Friday, March 27, 2015

Lower Living Standards For Generations To Come? Thank Global Monetary Policy

In many areas of the corporate Pollyannish press one reads about the expanding future and how many millions of more gadgets and processes will make our lives easier. Oh, and it'll all be much cheaper and we'll each even have our own drones and driverless vehicles.  To read some of this codswallop one would think a limitless cornucopia is soon upon us and everyone will basically be on "Easy street". Don't believe it for a second.

As the Mar. 25  Financial Times article ('QE Will Lower Living Standards Long Term')  puts it:

"The prospect of improvement in economic growth is largely a monetary illusion. ....Lacking the political will necessary to address the issues, central bankers have been left to paper over the global malaise with reams of fiat currency"

By "paper over" the FT means the ongoing practice of QE or quantitative easing  - which has already resulted in the Federal Reserve infusing more than $4 trillion into the U.S. bond markets and - combined with essentially zero interest rates - fed a ginormous stock market bubble.

Accentuating this low note, a report by the Bank of America -Merrill Lynch has projected that the year 2015 will mark the first decline in growth since 2009 the year after the financial meltdown and credit crisis. The FT piece notes how the Fed's QE, for example, has "perversely morphed into a new monetary orthodoxy" where central bankers themselves use their balance sheets as tools to implement fiscal policy.

This as opposed to politicians doing it via new regulations, tax reforms, monetary policy. But see - the politicos these days have no courage. They are all basically spineless worms who so fear the T-word they are afraid to actually practice representation. Thus, as the FT notes:

"The politicians lack the willingness or ability to implement labor and tax reforms."

So, because of these venal jackals, the banksters (in which I include central banksters)  are de facto allowed to set policy with their QE. But long term it isn't working and the world will become poorer for it, that is - the world our children will inherit.

Much of this follows from the extent to which QE policies damage fiscal health. For example, the FT points out correctly the negative impact of QE on interest rates. The depressed returns available on fixed income securities (such as commercial paper), largely as a result of QE, effectively act as a tax on investors, including individual investors.  At the same time the QE is providing a subsidy to borrowers.

If you have your money stashed in a money market fund for commercial paper - which is used to fund new  business investment - there is little reward given the 0.5 percent rates, so there is a bigger incentive to pull the money out and put it elsewhere for higher yield (say in an online bank for a fixed income account for which the interest is doubled.)  Practiced widely such pullouts will  dampen investment and stifle new business. As the FT puts it:

"The cost of QE is greater than the income lost to savers and investors. The long term consequence is likely to permanently impair living standards  for generations while creating a false illusion of reviving prosperity."

Less on the radar but surely playing a role in declining living standards is the ever degraded quality of energy sources. For example, current fracked oil (from shale) costs on average $70 a barrel to extract. If the oil price is less than this, that means the source isn't even at "breakeven" point in terms of energy returned on energy invested.. By contrast, the light sweet crude oil we'd been getting earlier returned nearly 18 times more than the cost to extract it per barrel. These are signs Peak Oil has come and gone (estimated in 2005) but most people don't even know what Peak Oil means. It doesn't mean the oil has stopped or slowed in production, it means the era of cheap oil is over,  making everything more expensive. Plainly put, our current energy -intense civilization is simply unsustainable in an era where only low EROEI oil is available.

You can read much more on this aspect here:

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