Tuesday, October 13, 2015

Central Bankers & Governments Lose Control; Monetary & Fiscal Policies Have Failed



One of the primary themes I’ve written about on this page in recent years is how little bang for the buck the Federal Reserve has gotten from its massive -- and unprecedented -- monetary policies.

Near-zero interest rates, three rounds of quantitative easing (QE), Operation Twist, etc., have gotten essentially nothing in return.

Consider that the Fed increased its balance sheet from $869 billion in August, 2007 to $4.5 trillion today. That’s a 450% increase in just eight years.

Yet, the US economy remains stuck at roughly 2 percent annual economic growth -- less than two-thirds of its historic average. That's clearly not the result the Fed was anticipating.

However, the Federal Reserve hasn’t acted alone. Central banks around the world — the Bank of Japan, the Bank of England, the European Central Bank, for example — have initiated their own QE schemes (money printing) and zero-interest-rate policies (ZIRP).

The central banks took these extraordinary measures in the belief that they would stimulate their beleaguered economies in the wake of the 2008 financial and economic crash.

After seven years of easy-monetary policies in developed countries, central bank balance sheets have risen to nearly $8 trillion!

And what do they have to show for it? Roughly 1 percent annual economic growth. Simultaneously, inflation has descended toward zero. In fact, deflation has become a genuine, and growing, threat.

After so much manipulation, so many schemes, and such gargantuan efforts by central banks, investment and growth both remain below pre-crash levels.

Bloomberg described it this way:

"More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world’s economic woes.

"Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market’s outlook for inflation worldwide is approaching lows last seen during the financial crisis. In the U.S., Europe, U.K., and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying.”

The emperor has been revealed to have no clothes. Central bankers, who see themselves as masters of the universe, have been exposed as having little power after all.

One Fed official has even publicly admitted that QE failed.

Stephen D. Williamson, vice president of the St. Louis Fed, says that quantitative easing has, at best, a tenuous link to actual economic improvements.

"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed — inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” wrote Williamson.

Williamson also said the zero interest rate policy in place since 2008, which was designed to spark "good" inflation, has actually resulted in just the opposite.

Even as monetary policy has failed to meet its goals, government leaders around the world have (through the utilization of fiscal policy) vigorously added to their already enormous piles of debt. They seemed determined to spend their economies out of the doldrums and invigorate them with new debt. But it hasn't worked as planned.

In just eight years, they have added nearly $60 trillion in new debt to the existing mountain — while GDP grew by only $12 trillion over the same time period, notes Chris Martenson, over at Peak Prosperity.

Despite the debt binge, global nominal GDP is projected to be $68.6 trillion in 2015 — virtually unchanged from 2013.

In other words, that massive debt increase got the world very little in return, and essentially nothing over the last two years. The global economy continues to struggle and is, in fact, barely growing at all.

Taken as a whole, developed and emerging countries racked up debt at five times the rate of nominal GDP growth.

This is madness!

Massive debts are not a solution to economic woes if they aren’t accompanied by commensurate economic growth and higher tax collections. Absent those things, debt is an albatross that ultimately weighs down a nation and hinders its government from serving the public interest in areas such as education, health and infrastructure. Servicing the interest on massive debts buys you nothing.

Back in 2010, I wrote that the world’s answer to the debt crisis was to add more debt. In essence, the solution was to treat the disease with more of the same disease.

Five years later, nothing has changed. Somehow, the world still hasn’t learned that you cannot cure a debt crisis with even more debt.

The lack of economic growth presents an epic challenge for global leaders.

They all need economic growth to service their enormous debts. The trouble is, there can be no growth without debt. Growth equals debt. In order to grow, the world's economies will have to incur even more debt. But that’s like adding more disease to an already sick patient.

Central bankers keep doing more of the same, expecting different results. By the way, that’s the definition of insanity.

The IMF recently downgraded its growth outlook for the world, and warned of a rising risk of a global recession.

Meanwhile, the Organization for Economic Cooperation and Development says leading indicators on a wide variety of data show that the world’s three largest economies — the U.S., China and Japan, as well as the U.K. and Canada -- are poised for slowdown.

This has got to be stunning, and depressing, for central bankers and government planners (not to mention the rest of us).

They’ve given it their best shot — utilizing every resource at their disposal, really — yet they’ve failed to re-inflate the bubble. All they’ve done is create absurdly unstable balance sheets, while racking up absolutely massive amounts of debt.

Maybe they’ve so far prevented a global depression. We’ll never know, since you can’t prove a negative.

We’re now in uncharted waters. These are unprecedented times. The world has never seen so much debt. Nor has it seen interest rates this low, never mind for this long.

In a normal world, this should be sparking massive, out of control inflation. But that hasn’t happened. This isn’t how the playbook says things should be. Economic textbooks will have to be re-written.

At this point, the Federal Reserve and other central banks appear to be trying to hold back the tide. Obviously, such an effort is in vain. The forces of global deflation are gaining steam, and world economic growth has reached a standstill.

There is plenty of academic work showing that massive debts -- both government and private -- ultimately hold back economic growth, and we're likely seeing that right now.

Again, global debt has increased at five times the rate of nominal GDP growth over the past eight years.

Clearly, that isn’t a solution. It’s more like a recipe for disaster.

Hold on tight. Things are about to get very bumpy.

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