Saturday, July 13, 2013

QE - A Mask On Reality

For years central banks across the world have printed ever more money and have spent their time looking for "green shoots". Politicians and the optimistic have continued touting that we only need "confidence", and that consumers need to go out and spend. Many economist have placed the blame for our woes on austerity claiming that it is not the answer and will only make things worse. With the bonds and coupons of the strongest countries yielding near zero after inflation savers are left with a losing hand. The reward for saving and doing the "right thing" is gone. Our government centered economy  does not work, the emperor has no clothes!  Slowly our Government, and those others across the world are breaking their promises and rewriting the rules.

The term "modern society" is based on the idea that mankind and society has seen rapid and massive change over the years. During the last two hundred years we have created new ways for man to relate to his governments, institutions, and each other. The entitlement societies that have developed over the last several decades were created following the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. They were built on the assumption that those advantages would continue in both Europe and US, and that ever greater prosperity and entitlements would be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about ever more growth.

Now reality has raised its ugly head and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have begun to overwhelm those forced to honor them. While the populations of  Europe and America were led to believe the good times would never end, recently they have begun to see their core advantages in technology, capital, and productivity started to erode, and  to lag behind the emerging countries. Manufacturing jobs have steadily moved to countries that have the resource of cheap and abundant labor, many of the good jobs are being replaced by low skilled service jobs, this has removed the supports from our debt fueled prosperity and showing it to be unsustainable.

We were told that we were moving up the value chain, while in reality the opposite was true. The debt fueled prosperity and consumption growth of the past has led many to believe that their future would be secure if they moved towards "higher value adding activities" than the emerging and developing countries. The economies built on those false assumptions are now burdened by the weight of past debt. Add to the suffering pain from a surging world population and changing demographics and you have a new economic reality. Merely addressing the symptoms of our malaise as "financial problems", a tactic being tried by  leaders, central banks, and the IMF, will only raise false hope, it will not avert the economic and political catastrophe.       

Central banks have tried to address the situation by printing money and adding liquidity, this is their equivalent of a band-aid. Sadly they have been putting one band-aid on top of another, but our wounds are not healing. In the modern border-less world we have created, bankers are finding it impossible to control where money flows, the result is akin to pouring water into a leaky bucket. Money flows into the hands of speculators, manipulators, and a over valued stock market, meanwhile the poor and many people receiving a "stipend" from the government have little incentive and few prospects to earn money. With the burden of supporting a ever larger number of people not employed in real jobs in the private sector governments are running massive deficits.

Quantitative easing and the printing of money only mask the many problems that exist in the economy. Propping up banks and governments that fail, and will continue to fail is not the answer. We live in a world with serious issues that can and must be addressed by reforming the structural problems that have been allowed to fester. Creating more debt that cannot, and will not be paid off, is not the answer on how to move towards a sustainable long term economic model. Governments must face the reality that they have to step up to the plate and take responsible action, they must cut waste, and better utilize the tools at their disposal to better allocate opportunity and reward those who want to work and do the right thing. The bottom line is that you cannot spend your way out of debt.

Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.


  1. "Governments must face the reality that they have to step up to the plate and take responsible action, they must cut waste, and better utilize the tools at their disposal to better allocate opportunity and reward those who want to work and do the right thing."..... if only that could happen!!
    Allocating opportunity and reward would require punishing those who don't "want to work and do the right thing". That would include investment bankers, stock market analysts and brokers, lobbyists, military development, professional politicians, the entire space program, tenured professors, the entire religious hierarchy, litigators, legal and illegal drug lords, advertising companies, statisticians, modern artists, people on social assistance, etc., etc., etc.,
    What the world really needs is a universal standard for money. Not gold! Not empty promises by central banks! Just a sober evaluation of whether the community (local, national, or global) benefits or doesn't benefit from each person's enterprise and industry. If there is no benefit, there should be no money. Period.

  2. "The bottom line is that you cannot spend your way out of debt." That is not exactly true. If your spending is concentrated on solving the problems that keep your income lower than your expenses, you can spend your way out of debt.

    Also must agree with Blair above, " Not gold!" There is not enough gold in the world to monetize the products and services in existence and available for purchase. But a universal standard for money? I doubt if that is possible. What would you use? Technology becomes obsolete. Food spoils. Commodities rise and fall in value with the ability or need to use them and their availability. An example: gasoline. Cars will become electric eventually--gasoline will go the way of kerosene and horse drawn carriages.

    Fiat currencies can work, but some basic changes in society will have to be instituted. Indolence of the able cannot be allowed. Leisure must be earned. Currencies will be valued by what they can buy and standards can be set. The government should run it--not a private for-profit central bank, but the government must not be able to substitute dog food for steak when it makes its valuations, nor should it be allowed to ignore those not looking for work when counting the unemployed. Free trade is like the free lunch, and it will have to be seen that way before any of these problems can be fixed.

    So let's get started! Install a tariff that replaces the income tax. Reduce or eliminate corporate taxes in the U.S. Make training programs that bring us back to full-employment, add child-care if necessary. Make a living wage a requirement, but graduate it for those new to our society and the young. Make immigration a plus instead of a negative, but to come you must abide by our standards. Insist on full participation--in this information driven society even the disabled can contribute something. And finally, level the playing field so that liars and cheaters do not prosper. It's a big vision, but it can be done.