QE Purchases – Brace Yourself For The Quadrillion-Dollar Reckoning by John Mauldin
The ever more extreme antics of our central bankers keep forcing us to find new ways to describe them. My good friend Danielle DiMartino Booth does this by drawing an interesting historical parallel.
Danielle takes us back to the 20th-century era of World Wars and draws upon Liaquat Ahamed’s. The Lords of Finance. His work was inspired by that 1999 Time magazine cover story “The Committee to Save the World.” You may recall it: the lovely mugs of Alan Greenspan, Robert Rubin, and Larry Summers up there, grinning like the Cheshire Cat.
Danielle says that Ahamed’s work is “a study [of] the perils of devaluing stores of value by force, the dangers of runaway debts, and the menace of monetary myopia.” Franklin Roosevelt devalued the Depression-weighted US dollar by forcing up the price of gold. At the same time, Germany couldn’t pay its World War I debts. This set off a chain of defaults among US allies. The US then had to bail out Germany’s debt. Central bankers around the world began competitive interest rate rises. That move caused their countries to hold onto their dwindling gold supplies, even though the floundering global economy needed lower interest rates.
Fast-forward to today. Danielle points out that “the debt is simply everywhere, at least to the extent we can see and measure it. Corporate and sovereign debt, of both the developed world and emerging market varieties, are at record levels. China’s debts certainly add to that record but who really knows to what extent? It’s the ultimate black box of leverage on Planet Earth.”
[drizzle]Read on to see why Danielle doesn’t think “a perverted gentlemen’s agreement” among central bankers, politicians, and investors will stave off a quadrillion-dollar reckoning.
The Overlords of Finance
By Danielle DiMartino Booth
It was the best of times. And it still is. Intrepid investors who never dreamed they’d put all of their eggs in one full-boar risk asset basket have never had it so good. Stocks are up, bonds are up, emerging markets are up, real estate is up. Heck, it’s all up. As it should well be. It’s different this time. No, really. It is.
Depositors pay banks interest to hold their hard-earned savings for the first time in written history. And, as far as investors are concerned, sustained bad news is the only true form of good news. For this warped reality, we owe a debt of gratitude to the world’s central bankers who have changed the rules of the game by dispensing with the conventional in favor of the arbitrary. There is a word for such extreme power, in both noun and verb forms: Overlord, as in a person who lords over lords.
Was happening upon and being stirred to employ this all-encompassing word pure coincidence? To boast such divine inspiration would be disingenuous at best. Rather, it’s another inspiration that begat today’s theme. Liaquat Ahamed, author of The Lords of Finance, is said to have been moved to write his seminal tome after reading a 1999 Time magazine cover story titled, “The Committee to Save the World,” which featured the then three superstars of the economy: Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Rubin’s right hand man, Larry Summers.
As droves of acrimonious Americans can attest, “Save” is not the word that comes to mind when they see those three men’s faces.
Some of the bitterest among the economic outcasts who were ruined by the ‘Committee’s’ manipulations will never have the wherewithal to pay off their dusty subprime mortgages with their still inadequate incomes. Others among the shell-shocked didn’t want to be told to stay in the stock market. They’d been burned twice and that was enough for one lifetime. For that, they are constantly chastened for missing the second greatest bull market of all time. But tragically, for some, they just wish they could exit this world with dignity; they fear they will outlive their savings in a world where savers are punished and cash itself is an endangered species.
The truth is Greenspan, Rubin and Summers were merely clones of the “Lords” to whom Ahamed refers to in his book. It is impossible to summarize Ahmed’s book, which still stands as yours truly’s greatest literary guidepost to where we find ourselves today. If you haven’t read it, please do.
To synthesize the thrust of the book, it is perhaps best to view it as a three-way study in the perils of devaluing stores of value by force, the dangers of runaway debts and the menace of monetary myopia.
How does one devalue by force? Illustrations from the period are numerous. Some suggest the best example comes from a decision made by President Franklin Roosevelt in 1933 as his country emerged from the most savage year of the Great Depression. To counter the scourge of the day, falling prices, one commodities economist hypothesized that prices merely need to be forced upwards. This simplistic rationale accepted, Roosevelt began to devalue the dollar by driving up the price of gold.
Moving on to the ticking debt bomb, the initial debt build sprang from the unpaid bills racked up both during and after World War I. History tells us these debts morphed into the very source of the hostilities that drove the world headlong into its second world war. Germany’s inability to pay its war reparations set off a daisy chain of defaults among U.S. allies. To finally tourniquet the wound, the U.S. effectively bailed out the bad German debts.
As for the hubris of those central bankers, a 2009 New York Times book review best summed it up as follows:
If anything, the power of the kings and queens running the world’s central banks has become even more concentrated. In a reversal of economic fortunes, today’s economy is in desperate need of higher rather than lower interest rates, of a normalization of policy to put a floor under the bloodletting in pensions, insurance companies and among retirees worldwide.
And yet, the powers that be insist they know that better than the unwashed and uneducated masses that suffer at the hands of their misguided policies. Of course the benefits of negative interest rates outweigh the costs. And whose business is it anyway if central bankers impinge on the ability of capital to determine the value of a given entity?
If you think such encroachments into the Darwinian process of price discovery invite debt creation where it would not otherwise be possible, you are right. That brings us to the