Global Macro Monitor illustrates how different the present spate of quantitative easing is from the one that was implemented as a response to the financial crisis. You could read the text or just skip to the bottom of the post and look at the two graphs, of the year-on-year growth of bank credit and the M2 money stock respectively. They pretty much tell the whole story. And illustrate neatly why I’ve been expressing concern.
This is a topic for Jeffrey Snider. I do not keep up with him, and he may have already written about it.
Without understanding money, there is no way to understand the problem. The upward spike in M2 is not the problem. A downward spike is the problem.
Again, money is created through lending, and money is destroyed through loan pay-off, write-off, or write-down. When the financial assets purchased through the QE programs no longer exist, the money created by them will no longer exist.
Were that spike in M2 being invested in production, that investment would eventually generate new financial assets to replace QE, and everything would proceed as if nothing untoward had ever happened.
Unfortunately, much of that spike is inflating unproductive assets, especially stocks. Most money is not real, and it can vanish into thin air, instantly. When those unproductive assets deflate, money is destroyed.
(When the student loans are forgiven, nobody will gain any money. Instead, that money will vanish, and any assets created by leveraging those loans will need to be replaced. Since it is unlikely that the students will be able to obtain new loans, the economy will shrink.)
In 2008, the run on money market funds threatened to collapse the entire US financial system, and this would have collapsed the US economy. This was caused by about $800 billion in problematic mortgages (~$12 trillion total).
The US financial system is not an ancillary part of the US economy. It is the heart, veins, artilliaries, capillaries, and blood. It delivers money to the smallest lemonade stand as well as the largest corporation. The financial system is more than just the much hated banks and the much hated bankers. (Let’s be real. Most of the bankers are parasites.)
Yep.
You, Jeffrey, and I seem to be the only ones who get it.
While a either a stock market crash and/or a financial collapse causing hyperflation is possible, I think a Japanification is more likely. Without an expanding manufacturing base, the eurodollar can delay stagnation, but I do not see how it can be avoided.
(For those confused, the eurodollar allows the US to have a foreign manufacturing base by importing goods through a perpetually increasing trade deficit.)
It’s hard to know where to start in talking about the differences between the Japanese economy and ours. GDP is basically flat there and has been for 30 years. They’ve maintained that even as the population has declined. The median age in Japan is nearly 50 and the personal savings rate is, get this, over 60%.
In the U. S. flat or declining GDP would result in a steeply declining per capita GDP and falling standard of living.
Japan is monetizing debt, and rather than a catastrophic collapse, it results in stagnation. The birth and savings rates are a result of the stagnation. The future is likely to be worse than the present, and the people are acting accordingly.
In essence, they are rotting from inside.
The US lacks a manufacturing base to support its standard of living. The standard of living is supported by the financial base creating eurodollars for importing goods.
In essence, we are shitting in the bed.
I’m still trying to imagine a 60% personal savings rate in the U. S. I think the first thing that would happen is that the economy would collapse. Keep in mind that personal consumption is 70% of the U. S. economy.
Maybe that wouldn’t be the first thing. Maybe a wave of bank failures would be the first thing.
Without a substantial manufacturing base, I do not think it is possible, naturally. US consumption is built on a financial base, and a 60% savings rate would need to be replaced by additional debt creation.
Savings must become investments, or the bank must charge a fee for holding money. With sweeps, checking account fees went away. (Does anybody remember when it cost money to have a checking account?)
It is counterintuitive, but in the MMS, increasing savings could lead to bank failures.