by Karl Denninger
"Well well well.... Even though economy is heading downward, flooding it with more money may not help. The problem isn’t the cost of capital. Most businesses can get all the money they need. Big ones are still sitting on $1.8 trillion in cash. The problem is consumers, who are 70 percent of the economy. They can’t and won’t buy enough to turn the economy around. Most don’t qualify for more credit given how much they already owe (or have already defaulted on). Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they’re doing.
Right. Now here's the problem. ZIRP/QE destroys capital formation. But you need capital formation in order to build new businesses. Without it, you have nothing, and the economy stagnates on innovation. Now add to this offshoring - so called "free trade" - and you have an intractable problem.
And don't start with "consumer deleveraging" either. Consumers have done no such thing - at least not voluntarily. Of the ~600 billion that consumers have "de-levered" 588 billion of it was by default - that is, they couldn't pay and quit. There has been no de-leveraging in the consumer space, and in the business world the amount of debt they're taking on is actually going up! That's additional leverage, not reduction in leverage. So long as corporations can send labor overseas and pay someone 70 cents an hour, they will.
China's Wen told the truth the other day: "If we cut the crap our people will starve. Therefore, we won't and your people will starve." Effectively, he dared our Congress to force his hand.
So which way would you like it, America? We spent a decade in wage deflation, and we made up for it with credit. Bernanke hasn't acknowledged this nor his part in intentionally causing and fostering it, but the facts from Census and elsewhere in the economy prove it. What's even worse, the numbers on the so-called "de-levering" prove it - consumers CAN'T delever by other than involuntary means (bankruptcy) as they have no surplus to put toward paying down debt.
We in America have to make a choice. If we do not decide we will make the choice by default. We will move closer and closer to the Chinese model: one where your personal space is one half of a 3x6' swath of linoleum-tiled-floor, half a bunk space in a factory dormitory, along with one high-school sized locker for your personal effects. That's all they have, and soon, that's all you will have. Or we can force the de-leveraging to take place. We can protect our workers, our environment, and our economy. We can force China to eat the consequences of their intentional machinations and mercantilism. The false choice presented by pundits and others is that if we do #2 we'll crash our markets but if we don't "it will all be ok."
No it won't. Either way our markets will have to revalue downward. When your personal space is 1/2 of that 3x6' bunk and a high-school locker you won't be consuming Cadillacs, Hollister clothes and iPods. You'll be eating - and little else.
The market levitation today is all currencies. But the so-called "intervention" (which Japan is denying last night) is getting amusing. I wouldn't admit to this either - they got a 2x4 up their ass sideway; that spike was clearly artificial, and yet all of it was lost - and more - within a few hours. Not that this is unexpected; Japan has been attempting to intervene in the FX markets for more than a decade and it has never worked for long. It's simply flushing money down the toilet, and they know it - but they don't care, as the political pressure to "do something" is immense - just as it is here.
The problem is that "doing something" has backed them into a corner with no options. Two decades of QE has placed the government in a spot where any material rise in interest rates instantly bankrupts the government. Yet they can't grow the economy without getting rid of ZIRP and paying an actual return on savings. They're trapped. But we will be too, if we don't cut this crap out. We're headed down the same road but we don't have a decade or two of "cushion" before our situation goes supercritical, as too much of our debt is held outside the United States.
Devaluation of the currency is essentially impossible to implement. in a world where everyone wants a weaker currency in order to export. Further, in a world where labor and capital can move freely without tariffs or restrictions all devaluation does is destroy the middle class and below, as imported goods and services you need, particularly energy, ramp in price.
We should have gasoline at about a buck a gallon along with other energy prices half what they were in 2007 at this point. Why? Because demand has collapsed. If that had happened it would have helped everyone in the lower and middle classes, since energy goes into every stage of food production, and thus the two major things everyone must buy - food and energy - would have come down in price. Those are a much larger proportion of the lower and working class people's budget than they are the rich. But instead they got squeezed - all so the banksters could maintain their illusion of "value" in their so-called "assets", and now we have an intentional policy of trying to maintain the imbalances that led us to this mess - too much credit, too much debt - in the first place. Energy and food prices have gone to the moon, even though the economy is in the dump.
These attempts to "stimulate" won't work folks - if the intended policy "works" we will get trashed as the dollar continues to decline and the middle class loses all discretionary purchasing power, and we lose anyway. While people believe this will make the market rise, that rise - if we get it - will be temporary. Look at the Nikkei 20 years after they began their games and tell me how we'll get a different result. We won't."