QE is dead. Long live QE!

Nov 7, 2014

Baltimore, Maryland

    ...nothing is more essential than that permanent, inveterate antipathies against particular nations and passionate attachments for others should be excluded, and that in place of them just and amicable feelings toward all should be cultivated. The nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave
    - George Washington's farewell address
Dear Diary,

This time it was the European Central Bank that bought the drinks. US investors bellied up to the bar and helped themselves; the Dow rose 69 points. Gold kept slipping. Since America's QE program ended, both the Bank of Japan and the ECB have come forward promising more money for stock markets.

    Draghi faces pressure to do more to support a slowing euro-area economy after the Bank of Japan last week unexpectedly boosted its stimulus plan. Draghi said policy makers will be ready to implement further stimulus measures if needed as he signaled officials may cut growth forecasts next month. ECB officials were unanimous on more stimulus if needed, Draghi told reporters today after keeping interest rates unchanged.
According to the standard narrative, the US is fully on the road to recovery, while Japan and Europe struggle. Globalization? Forget it. The US has apparently 'decoupled' from the rest of the world. And now Japan and Europe need QE.

The story is appealing. But untrue. The US has not and cannot decouple from the rest of the world. And the US is struggling too. That was the real message from Tuesday's US elections. The democrats had promised a lot. They hadn't delivered. The voters - whose real incomes have been going down since the turn of the century - knew the truth.

Now it's the Republicans' turn to make promises they can't keep. They can't keep them because it will take major changes to turn the economy around... the voters don't really want any major changes...and the Republicans don't plan to make them anyway. The electorate has been largely zombified by giveaways and special privileges. It doesn't want anything different. It just wants more.

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What would be different? Easy...a flat rate tax, a neutral foreign policy, and a balanced budget. Any chance of those things? Did you hear Mitch McConnell promise them? Would a single member of Congress vote for them?

The Russians have a flat tax. It works perfectly well. 13%. Simple. Easy. Cheap to administer. A flat tax would save billions of dollars and help business, investors and households. But Congress will never vote for a flat tax because it would mean giving up its power to hand out special favors. That is what makes a national election at least as uplifting as professional wrestling; not just because the contestants can be gaudy and breathtakingly stupid. Sometimes, there's something really at stake...the private interests of the elite against the public interest of everyone else.

As for a neutral foreign policy, we could just butt out and watch the Sunnis, Sufis and Shi'ites kill each other without our help or our heavy artillery. That might be good for them and good for us, but it would be bad for the security industry.

There is, however, "a savage global terrorist threat that seeks to wage war on every American," say Mitch McConnell and John Boehner in yesterday's Wall Street Journal. But they don't seem to be gunning for the Swiss. Why not? "Avoid foreign entanglements," said Washington, thinking ahead. But today, the city named after him - and especially its Northern Virginia suburbs -- never met a foreign affair it didn't want to get entangled in.

A balanced budget? Ooops...have we said something wrong? The professional economists in the room are covering their mouths and suppressing giggles.

What a terrible mistake that would be, they will tell you. We have to encourage unbalanced budgets. We need to lure people to spend money - citizens, corporations and the government - not save it.

Households are wisely dragging their feet on this. Household net debt has gone down since 2007. But corporations and the government are doing stout service in the name of increasing debt slavery.

Why is it supposed to be a good idea to spend money you don't have? Well, there is something called the "paradox of thrift." The paradox is that saving is thought to be good for an individual, but bad for a whole economy. When a single person saves, he improves his own personal finances. But when many people save, spending goes down...sales go down..profits go down...and the whole economy disappears down some uncharted rat-hole. That's why Martin Wolf says Japan has 'too much' savings in Wednesday's Financial Times.

Like so much of modern economics, the 'paradox of thrift' is nonsense.

Savings give families a cushion against disaster. It also gives them the capital they need to improve their standards of living. On our farm, for example, we have a wood pile about 50 yards from the kitchen door. In the winter, we spend a fair amount of time just bringing in firewood. So, we put aside some savings...and use the money to build a closer woodshed. Time saved. We can live more comfortably (a higher standard of living) and we have time available to do other things (more household output!)

The same thing happens in an economy. Money spent is money gone forever. But money saved and invested is money that increases our standards of living, raises wages, and adds to our wealth.

Japan, the US, Europe...are all stimulating consumption and discouraging savings. In Japan, this has been going on for more than 20 years - with little to show for it aside from the world's highest, proportionally, government debt. These policies have failed everywhere. That is why the American voter turned against the Democrats; he held them responsible.

But they are extremely popular with the people who funded Mitch McConnell's re-election campaign, the source of more campaign funding than any other industry. Over the last 5 years, the Fed has given these people $3.6 trillion, making its campaign contributions one of the most successful investments ever. QE? Dead? With that kind of adrenalin pumping in Wall Street's veins, it will be amazing if we don't have more of it.

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

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