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Defying gravity forever… Is it possible?

December 31, 2013

So, is there some other reason (“other” than me just being flat wrong about this economy defying gravity) that our financial markets continue skyward ad infinitum?

If the United States was alone in their hyper-liquidity experiment, I seriously think we would have already suffered the consequences and most likely those consequences would have caused a collapse of the dollar. It is great — in the short term — to own the international currency and the printing press — because that puts you in charge. If I had suddenly discovered that I had lived beyond my means to the tune of trillions of dollars, and owed, oh let’s say China (not a real ally that we may have some desire to treat right), I might be tempted to pay off that debt with money I created out of thin air.

However, China is no dummy. They are not about to be outdone by their indebted foes. From this morning’s Bloomberg report: “China’s borrowing spree in recent years has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades.”

And speaking of Japan and Abenomics (Abenomics is the economic policy implemented by Japan’s leader Shinzo Abe, which makes America look asleep at the wheel), we have the following conclusion by Bloomberg: Consensus Now Believes Abenomics “Recovery” Will Fail.

And do I even need to mention the European Union?

When it seems that America’s No. 1 export is the good old greenback, as fast as it can be printed, the world seems to follow suit. It is interesting to watch an entire world economic system on an unprecedented liquidity high. And I am confident that all these competing interests will be able to unwind this grand liquidity experiment without a hitch. After all, the Federal Reserve has just taken a “bold” step by reducing the purchase of our own US debt by a whole $10 billion per month, from $85 billion per month to $75 billion per month!

I keep thinking about all of this in terms of the future we’re creating and the question has to be: what happens to all this unprecedented debt (and the payment on this unprecedented debt) when interest rates normalize?

In just a year and a half, the treasury rate on a 10-year bond has more than doubled from an all-time historical low of 1.39 percent to 3 percent today. Look at the chart below and consider what would happen if rates were not massively manipulated through the Fed’s zero interest rate policy (ZIRP) and their monetizing of debt (quantitative easing, QE). The Fed, and by extension, our nation, and by extension, the world economy, could not handle a truly free market governing interest rates again — ever. This is the quandary they know they are in: If interest rates normalize we are in deep trouble, yet they need to show our economy has grown legs and can stand on its own.

I believe the only way the Fed has been able to get away with an insane monetary policy for so long is because they have gotten the world to go along with the experiment. With the world helping to dig the hole, it only makes the hole deeper, not safer.


Defying gravity chart

ZIRP and debt monetization has certainly cheapened the cost of borrowing (debt), making it easier to go ever further into debt, but this is where I depart adamantly from those who support the present monetary action. If one concludes that we had a credit crisis (an inability to borrow money), then the present course may make sense. But if one believes that the crisis originated as a debt crisis, like I do, then the present course is exactly opposite of what we need to be doing. The Fed’s theory is that they are stimulating growth and the growth will lift us out of this quagmire. The Fed may be stimulating growth, but it is limited to Wall Street, and Wall Street hasn’t heard about the trickle-down theory. Happy New Year!!! It should be an interesting one!



  1. Robert Cameron permalink
    January 12, 2014 5:00 pm

    Interesting article. I enjoy your take on things, which is several levels above mine and way better articulated.

    I get exactly what you are saying and it is worrisome. What to do is the question. As a citizen of relatively modest means, I suspect not much can be done to change the system other than vote against the tax and spend crowd.

    In my personal finances I try to stay diversified and well rounded and to invest and save for the long term. But, I expect at any moment to see all I have worked for by following this path to be drastically impacted so we can “be fair” to the 50% of folks who live hedonistic lifestyles.

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