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“Man is not what he thinks he is, he is what he hides.”

Andre Malraux

Commentary & Analysis

Shadow Dancer Part II – Money Madness Isn’t Working. But it could be very good for the dollar.

Thirteen months ago in a Currency Currents I wrote a long piece titled, “Ben Bernanke – The Shadow Dancer.” I explained why QE3 would fail. If we look at the numbers globally since the advent of central bank QE over the past five years, we can see just how dramatically it failed.

[Arguably the initial liquidity provided by central banks to commercial banks did save the system; but that was the legitimate roll of central banking.  Rushing off into a “monetary wonderland” after stabilization of the system should not have been part of a central bank’s mandate.]

Five years on, and we are still locked into the same deflationary dynamic; it seems to be getting worse as the years flow by…The premise Black Swan Capital developed soon after the credit crunch five years ago has not changed:

Here is what five years of government stimulus and central bank liquidity have wrought:

  • Government debt increased $30 trillion (+65%)
  • Central bank balance sheets have grown by $10 trillion (+150%)
  • Private debt increased $22 trillion
  • Stock market capitalization increased $26 trillion (84%)
  • Global GDP increased $8 trillion

QE and fiscal stimulus have failed every one of the explicit and implicit policy objectives, which were global debt sustainability, reduction in unemployment, and global growth.

  • Debt has become more unsustainable, growing from 285% to 313% debt to GDP
  • Unemployment has increased by about 32 million globally*
  • Global growth has increased, meagerly compared to financial assets, but is slowing again.

The Austrian School of Economics warned us, but our elite schools and illustrious leadership prefer Keynesian policies instead [but to be fair to Mr. Keynes; I suspect he would be mortified to see how governments and central bank leaders have bastardized his theories].

Over to Ludwig von Mises again:

“Credit expansion is the government’s foremost tool in their struggle against the market economy.  In their hands is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”

*The employment situation seems far worse in reality than the official statistics when considering the participation rate; and the millions who are woefully under-employed or working several part-time jobs just to get by.

But who knows; if about 10-15 million more people drop out of the US workforce, the Obama Administration, congress, and the Fed can maybe declare victory as the official unemployment rate might be back around 6%.

Bottom line: the financial economy is crushing the real economy.  If you add up all the debt created, plus the increase in the stock market capitalization it totals $88 million.  Thus, we have an $88 trillion increase to the financial economy compared to an $8 trillion increase in the real economy, i.e. growth of global GDP.

  •          Financial Economy +$88 trillion
  •          Real Economy +$8 trillion
  •          That is 11 to 1 ratio in favor of the financial economy. Yikes!
  •          This should scare all of us because financial assets represent claims on underlying real      assets.

Wiley Coyote call your office!

Capital productivity is increasing thanks to increased integration of technology into manufacturing and services; it is bad news for laborers when you consider $8 trillion in global GDP growth was produced with 32 million fewer workers.  There is a massive wedge being driven between the owners of capital and owners of labor thanks to all the governments and central banks are doing to “help” the economy.

Those whose wealth is based on financial assets are quite happy; those whose income is based on real income and wages are not.  This is a global phenomenon.  It is worse in Europe than America.  It is even far worse in China where income inequality has soared.  This is why China stopped reporting its Gini Coefficient.

Is it any wonder why we are seeing rising social and political unrest everywhere?

So what is the answer from our collective “leaders:” More of the same…you couldn’t make this stuff up if you tried.

Now, why it that I say all of this bad news is probably good news for the US dollar; here are the reasons in a nutshell:

  1. It sets the stage for a MAJOR risk bid—the world reserve currency benefits usually during times of global systemic risk.  The credit crunch rally in the buck is a good recent example.
  2. All of this stuff is deflationary.  In a global deflationary environment the supply of dollar credit drains from the system and usually benefits the global reserve currency.
  3. It is all relative.
    1. Political unrest is worse in Europe then the U.S. as anti-EU fringe parties are gaining popularity and growing quickly in many European countries.
    2. Eurozone banks are in worse shape than U.S. banks.
    3. Europe is increasingly less competitive than the U.S.
    4. China is increasing less competitive than the U.S. If you don’t believe that, then try on this statistic for size: The US manufactures almost the same amount as China, but does it with about 8% of the workforce.

i.      Consider how much worse this will be for China if Japan captures more high-end                                       manufacturing from the mainland; which is a critical part of Abe’s three-arrow                                             strategy.

ii.      Consider what the advent of new manufacturing technologies such as 3-D                                                  printing will do to obsolete Chinese manufacturing facilities and massive supply of                                      labor.

4. Despite the fact that most US citizens, who pay taxes and are not sucking from the teat of government like our crony capitalists and various K-Street lobbyist, despise our political officials, the political environment may be relatively more stable in the US.  That is because US citizens have more opportunities to “throw the bums out” given our election cycles compared to other countries.  Thus, there may be incrementally more stability here and change for the better in the US than elsewhere. But the jury is clearly still out on this point.

Anyway, our long dollar stance has not changed because of the QE disaster.  In fact, it is likely strengthened as perverse as that seems.

And boy, it is very perverse out that.  Be careful.