It's been quite a month.
In late October Japan, despite a year of fairly aggressive quantitative easing,
dropped back into recession and concluded that even easier money was the cure
for its ills. It announced a debt monetization plan of almost science-fictional
proportions in which the amount of new yen to be created, as a percentage of
GDP, will be equivalent to $3 trillion a year in the US. See Reactions
to BoJ's Kuroda's Stunning, Doubled-Down QE 'Experiment'
Then the European Central Bank, after years of operating in Germanic tight-money
mode, finally accepted that a shrinking money supply was pushing the weaker
eurozone countries into depression. On November 21 it threw caution to the
wind and began buying up (by the sound of it) pretty much every stray piece
of paper that's blowing in the Continental wind. See Mario
Draghi Says E.C.B. Will 'Do What We Must' to Stoke Inflation
Most recently China, whose massive purchases of raw materials became the engine
of the post-2008 recovery, discovered that much of the debt incurred to build
those entire new cities is about as likely to be paid back as a typical subprime
mortgage circa 2007. So it announced a surprise interest rate cut and a promise
to do much more if necessary. See China's
surprise rate cut shows how freaked out the government is by the slowdown and Fear
Of "Surge In Debt Defaults, Business Failures And Job Losses" Means Many More
Chinese Rate Cuts
These are not the actions of economies in sustainable recovery but of countries
falling into an abyss. Such open-ended offerings to the market gods are explicitly
designed to get the juices of stock traders flowing. But so far that's all
they've done. Here's a chart from Zero
Hedge showing how each year's initial GDP optimism has faded even while
equity prices have continued to rise.
So, two questions:
1) Will stepped-up debt monetization and interest rate reductions succeed
where the past batch failed? Not likely, for both practical and theoretical
reasons. There's just too much debt outstanding to allow normal market mechanisms
to produce sustainable growth. There's simply nothing that Italy or Japan can
build with borrowed money that will generate a positive return, given how much
they already owe. So those descending GDP estimate lines will soon be joined
by a new one with the same arc for 2015.
2) Can the US remain aloof from the carnage taking place all around it? Also
not likely, since the actions being taking by our trading partners all coalesce
around a single data point, which is a more expensive dollar. The US has had
a relatively smooth few years because Fed policy was relatively easy and the
dollar, as a result, was relatively weak versus the yen and euro. Now both
of those trends have reversed in a big way. Here's the dollar versus the world's
other main currencies over the past year:
Where the previously-strong euro and yen pushed Europe and Japan into recession,
a strong dollar will impose the same headwind on the US in 2015. So there's
a decent chance that a year from now we'll be faced with a world in which debt
monetization has failed in three of the four major economies and a strong currency
has sucker-punched the last one standing. And the only politically-acceptable
response will be more of the same. Why isn't gold soaring?
