QE funds banks and governments at the expense of households

Despite all the hope and hype about loose monetary policy creating inflation the truth is precisely the opposite. QE liquidity in the banking system has funded speculation in financial markets by traders and banks over the past 5 years, and low rates have helped the world’s highly indebted governments to continue making their bond payments. But what has sustained bloated governments and banks has held back the real economy as low interest rates and taxes have sucked buying power directly out of households. The result has been ongoing declines in consumer demand all over the world.

Because Japan has been assaulting its people with various forms of “Quantitative Easing” since 2001, it offers a test case of self-defeating results. Gavekal’s Joyce Poon explains the growth-destructive cycle well this month in Japan’s Self-Defeating Mercantilism.

“In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in January it recorded a record monthly trade deficit of ¥2.8trn ($27.4bn). Having eked out a 0.7% current account surplus in 2013, Japan may this year swing into deficit for the first time since 1980. So why is the medicine not working?…

Unfortunately, Japan defies this textbook paradigm because in addition to devaluing, it is also engaging in massive quantitative easing. This keeps bond yields low, enabling the government to keep financing its deficit at low cost. There is thus no incentive for the government to cut spending— and in fact the consumption tax hike will be offset by even more spending. Furthermore, low bond yields suppress the financial income of household savers.

The end result of all this is that the government bears none of the burden of the adjustment and the household sector bears all of it, through higher import costs and lower financial income. With the household sector’s spending power thus crimped, companies have no incentive to invest in domestically-focused production. Instead, all their investment will be geared toward exports—mercantilism on steroids”…

The bottom line: “Since all the leading economies favor policies that support production over consumption, the world is getting more goods than it can absorb. The result is ongoing price declines, which have the effect of deferring the ultimate global recovery.”

Having killed the golden goose middle class of the global economy with 30 years of ever more reckless credit schemes, central banks, banks and governments today sit perched on the chest of the real economy still gorging on the public tab and mystified as to why the “little guys” are not getting up.

Yesterday the US Fed announced that after 5 years of taxpayer funded life-support the largest US banks have are now judged healthy enough to withstand the next economic recession. Unfortunately however, 99% of the little guys–the engine of global demand–are not.  As a result, the deflationary cycle will continue to confound policy makers and growth bulls alike.

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