T
The Byre
- Original Poster
- #1
Elsewhere, @japancool wrote -
Heads of state get their heads removed and placed on spikes at the castle gates when things go suddenly wrong and in such a way that it affects everybody. The fun part is that those sudden changes for the worse were the result of gradual creeping mistakes, combined with inevitable cultural changes.
The French crown was financially bust, the nobility was not prepared or able to step in and support a decadent crown and (as the old gag goes) the commoners were revolting! The enlightenment had been creeping across Europe and new concepts and demands by the common man (who increasingly was either able to read or had access to people who could read popular pamphlets for him) better informed and aware than ever before.
The same is happening today!
Leaving the gold standard meant that the dollar could be 'created' out of thin air to pay for imports. So more and more cheap imports flooded into the West with the rise of Chinese industry. Western productivity fell. Then the 2007 CDO crisis lead to the 2008 banking crisis, solved foolishly by QE - more money!
Rather than letting the clearing banks go to the wall, victims of their own Ponzi schemes, the Fed, the BoE and the ECB printed more reserve currency to rescue them.
But QE is like heroin or crack. The more you use, the more you need to use.
Why? Why not just leave things at that and then suck all that QE back out with deflation?
Because deflation slows down the economy in the short term, despite being healthy for the economy in the long term as it increases money's velocity. Falling prices --> your money buys more!
Conversely, QE leads to inflation and rising prices --> your money buys less! Money supply affects velocity because (like oil in an engine) the more there is, the less often it has to go around in circles.
The problem is that politicians are forced by electoral systems everywhere to think in very, very short time-frames - four or five years to the next election! So a deflationary belt-tightening is O-U-T out!
The absolute belief that the C19 crisis could only be solved by throwing fresh money at the population in the form of stimulus cheques and furlough schemes and other ideas like central banks buying mortgages and company bonds meant that QE is now going nuts. There's no other word for it! The US government's debts stand at $30tn.
So what? Interest rates are at record lows so servicing that debt costs almost nothing - right?
US Treasury Secretary Jannet Yellen is going to spend $1.1tn out of the government's Treasury General Account (at $250bn a month) and a further $1.9tn in QE will be spent (at $370bn a month). Add to that, the Fed is spending $120bn already today every month buying up company bonds and mortgage bundles. So $740bn every month is pouring out of the government and the Fed combined!
About three-quarters of a trillion EXTRA dollars pouring into the real economy - what the hell happened to inflation?
House prices are escalating. Commodities are going through the roof - timber prices have quadrupled over the past 18 months, rubber prices are double, corn, wheat, oil, you name it and the prices have all more or less doubled.
But in that strange game of 'Follow-The-Lady', the CPI (consumer price index) everywhere is shuffled and reshuffled, so that products, goods and services move in and out of the consumers' basket, making year-on-year comparisons impossible.
QE is used to buy mortgages, bonds and other financial assets, thereby increasing their prices but reducing their yields (the amount you earn in percentages by owning them). So QE helps to keep interest rates low - but this leads to asset inflation and that leads to increased pressure to increase central bank interest rates to prevent inflation.
So how the F do we stop having to raise interest rates and thereby bankrupt the government and the private sector, now over their collective heads in astronomical debt and rising?
Easy - more QE!
Trust funds and retail punters ain't stupid. They know full-well that this can't go on and they are putting customer funds and those 'Stimmy' cheques into anything that isn't dollars, pounds, or Euros. Shares, gold, platinum, commodity futures, cryptos, the gum on your shoe soles - you name it and they're buying.
I've been watching the share price of a totally worthless zombie company that has a net equity of minus $200m go from $5 to $25. The market cap for a company that has mortgaged everything it once owned and hasn't seen profits ever and has had to cancel nearly all R&D just to keep the doors open, stands at $1bn. Yikes!
PE ratios everywhere have doubled in the past twelve months. Yikes again!
BIG PROBLEM - Many Western economies are no longer built upon productivity and efficiency but upon rising asset prices. This is especially true for the US and the UK. We call it a service-based economy but it is the act of paying for foreign goods with fiat money we have created out of thin air, backed by the inflated prices for our assets.
But we have been underwriting our lack of actually making stuff by having our assets increase in value. But what happens when our £1m house goes back to being worth £500k? What happens when that $25 company goes back to $5 a share and therefore falls foul of the covenants in its mortgages?
What happens when (de facto) negative interest rates go back to more realistic rates to prevent hyperinflation? What happens when servicing mortgages, government debts, company bonds and all the other debt floating around from credit cards and overdrafts start to cost twice as much or more per month?
Just what happens when the music stops?
