What happens when “shock and awe” becomes more of the same? Central bankers everywhere must be wondering about that as mainstream money managers are now openly talking about the “Japanification” of the global financial system. That implies doubts about central bankers’ omnipotence are surfacing since Japan has been stuck in a funk for decades even as the BOJ became increasingly aggressive.
The fact that the Fed has never been able to meaningfully reverse the emergency financial measures it began a decade ago is leaving its credibility in tatters. Chairman Powell’s unusual interview on “60 Minutes” this week spoke volumes about how desperate the Fed is to maintain control of the narrative. Similarly, in a recent press conference, the head of the ECB, Mario Draghi, lacked his usual swagger, seemingly weighed down by the failure of the Euro economy to respond as promised to years of radical easing measures. China and Japan are also grasping at straws as their respective centrally planned charades unravel.
Recent calls to conduct even wackier monetary and fiscal policies are coming from once reasonable people both inside and outside the central banks because they are out of new solutions and can’t stomach less manipulated markets that might allow for real price discovery. Letting market forces take over with much less government intervention is off the table because the deciders think the pain would be too great. Capitalism is being tossed aside in the process and that is ultimately horrible for equity valuations as we have seen throughout history.
With economic growth downshifting in recent months, across the globe pols, commentators, and market participants are now trying to form a consensus that solving the world’s growth problems is easy. Borrow even more heavily at the sovereign level and let the central banks buy the debt. Strangely, some people who have been around a long time and used to know better are warming up to this “solution.” Count us out!
Supporters call the next step into madness Modern Monetary Theory (MMT), but it’s really socialism under another name. Central banks paved the way for it when they rescued big banks and investors starting in 2009. Capitalism when markets were rising gave way to socialized risk-sharing when they fell and that has rightfully angered a large segment of the population. After all, if the Fed can support stock prices for the wealthy by printing money, why not just print some income for those who don’t own stocks? It’s nutty, but so is what the Fed has been doing for ten years.
Everyone conveniently forgets that Japan has been moving further into the realm of such monetary experimentation for thirty years to no avail. Europe, China, and the U.S. followed suit in the last decade to no avail. Last week, in an abrupt reversal of its plans to tighten, the ECB announced another in a long line of supposedly stimulative lending programs. Markets were mostly unimpressed. Promises of more negative interest rates policies were unveiled as well and that was supposed to be a good thing according to the PhD economists. However, holding rates below zero has proven quite detrimental to bank profitability and bank stock prices in Europe, leaving one wondering why they should be expected to boost lending this time around.
The QE “cure” is what is killing capitalism and global growth. Haven’t we learned that cheap money leads to overcapacity, further concentration of the economy in the hands of large corporations, and the formation of bubbles in numerous sectors? Wage suppression follows suit as capital is substituted for labor. Enormous amounts of debt (which is just future spending brought forward) are created. However, the debt must be serviced, creating a big drag on future growth. We have been living this for a decade.
The powers that be are using some of the same free market verbiage as their predecessors, but the words ring hollow because they are guiding us further into socialism and its evils. They think they are being clever. Central banks simply can’t be allowed to play the pivotal role in a truly capitalist system because they obstruct key market forces like competition and creative destruction.
It’s clear that what the majority of mainstream central bankers, politicians, and bureaucrats care most about is maintaining stock prices at bubble levels. They believe that QE enables that outcome and keeps them in power, but we think they will be proven wrong. They simply don’t or refuse to understand that running an economy based on stock prices does not optimize the functioning of the real productive economy. The central planners were not content with simply maintaining more orderly markets around the 2009 crash, they have “graduated” to attempting to control every tick in the S&P 500.
Importantly, these prescriptions are opening the door to a future with less market-friendly leadership that is brought to power by those who don’t own stocks and are falling further behind with these remedies in place. A growing segment of the electorate wants to end socialism for the country club set as conducted by central bankers after the 2008-09 fiasco and replace it with socialism for everybody else. Both are wrongheaded.
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