Ever since the 2008 financial crisis collaterally damaged the
hull of the financial “supertanker,” overly indebted governments have been
struggling to right the over-leveraged and listing financial system, and have
clearly not been able to steer it in any other direction. As economic and
monetary contraction started apace after the US sub-prime mortgage bubble
popped creating a wave of global banking insolvencies, western governments and
central banks cobbled together a plan to refloat the banking system. As asset prices started to drop and
deflationary forces took hold, central bankers warned of a complete collapse of
global finance and thus a societal collapse. Their subsequent actions now five
years on should be assessed; so, has anything actually been achieved by the
centrally planned rescue effort? Or are the policies pursued a futile exercise
that will end in disaster?
Quantitative Easing - Part One
QE is a monetary expansion policy tool that created a
bailout mechanism for the banking sector in the wake of the sub-prime crisis.
It was the first shot fired in the “war” to save the current monetary system.
It was orchestrated by the US Central Bank (the Fed) whereby banks and major
corporations (through the troubled asset relief program - TARP) globally
received billions upon billions of new money in return for failing assets. This
injection of liquidity helped initially to maintain implied solvency of the
system; however, all that has actually been achieved is that the central banks
now hold a significant proportion of the bad debt on behalf of Governments and
ultimately tax payers (adding to national debts). The new money received by the
banks was used to re-inflate asset prices to save the system, but has also
maintained the gambling-and-champagne lifestyles of the privileged bankers.
QE, it would appear, has not solved anything; rather, it has
just pushed the problem into the future. Nominal asset values are held steady
in order to maintain solvency; however, at some point in the future, the
central banks will have to sell the assets they are now holding. If they were
to fail to get good value for those assets, then the central banks themselves
would need a bailout. This could be achieved by a simple balance sheet exercise
- the cancellation of the debt/asset leaving just the liability of the freshly
printed money. Pure and simple debt monetization or as central bankers call it
“unsterilized “money creation. Starting the process of QE is the easy bit,
getting out as we will see may just be impossible.
Sovereign Bailouts
While sub-prime was busy undermining the global banking
world, bailouts to the financial sectors of individual countries were adding
more debt to already overly indebted governments. Government debt levels were
extremely high around the world, but particularly in Europe
due to years of deficit spending. The southern European countries (PIGS) had
not controlled their deficit spending obligations under the Maastricht Treaty
and were thus in danger of default as sovereign bond yields went sky high. Of
course, many of the creditors of the sovereigns were the global banks that held
Government debt as collateral. This was undermining the over-leveraged banks
from a different angle. Even though some creditors had to take “haircuts”, the
bailouts added much more debt to these countries so that zombie states have now
been created. Impoverishing populations by austerity and debt servitude has
been the order of the day, but also, by being trapped in the strait jacket of
the Euro, they have been unable to restart their economies via currency
devaluation. Thus only structural and fiscal reforms are open to them, sending
these economies into 1929 great depression style deflations. Iceland’s
approach in comparison to the likes of Greece et al has been more successful,
albeit on a much smaller scale. A straight default and an inevitable
devaluation of its currency has left it weak, but in charge of its own destiny, and it is very much on the way to being productive after its flirtation with
failure due to over financialisation. It has also been jailing the main banker
culprits in its financial downfall.
This would seem the correct approach, but in this world not
all countries and people are equal. The US, the UK and Japan, to name but three,
are using mainly monetary policy to try to solve the problems with a large dose
of financial repression thrown in. (A policy of financial repression, although
not stated, occurs when low nominal
interest rates (ZIRP – zero interest rate policy) can reduce debt
servicing costs, while negative real interest rates erode the real
value of government debt.)
Quantitative Easing - Part Two
Current levels of QE
are outrageous particularly in the US
and Japan.
As stated through the concept of financial repression, the reality of the
present QE policy is about currency devaluation and inflation. To weaken one’s
currency in order to import inflation through international trade is in real
terms to reduce the debt burden. This is different from the initial reason QE
was used when the first bailouts of 2008 occurred. As I stated earlier, getting
out of the policy is proving very difficult for central banks as they now seem
to be the buyers of last resort in the bond markets as surplus countries are
moving away from buying debt, particularly in US dollars. Why hold debt that is
constantly being devalued? The UK
is probably not too far behind with debasement policy; it may be suggested that
the Bank of England will before long be pushed to devalue sterling further by
another round or two of QE. We will be told that we need to boost our export
sector, but with an ever increasing national debt, currently at £1.2 trillion,
we will need to squash interest rates down to keep our debt servicing costs as
low as possible. Of course, by creating
a negative real interest rate we are also reducing the savings of a nation.
This could be considered yet another form of taxation.
The long-awaited
“taper “in the US
has now finally occurred; however, a very definite contradiction of policy has
been shown up. At the same time as a reduction of asset purchases was stated,
it was also stated that ZIRP would be maintained. Based on this low interest
rate policy, the Fed will more than likely have in the near future to reverse
the taper as bond yields increase making their debt servicing cost on $17
trillion unsustainable. It would seem that for the time being, centrally
planned manipulated markets are with us to stay.
What Can We Look Forward To?
What has become evident with all of these seemingly futile
policies pushing the problems into the future is that overall inflation hasn’t
been as forthcoming as has been needed really to debase the overall debt loads.
Therefore one-off wealth transfers in the form of bailins a la Cyprus
are waiting in the wings. Instead of stealing peoples’ and corporations’ wealth
via stealth inflation over the long term, why not just extract it from their
bank accounts in the form of a one-off tax? Coming to a country near you soon,
“BAILIN” will be the new political buzzword. Thus, any one with cash in a bank
over and above the government insured sum will be at risk of losing a fair
percentage of that money.
This type of action of course does nothing to solve the
structural economic problems of, for example, off-shoring and corporate tax
evasion being faced by indebted governments. It again just buys time. This type
of “futile” event may just again tip western societies into the sort of social
unrest we have already seen in countries like Greece,
Portugal and Spain
and across the Arab world with the Arab spring.
Conclusion
There appears no end
to the mad interventions that Governments and Central Banks have to take in
order to maintain the integrity of the financial system which since 2008 has
grown in scale, complexity and danger. All policies are clearly designed to
prolong the current system of continual expansion and growth which has become
evidently impossible. The problem with this model is that it has stopped
working and has now quite literally turned into a Ponzi scheme. The broken
system requires changing before the monetary authorities destroy what is left
of the remaining capital of the people. It is time we allowed free markets to
be free and let the creditors take the hit for their bad investments. It will
be a painful transition but ethically we must do what is necessary for future
generations to flourish rather than be lumbered with the erroneous debt that
has been building up for the last four decades (but particularly since 2008) on
the back of a currency system that has now failed. We are but a moment away
from the next “Black Swan.”
This article is written by Richard Horswill. All views expressed are strictly his own.