There is a lesson in there for today's governments - unfortunately, that lesson is coming too late!
Heads of state get their heads removed and placed on spikes at the castle gates when things go suddenly wrong and in such a way that it affects everybody. The fun part is that those sudden changes for the worse were the result of gradual creeping mistakes, combined with inevitable cultural changes.
The French crown was financially bust, the nobility was not prepared or able to step in and support a decadent crown and (as the old gag goes) the commoners were revolting! The enlightenment had been creeping across Europe and new concepts and demands by the common man (who increasingly was either able to read or had access to people who could read popular pamphlets for him) better informed and aware than ever before.
The same is happening today!
Leaving the gold standard meant that the dollar could be 'created' out of thin air to pay for imports. So more and more cheap imports flooded into the West with the rise of Chinese industry. Western productivity fell. Then the 2007 CDO crisis lead to the 2008 banking crisis, solved foolishly by QE - more money!
Rather than letting the clearing banks go to the wall, victims of their own Ponzi schemes, the Fed, the BoE and the ECB printed more reserve currency to rescue them.
But QE is like heroin or crack. The more you use, the more you need to use.
Why? Why not just leave things at that and then suck all that QE back out with deflation?
Because deflation slows down the economy in the short term, despite being healthy for the economy in the long term as it increases money's velocity. Falling prices --> your money buys more!
Conversely, QE leads to inflation and rising prices --> your money buys less! Money supply affects velocity because (like oil in an engine) the more there is, the less often it has to go around in circles.
The problem is that politicians are forced by electoral systems everywhere to think in very, very short time-frames - four or five years to the next election! So a deflationary belt-tightening is O-U-T out!
The absolute belief that the C19 crisis could only be solved by throwing fresh money at the population in the form of stimulus cheques and furlough schemes and other ideas like central banks buying mortgages and company bonds meant that QE is now going nuts. There's no other word for it! The US government's debts stand at $30tn.
So what? Interest rates are at record lows so servicing that debt costs almost nothing - right?
US Treasury Secretary Jannet Yellen is going to spend $1.1tn out of the government's Treasury General Account (at $250bn a month) and a further $1.9tn in QE will be spent (at $370bn a month). Add to that, the Fed is spending $120bn already today every month buying up company bonds and mortgage bundles. So $740bn every month is pouring out of the government and the Fed combined!
About three-quarters of a trillion EXTRA dollars pouring into the real economy - what the hell happened to inflation?
House prices are escalating. Commodities are going through the roof - timber prices have quadrupled over the past 18 months, rubber prices are double, corn, wheat, oil, you name it and the prices have all more or less doubled.
But in that strange game of 'Follow-The-Lady', the CPI (consumer price index) everywhere is shuffled and reshuffled, so that products, goods and services move in and out of the consumers' basket, making year-on-year comparisons impossible.
QE is used to buy mortgages, bonds and other financial assets, thereby increasing their prices but reducing their yields (the amount you earn in percentages by owning them). So QE helps to keep interest rates low - but this leads to asset inflation and that leads to increased pressure to increase central bank interest rates to prevent inflation.
So how the F do we stop having to raise interest rates and thereby bankrupt the government and the private sector, now over their collective heads in astronomical debt and rising?
Easy - more QE!
Trust funds and retail punters ain't stupid. They know full-well that this can't go on and they are putting customer funds and those 'Stimmy' cheques into anything that isn't dollars, pounds, or Euros. Shares, gold, platinum, commodity futures, cryptos, the gum on your shoe soles - you name it and they're buying.
I've been watching the share price of a totally worthless zombie company that has a net equity of minus $200m go from $5 to $25. The market cap for a company that has mortgaged everything it once owned and hasn't seen profits ever and has had to cancel nearly all R&D just to keep the doors open, stands at $1bn. Yikes!
PE ratios everywhere have doubled in the past twelve months. Yikes again!
BIG PROBLEM - Many Western economies are no longer built upon productivity and efficiency but upon rising asset prices. This is especially true for the US and the UK. We call it a service-based economy but it is the act of paying for foreign goods with fiat money we have created out of thin air, backed by the inflated prices for our assets.
But we have been underwriting our lack of actually making stuff by having our assets increase in value. But what happens when our £1m house goes back to being worth £500k? What happens when that $25 company goes back to $5 a share and therefore falls foul of the covenants in its mortgages?
What happens when (de facto) negative interest rates go back to more realistic rates to prevent hyperinflation? What happens when servicing mortgages, government debts, company bonds and all the other debt floating around from credit cards and overdrafts start to cost twice as much or more per month?
Just what happens when the music stops?
