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.
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.