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QE Casino


QE managing of bond markets - Intended

In the view of Monetarists/Keynesians, the purpose of managing the economy is to do so "for the greater good". By definition QE is designed to affect the bond markets by lowering long-term interest rates. Thus, by definition, QE "manages" bond markets. That's OK because as soon as the economy rebounds Central Banks will stop "managing" this market and everything will get back to normal.

QE destruction of bond markets - Achieved

In reality bond markets are one of the most basic elements of capitalism, if not the most important. Think about it. Capitalism works because capital exists. Capital is simply savings. People save, they loan these savings (getting interest in return) and entrepreneurs use these saving to make more goods and services that fulfill our needs. You remove capital from the equation and everything collapses. Simple, right? The problem with QE is that by rising prices it makes sure that people will buy at peak price but at the same time receive little to no interest! So, would you buy an asset that is almost guaranteed to drop in price and that produces almost zero revenue? Of course not! Nobody is that stupid. As a consequence people are not placing their savings in bond markets. No savings means no capital and no capital means no production! Things are so bad due to QE that bond markets have now been defined as "profit-free risky investments". The bond market has been utterly destroyed. There you have it. QE has decimated the very engine of free markets and capitalism. So much for "stimulating" the economy!

QE stabilization - Intended

The idea of QE is simply the continuation of Monetarist/Keynesian theories for the need to "manage" the markets. Paraphrasing von Clausewitz, QE is the continuation of monetarist policies by other means. The ultimate goal being, of course, a "stable" economy.

QE mega bust - Not Yet Achieved

The only tiny problem with this thinking is that the "stabilization" practices of Central Banks are the ones creating the boom and bust cycles in the first place! QE is nothing but the very same policies on steroids. What we must expect are mega boom and bust cycles… if we are lucky and don't go into mega-bust phases directly. It is outright insane to believe that if a fair amount of inflation is bad, something that will create monstrous amounts of inflation in the mid to long term can be good. Their thinking is along the following lines: Hummmm… a little bit of rat poison is good but if we have too much it will sicken us. However, if we have a lot, it will be OK! Crazy right? Yet, this is exactly what they are saying in financial terms.

QE currency devaluation - Intended

Yet another goal of QE (identical to any other printing) is the devaluation of a currency. This is nothing but a simple supply and demand. The more currency there is floating around, the less value it has. According to Monetarist/Keynesian economists this is good because it allows producers in a country to export more because in terms of local currency their products become cheaper.

QE currency wars - Achieved

But this is not the entire picture. Consider the other side. Consider an importer to a country performing QE. For this person the imports have suddenly become prohibitively expensive. And before you say that this is good because it will spur local industry, allow us to remind you that no country is an island. All countries need imports (industrial and retail) for the benefit of all. Cutting off imports only harms local industry and local consumers who now have to pay more for their needs…assuming they can even find them. Think USSR and empty shelves and you will have the correct idea.

At an international level the only tiny problem with the idea that currency devaluation is good is that once a major country is in this war path this indicates that all the other countries that were exporting to it are screwed. This situation is so bad that many countries have declared that QE is equivalent to a new form of protectionism. Their exports just became impossibly expensive thus, all these other countries need to devaluate, whether they are in QE or not. This triggers a race to the bottom called currency wars and just as in any other nuclear war we all lose. This devaluation also creates local inflation due to QE from another country. It does not matter where you live or what you do, the currency your profits are stated into is worth less and less every day, far beyond what it would normally depreciate because your country now "needs to remain competitive"… yeah… let's have a competition into oblivion.

QE helping debtors - Intended

Another side effect of QE is that debtors in a country performing QE find themselves in a better situation if they have taken on debt on a variable interest rate basis. As interest rates drop in a QE environment, debtors owe less than anticipated and this is expected to initiate market activity. Basically, if you owe less you will spend more thus the economy is further "stimulated".

QE sinking creditors - Achieved

However, let's look at the counterpart. For every debtor there is a creditor and if a debtor now pays less to a creditor then the creditor has less profits. This would not seem bad, but as we stated before, the engine of all free markets is capital. If people don't get the interest payments they want for lending money they simply won't. They will find a different way to spend their savings or they will simply not make them available for loans. Think about it. Would you keep money in a bank account if you get zero interest rates? Of course not! You would do something different with it. What this means is that your cash is worthless and inflation is growing. Basically, you can't save and you can't provide for your family and future!

QE good trade-offs - Intended

There are several negative consequences that Central Bankers acknowledge that QE will have but they are quick to respond that everything is going to be OK once the economy rebounds.

QE really bad trade-offs - Achieved

The reality however is that all manner of savings and pension funds are in a terrible state. Those organizations have contractual obligations to provide a certain amount of money for their clients when they retire in the future. In order to do so the most expedient way is to buy bonds because bonds held to maturity are fully forecastable. There are no hiccups since their price does not oscillate widely with market fluctuations. However, what happens if bond prices raise and their interest drop down to zero or becomes negative? Savings and pension fund organizations suddenly don't have any income, which means that they won't be able to meet future obligations. Yes. Your private pension plan or retirement savings system is one of those. Hope you have a lucrative skill to exercise in your "golden age" because you are going to need one!

QE local capitalization - Intended

We have mentioned before that QE is intended to restore liquidity to "zombie banks" through re-capitalization of their "toxic waste". This capitalization is intended to revive local economies.

QE world bubbles - Achieved

However, banks are not stupid. They have two options. The first one is lend money in the local economy… which is going nowhere fast… or… they can invest elsewhere. And by elsewhere we mean elsewhere. And so all kinds of bubbles are developed in far, far places, places that would otherwise not be affected. Consider for example the world-wide real estate bubble. How do you think this happened? Most countries (i.e. non-developed ones) are not doing QE yet they are in a property bubble! Commodity markets? Bubble. Emerging markets? Bubble. And so one. Yet another side effect of QE is that it has devastating consequences in countries other than intended damaging the standards of living of everybody on this planet! And for what? So that the citizens of one country do not go through a cleansing bust phase? In a sense this is the very example of socialist equality…we are all equally screwed!

QE helping local workers - Intended

One of the most stated or sought effects of QE is to create jobs. As such the idea is that when the economy rebounds jobs will be created thus regular people will be far better off.

QE helping rich people - Achieved

However, it so happens that those who are savvy investors and have the infrastructure and know-how to utilize ZIRP loans are those who benefit the most. Unfortunately and thanks to idiotic socialist economic policies, the middle-class does not belong to this group. As a consequence of this rich people benefit disproportionally (we would say wildly) from QE when compared to the average Tina or Gugliermo. We always said that the fact that rich people become richer is not a problem, and this is correct in a free market because they are dragging poor people with them into riches. However, in a managed market this is a large problem because poor people remain at the same wealth level while rich people increase theirs. We are all against the notion of socialist "inequality" except when it is exacerbated artificially. And this is exactly what QE has achieved. So much for helping the poor! QE truly represents a Hood Robin effect; take from the poor and give to the rich.

Note: please see the Glossary if you are unfamiliar with certain words.

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