Madness! Madness!*

We start off with two famous quotes:

1. “It is only one step from the sublime to the ridiculous” – Napoleon

2. “The definition of Insanity is doing the same thing over and over again and expecting a different result.” – Einstein

Today we are talking about Quantitative Easing (QE) as it has been “Madness” and “Ridiculous” to continue with it and it will lead to the “insanity” of many when they come to realise what it will, eventually, bring.

This is all down to the politicians and central bankers. The former because they know that the measures needed to sort the world’s economic problems require short-term, unpopular, solutions that no voter will want. That the latter have kept up with QE is purely down to the fact they do not know what else to do and also do not want to lose their jobs. However, what both have done is basically insane.

As Joanne Baynham of MitonOptimal said recently, “Ever since the much needed bail out of the banks in 2008, Central Bankers have become hooked on their own medicine and continue to print unprecedented amounts of money, in the hope of reducing unemployment and creating growth.”

However, the reality of it all is that the effects of QE on GDP growth have been mediocre to say the least. Also, it has to be recognised that most western economies still have millions of unemployed with America still showing more than 7% unemployment.

David Stockman, who used to be an economic advisor to ex-President Ronald Reagan, has been quoted as saying, “The economy has added only about 4 million jobs since 2000 while the Fed’s balance sheet during that time has gone from $500 million to $4 trillion. Clearly printing money, expanding the balance sheets, driving interest rates to zero is not helping… The faster they taper and the sooner they admit they’ve been totally wrong in trying to be the monetary politburo, running the financial system of the world, the more likely we are to get out of this mess.”

The fact of the matter is that not only has growth been seen as less than average, but the sharing of that growth has been “ridiculous” with lots of “insanity” thrown in for good measure. Considering all of this was meant to help the banks distribute money to kick-start the world’s economy the bankers have forgotten one small detail … they forgot to share and kept all the money for themselves. In fact, it could be argued that this is nothing less than criminal negligence. They have returned to the big, fat profits of yesteryear by keeping the money they were meant to help local businesses with. Central Banks today, with their loose monetary policy, have allowed the rich to become richer, given that money has effectively become free. Marc Faber, in his latest ‘Gloom, Boom & Doom’ report, highlighted that since 2007 the top 1% of Americans have seen their net wealth grow by an annualized 1.9%, whilst the bottom 50% have seen their wealth fall by 44% [Source: Federal Reserve’s survey of Consumer funds and flow of funds]. To put it basically, not only have the bottom 50% seen their wealth fall but now have the further embarrassment of only owning 1.4% of the total net wealth in America.

One thing the two bunches of madmen (politicians and bankers) seem to have forgotten is that nature will take its course and drive out the people who created this unholy mess. History will not look upon them favourably as it will be seen that they could have averted the impending disaster easily and a lot less painfully but put themselves before the good of the people. It will also see that Central Bankers only seem to understand one thing and that is a keenness to print money, for it is obvious they do not appear to know what else to do. In this scenario of further madness, it means more of the same; i.e., asset inflation and markets which will become increasingly expensive before they eventually crash back down.

As a former Fed official, Andrew Huszar confessed to the Wall Street Journal recently, “We were working feverishly to preserve the impression that the Fed knew what it was doing.” What he was talking about was the idea of buying bonds on the open market, the so called Quantitative Easing, so that the banks would then be in a position to lend this money to Joe Public – something that is, in large, yet to happen, unless you are massively bullish on student loans.

So, what is the reality of all this? Well, we are living in a word of Central Bankers who appear to have lost their marbles and, in their attempt to create growth have brought about a situation where there are potential asset bubbles everywhere. But as the former Citigroup CEO Chuck Prince once said, “As long as the music is playing, you’ve got to get up and dance.”… and we all know how that ended!

* A line from Bridge over the River Kwai