Central Banks Administer Monetary Morphine The problem is lack of growth and gigantic debt levels. And yet we only have interest rates suppression, as if this were a cure

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WASHINGTON – The financial and fiscal “New Normal” across the countries touched or devastated by the Great Recession of 2008 triggered responses by Central Banks that resulted in massive injections of liquidity. Interest rates have been effectively suppressed. In search of gains, investors have bought stocks. In America this caused Wall Street to regain all lost territory, and then move on to new historic highs.

Quantitative Easing for everybody

Now, while the US Fed mercifully stopped a few months ago, all the other Central Banks are also doing QE, Quantitative Easing, hoping that more liquidity will encourage more borrowing to finance investments leading to growth.

The American example is not that good. Yes, the US economy is finally growing again. But not in any spectacular way, (2.4%). This has been the worst and slowest economic recovery on record. Even though unemployment is going down to semi-acceptable levels, (a bit above 5%), the total US labor force is now smaller than it used to be, while too many new jobs are part-time and low-paying. This translates in stagnating or declining standard of living for millions of Americans. If is the best that QE can do in America, in an economic context that at least is not below average, I would not hope in much better results elsewhere.

Good Luck!

All this notwithstanding, the European Central Bank is now launching its own QE and Japan already started. Good Luck!

Speaking of Japan, the most remarkable thing is that in this country (once believed to be the wave of the future) the absurd has become normal.

Prime Minister Shinzo Abe believes that he can re-energize the economy by printing money and devaluing the currency. The point is that this remedy never works, unless it is accompanied by new productive investments that increase competitiveness and overall productivity.

Absurd Japan

And we do not see much of this in Japan. On top of that, even with absurdly low interest rates, Japan’s national debt has become so huge that it will eventually crush the country. Think of this: Japan’s debt is 240% of GDP. Debt service now absorbs 43% of all revenue. Which is to say that when you add mandates and other fixed expenditures, the Japanese government has zero discretionary spending opportunities. No investments. No nothing. Given all this, buying more Japanese bonds is either an act of charity, or the expression of total stupidity.

And yet this absurdity does not get much coverage. Japan is still the third biggest economy in the world. “Yes, it is experiencing some problems due to sluggish growth, but the Government is working on this, and markets hope that things will get better.” Really?

Well, the fact is that many Japanese are taking their money elsewhere, to Singapore for instance. The smart people now know that the boat is sinking, and are looking for alternatives. But the rest of the world contemplates all this without any uneasiness.

Fixing Greece?

By the same token, markets look at Greece trying to renegotiate the terms of its bail-out as if this were a “normal” transaction. The reality is that Greece is sunk. It is bankrupt. It is high time we would recognize reality. High time to understand that the Euro is OK only for strong economies. Greece, Italy, Spain, Portugal and France do not belong. But we hear none of this.

US entitlement spending

As for America, the ticking bomb is the slow but continuous growth of entitlement spending. Because of political gridlock in Washington, nothing will be done until Obama is President. But the problem, while currently ignored, is still there. As the national debt keeps getting bigger, (now well above US $ 18 trillion), the solutions down the line will be more painful. But, for the moment, all is well.

Monetary drugs

Welcome to the “New Normal”. Instead of minding the store, now governments do nothing, while Central Banks administer a lovely cocktail of monetary morphine and cocaine. Therefore, no anxiety and no pain.

 

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