Global QE Experiment: An Open Letter to the Debate Team by Danielle DiMartino Booth
Dear Madame and Sirs,
“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.” In 1930, John Maynard Keynes worried about how economic events had unfolded following the 1929 stock market crash penned these words.
It is not often that John Maynard Keynes’ words grace these pages. That may have more to do with the exaggerated reputation the legendary economist has posthumously earned in a world flooded with central bank-generated debt. It is convenient, if not fully grounded, to credit Keynes with the inspiration to keep interest rates anchored at the so-called zero bound in the name of sustaining an economic expansion.
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
In truth, Keynes is probably spinning in his grave given the magnitude of what those in the financial markets have come to know affectionately as QE, for quantitative easing. QE involves central banks buying their country’s debt in various forms. The hope is that purchase proceeds will flow back into the economy by way of higher asset prices, especially those of stocks. Emboldened by the higher share price, corporations are thus incented to expand their businesses and workforces placing the economy on a self-sustaining path to prosperity that can then be weaned off central bank life support.
The above Keynes quote was reprinted in a 2009 Sunday New York Times book review of The Lords of Finance: The Bankers Who Broke the World. If Liaquat Ahamed’s seminal work resonated in 2009, it screams to be re-read in 2015. The ‘Lords’ referenced in the book title were the most powerful central bankers in history, that is, until now. The “delicate machine” Keynes cited was the global economy.
The crippled state of the political and economic landscape following World War I created an environment in which central bankers were able to establish an unprecedented power base. The more married the ‘Lords’ were to the gold standard, the closer to the brink the world economy drew. Gold stocks were concentrated mainly in America and France. This required other postwar economies such as England, where gold was scarce, to borrow to finance trade with the rest of the world.
The bottom line is there was simply not enough gold to go around. This necessitated those without it to borrow and to use the levers of interest rates and government spending to replenish their gold reserves. On the losing side was employment, which suffered the circumstances of the boom/bust-inducing policy.
Why the history lesson?
Dispensing with history has never been wise. Back in the 1920s, it was a deeper sin than that of hubris. The central bankers, whose decisions largely led to the Great Depression, were mired in myopia. Their marriage to a singular ideal to help the post-WWI economy recover succeeded only in bringing it to its knees.
History could well prove that today’s central bankers are even more infected with tunnel vision. A protracted overly-easy monetary policy has subjected the world economy to a damaging rollercoaster existence for nearly 30 years. QE is now seen as the antidote to cure all ills everywhere in the world.
Some $12.5 trillion into this global QE experiment, it is time for elected politicians to take back their leadership role, one they long ago abdicated to monetary authorities.
As for those of you on stage this evening, ask yourself some difficult questions about righting the U.S. economy as you ponder winning the opportunity to be one of these new world leaders:
- Under the assumption that the Fed has not killed the business cycle, how will you prepare for the recession that’s sure to challenge you as you cross the threshold into the Oval Office?
- Will you have the political will and wherewithal to direct future fiscal relief efforts to retrain workers who lose their jobs rather than indenturing them to a welfare state? Think of how much better off and proud millions of Americans would be today if they were still contributing to this great country’s economic wellbeing.
- Can you simplify the tax code once and for all? Can you pledge to retire Warren Buffet’s quip that his secretary pays taxes at a higher rate than he does? Can you put a nail in the coffin of the mortgage tax deduction for the wealthy? Can you take on the lobbyists?
- Can you rewrite our national energy policy? We already are an energy-independent nation. Invest in converting the country to a natural gas grid as a sign of respect for the sacrifice our fighting men and women make to protect our very freedom.
- How will you address the thorny issue of reengineering the Federal Reserve? Will you have the ability to bring Congress together to recognize that we’re not a third world country, that there is no ‘Ending the Fed’? By the same token, we’re not the same country we were over 100 years ago when the Fed was established; this must be reflected in a thoughtful revamping of the institution.
- Is your voice strong enough to be heard by a public that’s been brainwashed into believing living beyond its means represents a way out? Buying more house and car than what’s affordable just because it can be financed was probably not on the to-do list of our founding fathers.
- Should you be elected with interest rates still historically low, will you have the prescience to follow Austria, Canada, England, Mexico and Switzerland, to name a few, and borrow at maturities of 50 and 100 years to indemnify the nation’s balance sheet?
- On a related note, how can you work with the other branches of government to address the building risks in the public pension system? Pension portfolios are filled with investments that are not only overly risky but increasingly illiquid, placing pensioners in grave peril. The city of Denver has been reduced to cutting tulips from its budget to offset the need for greater pension funding. What happens when it’s more than flowers, when public services are on the cutting block?
- Saving the most difficult for last: What will you do to address the sanctity of the U.S. dollar? What is your vision for successfully tackling entitlement reform in the wake of so many others who have tried and failed? The Chinese are banking on political intractability as they envision unseating the dollar as the reserve currency.
Just imagine if you were the leader who could answer even half of those calls to duty. Tackle the seemingly impossible issues and you open the door to what really matters. Commit to reform the educational system that’s annihilated the American Dream.
Know that your challenge really does start with the Fed. Today’s central bankers are more powerful than at any time in history. Just as was the case in the Roaring 20s, they ‘Lord’ over their political underlings with the ultimate weapon of cheap money. Take the reins back. Lead fearlessly through an inevitable recession. In doing so, set the stage to maintain the country’s status as the superpower for generations to come.
Danielle DiMartino Booth
President Money Strong, LLC