QE Failed at Number One Goal....Supplying Credit to Consumers

We the people … are human beings with a soul. It is by far the most neglected element in the theory of the Keynesian economics, while at the same time the core in the Austrian view.

The Keynesian propaganda machine is turning at full speed in a relentless way. But do we see an increasing number of  signs of unsustainability in their theory?

Former Economy Noble price winner Paul Krugman, propagator of ultra weak money policies,  has a powerful position in the mainstream media. Apart from his TV appearances he is a columnist on NYTimes.com, one of the most visited financial sites. He has his ties into the highest échelon of the establishment. The power to influence (in our own simple words: perception management) is significant. But when realism has faded away, every new effort to justify things becomes questionable. We believe that is what happened in his latest column “Bernanke, Blower of Bubbles?” The writer obviously went too far. His commentary was really unrealistic, and almost unanimously every reaction in the comments section carried deep frustration. The most frustrating part for readers is probably the growing consensus that when the next bubble will burst both Mr. Bernanke and Mr. Krugman will not be hit. “We the people” will be the victims. We believe the direction of the evolution is becoming a serious concern amongst people, and it is having a profound impact on policy effects.

One possible outcome of this is that the harder policy makers try the further they could get from their objective. It is almost a fact right now that monetary stimulus has not proved to be effective. It has profoundly increased the gap between the top 1% and the rest of society. It has accelerated the decline of moral values in the financial industry. It has incited a worldwide destructive competition in currency debasements. It has undermined the credibility of our leaders and the establishment. It has created a false sense of stability while people experience the opposite in their daily lives (primary example: the real inflation rate as discussed here and here). But all those effects are not measured so they are simply neglected by our policy makers.

Even the German Bundesbank President Jens Weidmann today reiterated that monetary policy cannot tackle structural problems and said the longer the period of low interest rate continues the greater the stability risks (source: Reuters).

The following chart shows the impressive amount of liquidity that was pumped into our system in a very short period of time. Clearly, the explosion in the monetary base did not have a significant effect on credit expansion, which is the core of our debt and credit based economy.

It is only through growth of loans (credit) that the banking system can grow. It is through loans that new money is created (source: Positivemoney.org). Fresh new money is one of the ways to expand GDP.

Now what do central planners conclude from the above? Simple, the scale of monetary easing should be magnified. More easing is required to get things rolling.

But wait a minute. Suppose, just suppose, that we reached a kind of limit in this whole system. Suppose we are at a point where central planners cannot expect more lending and spending from people. Suppose that people are looking for balance and not for additional growth. This assumption could be true or false, nobody has the answer right now. But if it were true, then it would mean that central planning has gone too far, or that central planning simply has reached its boundaries. There are increasingly more signs that we could have reached such a point.

With that in mind, we believe that the following figures could support this thesis. Although more research, data and particularly time is needed to make such a case, the most basic behaviour of people should provide an indication. That is in contrast with the macro economic models that Keynesians are using in their decision making and key performance monitoring. In our opinion, disposable income in real terms per person and savings rate of individuals could be reliable indicators for our purpose. The focus in the following chart is on the US because it offers the most up-to-date figures (Q1 2013, courtesy of St Louis Fed Research). The blue line represents the real disposable personal income per capita with the scale in the left axis. The red line represents the personal savings rate with the scale in the right axis. The grey bars indicate official US recessions.

Not coincidentally did we chose the start date; our readers will understand why. What we see on the chart is that during the crisis in the 70’s the savings rate (red line) did rise to +10%. During the financial boom that followed people had been saving steadily less as the opportunity cost of saving was simply too high. Nowadays the savings rate has reached a point where it could almost only go up more from here. That implies less spending.

The real disposable income per citizen (blue line) seems to be topping in the last years. There is not too much room left for additional spendings.

Are we right to conclude that consumers (at least in the US, and very likely in Europe as well) do not have theability AND willingness to take on more debt in order to spend more? Maybe there is some spending fatigue occurring. As the French use to say: c’est trop.

Eric Sprott presented an economic viewpoint to look at this. He wrote the following in “solution is the problem”:

High levels of debt, or debt overhangs, cause more problems. Recent work by Carmen Reinhart and Kenneth Rogoff (Harvard University) demonstrates that banking crises are strongly associated with large increases in government indebtedness, long periods of unemployment and, ultimately, some form of default. They identify a threshold of 90% debt-to-GDP as the trigger to a debt crisis.

Looking at the same phenomenon from another angle Darryl Schoon discussed in his latest video message a possible end game scenario of the debt and credit based economy:

Credit and debt based economies must constantly expand because the money fed into it goes in the form of DEBT. All money created in capitalist economies comes in the form of loans. There is so much debt because that phantom of money is nothing but a debt machine with a happy face plastered on it loaning you money so you can pursue your dreams. Where does the money come from? It is nobody’s money; it is money that they made up out of thin air!

Banking is a Ponzi scheme put in place to drain off the productivity of all human beings. It is a Ponzi scheme that was once put in place, and that is now reaching the end of its lifespan. Now it is collapsing. Capitalism works as long as it is expanding. Why? That is why the focus is on GROWTH. Because time itself has become valuable and everything has become monetized and tied to a loan. The longer the loan is outstanding the more interest has to be paid on that loan which compounds CONSTANTLY. The reason why economies have to expand is because the aggregate amount of debt is constantly expanding. So to pay offthat constantly compounding aggregate amount of debt, credit has to go into the system hoping that it will induce enough new economic activity and profits to pay off the constantly compounding aggregate debt that is constantly growing larger.

Whatever the reality is, only time will tell if humanity has arrived at a critical point. As usual, there will be no black-and-white answers, and perception management techniques will be used to play with the facts. But we cannot ignore the growing number of signs that “we the people” are suffering from bubble fatigue. An increasing number of people is looking for more balance in different area’s in their lives. Maybe, just maybe, this could be a factor that central planners did not take into account in their calculations and theories, and one with serious implications. Only time will tell.