Tuesday, July 8, 2014

Quantitative seizing

A series of events will follow the winding down of the quantitative easing. Here are the major plot points:

  1. Since quantitative easing supports the stock market bubble, tapering means the bubble deflates and a tsunami of dollars floods out of Wall Street into the real world.

  2. With all that cash circulating through the economy, inflation skyrockets.

  3. The Federal Reserve raises interest rates to curb inflation (or they will have already raised rates to stave off inflation).

  4. The interest on the debt balloons, eating up more than the 17.8 percent of revenue it did in 2013.

  5. Hopefully, federal spending falls in line with revenue to avoid a debt interest death spiral—borrowing money to pay the interest on borrowed money.

Quantitative easing was an epic $4 trillion failure. Not only did it fail to stimulate demand, it guaranteed new problems once it ended!

Given how quantitative easing is the string keeping the sword of Damocles suspended over the economy’s throat, it’s worth wondering why tapering has to occur. Why not just keep printing money out of thin air, to avoid the reckoning?

Several reasons: The new wealth created thanks to quantitative easing exists on computer screens. It doesn’t reflect improvements in living conditions or a burgeoning of knowledge. Stagnant economies’ human and intellectual resources decay and shrink, and they lose confidence as harbors of deposit.

Endless quantitative easing also risks social unrest, as it increases inequality. During a 65-month period of historically low inflation and low growth, the NASDAQ index rose 250 percent. The stock option is the safer bet against old-fashioned entrepreneurship, risk-taking, job creation, and investment. Under this economic regime, the only wealth is established wealth. The velocity of upward mobility, like the velocity of money, edges towards zero.

The most important reason quantitative easing cannot go on is intuition. All addicts know, no matter the plentifulness of their stash, they will eventually come crashing down from their high. The longer addicts go without enduring the cleansing process, the harder that process will be. So it will be for unwinding from the Federal Reserve’s stimulus.

The first four things will happen. The fifth will measure the nation’s will and determine the near-term solvency of the republic. If we pare spending back to the 2000 baseline, we’ll live to fight another day. If we don’t, if we return to the opiates of number fudging and financializiation, the government defaults, which means no more Social Security, no more Medicaid, no more Medicare. Unemployment, unrest... Democracy will be a memory then.

In 1868 the Ottoman Empire was in the same situation, Simon Black observes. Debt interest was 17 percent of tax revenue. In 9 years the Ottomans’ debt interest hit 52 percent, and they defaulted.

We can avoid a similar fate. The withdrawal will hurt, but it’s not as bad as default.

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