Unlimited Means Limited December 15, 2012
Doug Wakefield
“Yes Virginia, there is a
Central Banker Santa Claus”
Draghi
Gets ECB Backing For Unlimited Bond Buying, Reuters, Sept 6, 2012
Fed
Announces Unlimited QE3: The Central Bank Could Pump Money Into the Economy
Until the Job Market Improves, US News & World Report, Sept 13 ‘12
Japanese
Election: The Promise of ‘Unlimited Easing’, Sparks More Yen Weakness,
Money Morning, Nov 21, 2012
Yesterday,
I was talking with a long/short manager I have worked with since 2005. His
career started out in the bond markets on Wall Street in the 1970s, so he has
watched an enormous amount of change in the markets and the tools used to
manage money for clients over the last four decades. He spoke about a recent
article that reminds us all that there are extremely negative consequences that
have been developing, especially in 2012, from the idea of “unlimited money”.
As you read the opening paragraphs from the Dec 13th article, The
Federal Reserve’s Zombie Economy, you will notice a totally different view
from “rescuer” being presented by the central bankers and political leaders in
the articles above.
Deutsche
Bank is out with a new warning that says the Federal Reserve’s latest round of
an estimated $1.02 trillion in total annual purchases of U.S. Treasuries and
mortgage-backed securities is creating lemon socialism, a U.S. economy filled
with the financially undead.
Deutsche
notes that stock markets are based on winners and losers, but there are neither
right now. That’s because the Fed keeps pumping liquidity into the system, so
everyone wins. When everyone wins, no one makes money, a bridge to nowhere
Japan has already crossed.
Is the problem with the actions of these central bankers that
they really do not understand that unlimited is limited? I find that hard to
believe, since they have spent their entire careers supposedly studying the
financial markets. However, in case at this stage in their careers they need
some help understanding what a monstrous mess they have created, let me suggest
they read the research of two men who are academics today, but have worked for
the International Monetary Fund. The following are quotes, pulled from the
book, Endgame:
The End of the Debt Supercycle and How It Changes Everything (2011) by
John Mauldin and Jonathan Tepper, and are originally found in the work, This
Time Is Different: Eight Centuries of Financial Folly (2011) by Carmen
Reinhart and Kenneth Rogoff.
“The lesson of history, then, is
that even as institutions and policy makers improve, there will always be a
temptation to stretch the limits. Just as an individual can go bankrupt no
matter how rich she starts out, a financial system can collapse under the
pressure of greed, politics, and profits, no matter how well regulated (or
might we not say unregulated when looking at the hundreds of trillions in
global derivatives?) it seems to be. …
“As for financial markets, we have
come full circle to the concept of financial fragility in economies with
massive indebtedness. All too often, periods of heavy borrowing can take place
in a bubble and last for a surprisingly long time. But highly leveraged
economies, particularly those in which continual rollover of short-term debt is
sustained only by confidence in relatively illiquid underlying assets, seldom
survive forever, particularly if leverage continues to grow unchecked.”
[Comments in italics are my own, Endgame, page 93]
If you are reading this article and have any way of
contacting the “leaders” mentioned in the first three “unlimited” articles at
the open on this one, I would encourage you to get a copy of these books in
front of them as soon as possible. Considering the fact that the Fed alone is
publicly telling us about the $85 billion dollars a month they are printing up
monthly just to buy up existing debt, and the cost of these two books is less
than $30 from this $85 billion pool, the cost of education seems extremely
cheap.
So which is it? Are these men liars or fools or both? What is
it that keeps the public in denial that as Mauldin comments from his own book,
“There are no good endings once you start down a deleveraging path”? Do they or
we really believe in the “unlimited Santa”?
In my humble opinion, the actions of most global political
and financial leaders today is one that has been around for almost 500 years.
“Men are so simple and so ready to
follow the needs of the moment that the deceiver will always find some one to
deceive….So a prince need not have all the aforementioned good qualities, but
it is most essential that he appear to have them. Indeed, I should go so far as
to say that having them and always practicing them is harmful, while seeming to
have them is useful.” [The
Prince (1532), Niccolo Machiavelli]
As for the public at large, whether in Germany or China,
Japan or England, US or Saudi, I do not seriously believe that most individuals
will be surprised when they watch the deleveraging of the idea of “unlimited”.
“Lenin is said to have declared that the best way
to destroy the capitalist
system was to debauch the currency. By a continuing
process of inflation,
governments can confiscate, secretly and
unobserved, an important part of
the wealth of their citizens. By this method they
not only confiscate,
but they confiscate arbitrarily; and, while the
process impoverishes many,
it actually
enriches some. The sight of this arbitrary rearrangement of
riches strikes not only at security, but at
confidence in the equity of the
existing distribution of wealth…As the inflation
proceeds and the real
value of the currency fluctuates wildly from month
to month, all
permanent relations between debtors and creditors,
which form the
ultimate foundation of capitalism, become so
utterly disordered as to be
almost
meaningless; and the process of wealth-getting degenerates into a
gamble and a lottery.
Lenin was certainly right. There is no subtler no
surer means of
overturning the existing basis of society than to
debauch the currency. The
process engages all the hidden forces of economic
law on the side of
destruction, and does it in a manner which not one
man in a million is able
to diagnose.” [The
Economic Consequences of Peace (1919), John Maynard Keynes, pg 235-236]
Two
thousand years ago, Christ made the following statement, as found in the Gospel
of Matthew, the sixth chapter.
“No one can serve two masters, for either he will
hate the one and love the other, or he will be devoted to one and despise the
other. You cannot serve God and wealth (mammon).”
In
a culture where we are told repeatedly that we are being rescued from
yesterday’s debt problems with more debt, and our central bankers will continue
to provide “unlimited” debt as the solution, has the EXPERIENCE of temporary
“wealth” become our god?
…“if people feel that their financial situation is
better because their 401(k) looks better or for whatever reason — their house
is worth more — they're more willing to go out and spend," Chairman Ben
Bernanke told reporters. "That's going to provide the demand that firms
need in order to be willing to hire and to invest." [Fed
Seeking to Create Wealth, Not Just Cut Jobs, Yahoo Finance, Sept 14 ‘12]
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Doug Wakefield
President
HUBest Minds Inc.UH, a Registered Investment Advisor
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