Debt Rattle September 7, 2014: The Simple Truth About QE

by: Ilargi

There's not a single day that we're not treated to more smart treats about stimulus measures. Are they necessary, are they good, are they bad, who profits from them. It gets really long in the tooth. Today, former ECB head Trichet says unlimited stimulus 'risks' blowing bubbles. Supplying unlimited amounts of liquidity at interest rates close to zero has "unintended counterproductive consequences."

Does Jean-Claude really mean to claim he just figured that one out now? Why else did he never say it before? There are 1001 other wise guys like Trichet who've only recently seen a sliver of light, and see fit to make the great unwashed party to their new found wisdom. And they're the vanguard, all the rest still sit on their asses.

The simple truth about ultra low interest rates is so simple it's embarrassing, at least for those who claim they benefit society. That is, ultra low rates make borrowing accessible to the wrong people, and to the right people for the wrong reasons. The former are people who shouldn't be able to borrow a dime, because they have no credit credibility, the latter borrow only for unproductive or counter-productive reasons.

Like companies setting up mergers and acquisitions not because a merger or stock buy-back is a good idea in itself, but because at 0% it's too easy a risk not to take when you know it'll lift your share price, and you can fire thousands of people to boot and label that 'efficiency'.

In that same vein, but on an individual scale, mortgages will once again be made tempting for people who shouldn't ever have a mortgage, at least not until they have their finances in order, through plans like the Access to Affordable Mortgages Act the US Congress is planning to launch upon the country. That is to say, if a 4% rate is too high for the poor, let's make it less.

But if you can't afford 4%, you shouldn't have a mortgage, period, and your government certainly shouldn't entice you into getting one. No matter how left or how right you lean politically, that is simply not something a pot a government should be stirring in or tampering with. That Congress prepares to do so anyway is a solid sign of how desperate Washington is about the US economy. That's not even open to discussion.

Ultra low rates in a situation of already existing excessive debt levels is like feeding terminal patients strychnine, and telling them they're sure to feel much better in the morning. Or maybe just something along the lines of: how much worse could it get?

US banks complain that they can't lend out more because the potential penalties, in case the loan turns bad, are too severe. So Washington will lower those penalties (want to bet?). If not, home prices will fall, and we can't have that, can we?

We live in a virtual economy, whereas we desperately need a real one. We need it because if we don't get one soon, the virtual one will eat huge parts of every hard-working American's (and European's) fast shrinking wealth.

There are no western stock markets anymore, other than a bunch of idle numbers we see in the media. Trade volume is at levels as ultra low as interest rates, AND central banks are buying shares, AND a huge chunk of the market is high-frequency trade. What all that means is the Dow and S&P no longer reflect anything even remotely related to the American economy. That link is broken, gone. Not a minor detail.

Handing trillions to essentially broke banks, and on top of that enabling them to borrow - virtually - unlimited amounts of funds, is in essence the worst thing that could happen to the US economy. It is, though, the only way to save those same banks. And that's why we have QE. It kills the real economy to save Wall Street. The latter has more political say than the former, i.e. it purchases more votes. It is simple indeed.

There are plenty of historical average charts and stats for business loans and mortgage loans, and there's no reason we should be at that average today.

Other than that, we are at a historically unique, never before seen, point at which we can only keep appearances if we give money away for free to those who already have the highest levels of debt. And that will only work short term. After that, all that remains is 'Le deluge', i.e. the wash-out flood, i.e. the debt tsunami.

That's the only simple truth there is as far as QE is concerned. It's nothing but yet another way to transfer money from you to the bankrupt yet privileged world of finance. Designed to allow the banks to postpone their inevitable moment of reckoning, and let everyone else pay for that delay.

How simple would you like it? The financial hole you're in gets deeper every single day courtesy of your own government and central bank. That's what QE means to you. Told you it was simple.