Economy
Shanmuganathan Nagasundaram
Feb 23, 2016, 06:02 PM | Updated 06:02 PM IST
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The phrase “it’s different this time” had been used so many times during the good old days of the New Economy, India Shining, the housing boom etc, that any experienced investor will tell you that it’s never really different any time. As soon as the euphoria induced by cheap money (Alan Greenspan, YV Reddy and Ben Bernanke respectively) wears off, all that remains is the devastation of the bust and the reality of the debt accumulated without any of the good effects of the boom.
But I do believe that it’s really different
this time, although not in a positive sense. The usual proponents of “this-time-it’s-different”
would claim that the good times will last for the foreseeable future, but I am
saying that good times for additional quantitative
easing (QE) and/or Keynesian stimulus are over, and we have pretty much entered
the phase of the Crack-Up Boom. It’s different this time in the sense that
future additional QEs, which will undoubtedly be unleashed, aren’t going to
produce any of the good effects even temporarily. Instead, they will bring
upfront all of the undesirable consequences that have hitherto been dormant.
Since the teeny-weeny 25 basis points (one quarter of a percent) hike by the US Fed in December 2015, markets the world over have been on a massive downward spiral. After the initial knee-jerk upswing, most markets have corrected by more than 20 percent. Perhaps with the notable exception of gold and related equities. Not only the stock markets, the world economy itself seems to have gone into a tail-spin just prior to and subsequent to the rate hike. As Maersk, the world’s largest container shipping company reported last week, “it’s worse than in 2008”.
Stock prices of major banks in the US and Europe are lower than they were in 2008. The Empire State manufacturing survey has reported their 6th consecutive monthly contraction – a record of sorts. I can add several more, but I presume the trend is clear.
As I wrote
in a previous article, the US Fed rate hike will only accelerate the
already set recessionary trends. Readers should understand that the much touted
low US unemployment numbers mean little – the U-6 unemployment still remains in
double digits (the U-6 unemployment rate includes those people looking for
full-time jobs and also those with part-time work and those who have stopped
looking for jobs despite wanting one).
Given the way the US Bureau of Labour Statistics calculates employment numbers, I wouldn’t be surprised if the US soon reports unemployment numbers comparable to what the former Soviet Union reported decades ago. Maximum employment and minimum production.
What Next For The US Fed?
With two out of the three major Central Banks (the European Central Bank and the Bank of Japan) following a negative interest rate policy (NIRP), it’s only a matter of time before the US Fed joins the bandwagon. Given how incredulously the bond markets have capitulated into becoming one gigantic bubble today, I am sure the central bankers aren’t much threatened by the nearly absent bond vigilantes.
As to why the market places any
confidence on the utterances of central bankers is a mystery; as Jim Grant
pointed out, the US Fed has predicted zero out of the last 10 recessions. It’s
the role of the markets to call the bluff and I think it’s about time the bluff
of central banking is pronounced loud and clear.
Janet Yellen in the next few
weeks/months will come out with some outlandish reason(s) on why the nascent
interest rate liftoff has had to be terminated for the common good of all
humanity. Time is of the essence and to avoid a full blown recession, the US
Fed has few options left.
They have reacted under conditions of much smaller
threats and not moving would be inconsistent with their actions of the last two
decades. Even more, stopping at zero wouldn’t help the moribund world economy,
or so they would say, and get into NIRP along with QE4.
But getting to be consistent doesn’t
make their actions right. Or even produce similar results as the earlier round
of QEs. The typical reaction to QE has so far been to bring forward the good
things (i.e. consumption) and postpone the bad things (debt repayment, savings etc).
But as I have said at the beginning, it could well be different this
time. We might well be at the footsteps of what Ludwig von Mises would describe
as a Crack-Up Boom. Quoting Mises:
... But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
The
After Effects
To me, the issues are as much economic as
moral. A policy of continuous inflation transfers wealth from the
poor/middle-class to the wealthy and the very fact that leading industry associations
have not taken up this issue points to the depraved state of morality. It’s
almost an inconceivable situation for businessmen to demand ‘sound money’ as a
policy – maybe it is sheer ignorance or blatant misappropriation. Neither is
forgivable.
The society at large isn’t too far
behind. Rather than thriving on the virtues of self-reliance and hard work, the
masses have become lazy slaves to government handouts of free food, medicine
and education (perhaps indoctrination is a better word). Never do they ponder
for a second about “who is the government taking this money from to give us
these free goods and services?” or “why should somebody’s productivity be forcibly
used to subsidise my requirements?”
Liberty, prosperity and character go
hand-in-hand and a society that lets government confiscate somebody’s wealth in
the name of societal welfare is doomed to failure. History has shown that
repeatedly and on that front, it will be no different this time as well.
Lest I end on a pessimistic note, I
should point out that gold sales the world over have been soaring. As Sprott
Asset reported recently, India and China alone account for as much as 3,200 tonnes
(and rising) of annual demand while the annual supply is at 2,700 tonnes (and
falling).
The market cleansing process of decapitalising the western central banks (who have to be this additional supplier from existing inventory) is well on its way and we might well see who is swimming naked when the tide flows out within the next couple of years.
Shanmuganathan Nagasundaram is the author of a recently published book RIP USD: 1971-202X …and the Way Forward. He can be reached at shan@plus43capital.com