Is QE really dead? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 29 October 2014
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Baltimore, Maryland

Dear Diary,

QE, we hardly knew ye...

Hang the black crepe. Get out the whisky. Say goodbye. And try to keep the tears from your eyes.

The Dow rose above 17,000 yesterday, near its all-time high. Higher stock prices should settle nerves at the Fed's FOMC meeting. It should leave the central bankers free to let their emergency money printing program die in peace.

The Financial Times announced the end even before it happened. On Monday, its headline read: "RIP QE...the quiet death of a radical US monetary policy."

But the Fed has to be careful. If it announces that QE is truly dead, it is likely to set off some untoward scenes of wailing and keening in the stock market. Investors will feel a deep sense of loss.

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The trouble with death is that it is so permanent. The dead stay dead. And if investors believe QE will never rise again, they may be disheartened. Or even feel betrayed. Remember, the central bank was always the life of the party. It was central bank credit that was behind the big run-up in stocks over the last 5 years. If QE is history...most likely, so it the bull market. The party is over, in other words. Then, stock prices are likely to put on their coats and hats and go back whence they came.

The Fed has already given out the word that while QE may be breathing its last, its offspring will live on. The Fed's vast holdings of debt will not be sold off...or even allowed to expire of natural causes. In the normal course of events these debt instruments would mature...and then - like all of us - disappear. But the Fed tells us it will keep them alive...preserving its huge cache of debt for many years, and perhaps until the end of this decade. The money supply will not be allowed to shrink.

We doubt that that will be enough. An economy that depends on debt needs more and more of it to get the same buzz going. The first time you pump a lot of credit into an economy's veins you get quite a rush. It's only later that the shakes begin.

As debt grows, it becomes harder for the economy to grow. Because the resources needed by the future have already been claimed by the past. Ultra-low interest rates disguise the problem and postpone the reckoning, but they can't eliminate it. A man who consumes a cup of coffee today...on a credit card...has an obligation that will take some of tomorrow's income. If he allows the debt to remain and compound, he could be paying for that cup of coffee ten or twenty years from now.

This debt drag has been explored in a number of economic studies.

    "...a country's growth rate will lose about 25% of its normal experience growth rate," write Van Hoisington and Lacy Hunt, when total debt reaches a 'critical' level of 250% to 275% of GDP. Currently, it's 334% in the US.
If you borrow to invest in a productive undertaking, the stream of income may be enough to pay off the debt and even give you a profit. But if you borrow, say, for Obamacare, war in the Mideast, or Wall Street bonuses, you're not in a better position to pay off your debt, you're in a worse position.

That is the conclusion of a heavy paper by a quartet of Ph.Ds laboring for the International Center for Monetary and Banking Studies. Deleveraging? What Deleveraging," shows us, as the title implies, that debt is still increasing. It also tells us that "an excessive level of debt poses both acute and chronic risks."

Nothing very surprising about that. Slow growth in turn puts you into a 'vicious loop' where you can't pay down debt. The authorities try to stimulate growth. They run deficits...and lower interest rates to encourage borrowing...in the belief that and these things will make it possible to 'work our way out' of debt. Instead, we just dig a deeper hole...increase the risks of defaults, depression and deflation.

Which is why, we wouldn't be so quick to throw the mud down on QE's face. It might not be entirely dead. And come the first alarm in the headlines - that the stock market has cracked ...or the economy is sinking - we will likely see a resurrection.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Is QE really dead?"

RS Rathore

Oct 30, 2014

Dear Friends,

For how long Fed could be a helping hand to the sinking economy of US. Ultimately, the bubble had to blast and its going to blast terribly. Merely the excess paper printing was not the real solution. Some dynamic reforms will have to be explored out by the globally renowned economists of US, so that not only USA, but the entire world would then feel a sigh of relief. In the near future, there does not seem any likelihood of any relief to the restless public in US, but how then the economy turns & things shape up in on coming time, I'm afraid I do not know at least.

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