they'd be ready for some Latin-style action...a little central bank salsa...a bit of monetary mambo... We predicted that QE wouldn't work...and that the Fed would want to be more activist -- probably by giving up on QE and directly intervening in the money supply.
So, what have we learned in the last 6 years? How has our view changed?
The answer to both questions is 'not much.' As we guessed, an aging, deeply indebted, zombie-ridden economy will not improve by adding more debt. Instead, it is doomed to follow Japan down that long, lonesome road of low consumer prices, low growth, and high debt. This road leads to eventual destruction...but when? How?
In America as in Japan, QE does not help stimulate a real recovery. But it does help simulate a real recovery. House prices are up. The middle class has more 'wealth'...possibly to borrow against. The rich are feeling fat and sassy. The Fed can continue modest tapering. This will produce a sell-off in the stock market. Then, the Fed will stop tapering. But it will be too late to reverse the damage to equities. They will go down for many years...bringing us even closer to the Japanese model.
Our guess now is that this situation will persist for a few years. As long as the pain is tolerable, the Fed will not be so bold as to abandon QE or take up more daring measures.
Tokyo today. Tokyo tomorrow. After tomorrow...we'll see.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.