Is the economy experiencing growth or merely treading water? Are companies hiring or laying off workers? Is the stock market a wise investment or a risky gamble? Will monetary inflation triumph over debt deflation?
While we can’t definitively answer these pressing questions, we have our own theories about what the answers should be. More crucial than our opinions, however, is the chaotic reality of what is unfolding and how it complicates our understanding of markets and political economies.
Bob Janjuah, head of tactical asset allocation at Nomura, remarked, “We have Monetary Anarchy running riot, where the elastic band between the real economy and the current liquidity-fueled markets is stretched further and further beyond credulity.” His observation underscores the current state of upheaval.
The situation is truly disarrayed. Bubbles are forming in nearly every sector—stocks, oil, food, copper, you name it—prices are on the rise. Just two days ago, we paid $4.27 per gallon for gasoline, yet the overall economy remains stagnant.
What is happening?
We share Janjuah’s perspective that monetary policy plays a critical role in this tumult.
A Simple Inquiry
Take, for instance, the European Central Bank’s recent decision to lend out $712 billion (€529 billion) to around 800 banks. This was in addition to the $655 billion (€489 billion) lent to 523 banks a mere two months earlier. Altogether, that amounts to over $1.3 trillion in just two months.
Before we dive deeper, let’s consider a simple yet essential question…
Where did the ECB source this $1.3 trillion?
The answer is uncomfortably straightforward, so much so that it could make even a credit card fraudster blush: The ECB simply made an entry in its ledger and—poof—created the money out of thin air to lend to practically any willing bank.
This practice is deeply misleading. Yet today, it is often lauded as enlightened monetary policy. And this isn’t the endpoint of the ECB’s dubious financial maneuvers; it’s merely the beginning.
The banks will take this capital and subsequently lend it to European governments and businesses, perpetuating a cycle of growing debt and financial vulnerability. Moreover, drastic market distortions—such as $6 per gallon gasoline—will emerge as the economy and markets are stretched “further beyond credulity.”
The Essence of the Matter
Meanwhile, not to be outdone, Federal Reserve Chairman Ben Bernanke made headlines this week when he told Congress, “The job market is far from normal.” However, due to his failure to announce an intention to initiate more monetary easing, investor confidence waned, leading to a 53-point drop in the DOW.
Clearly, Bernanke cannot launch QE3 with oil prices hovering around $108 a barrel and the DOW near 13,000. Nevertheless, we suspect that if oil prices continue their ascent, they could extinguish any signs of an economic recovery by summer. When oil prices and stock values decline, Bernanke will likely step in with more government debt purchases for a rescue.
This pattern has unfolded multiple times since late 2008. In doing so, Bernanke has conjured over $2 trillion from nothing and funneled it to the treasury, all while maintaining a belief that this approach will somehow restore prosperity.
These inconsistencies epitomize the challenges of managing an economy through a controlled fiat currency. Anyone who hasn’t been overly influenced by academic theory recognizes this as sheer folly. Yet, Bernanke and his global counterparts remain steadfast in their commitment to print money, even if it leads to widespread ruin.
In summary, these monetary practices represent a glaring example of everything that is wrong with our current economic landscape.
Sincerely,
MN Gordon
for Economic Prism
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