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Let’s say you’re diagnosed with colorectal cancer. But instead of going to a professional for help, you decide to treat yourself with glycerol suppositories and high doses of Vitamin C.

Well, then, you’re probably going to die, right?

This same rule applies to economics. If you try to reduce unemployment and boost growth by doing something completely unrelated to the problem itself, like dumping trillions of dollars into financial assets, then you’re not going to get the results you want.

This is largely the problem we face today. All of the economies controlled by the western bank cartel–Australia, Canada, US, UK, Eurozone, and Japan—are suffering from chronic lack of demand, the likes of which could be easily remedied by following Keynes recommendation of “government directed investment”. But instead of putting people to work building bridges and fixing roads which would provide them with the money they need to spend at the shopping malls and car lots; our glorious bank masters have decided to subsidize all-manner of risky speculation by dropping rates to zero and pumping money into the financial markets.

The beneficiaries of this process, called Quantitative Easing, are the people who typically prosper from Central Bank policy: The Moocher Class. Take a look at this chart from Bill Moyers. This is “who wins and who loses” with QE.

Average income growth in US recoveries: top 10% versus the bottom 90%. (Graph: Pavlina Tcherneva)
unnamed-3
See that small blue line heading straight down on the far right side. That’s you and me. We’re the victims of this policy. And, no, I am not going to bore you with a lot of blather about 1 percent-this and 1 percent-that. You’ve heard it a million times before, and don’t need to hear it from me. But it IS important that you get a visual idea of how the policy works, because we’re not talking about a “free market” here. We’re talking about policy, the way the Central Bank rigs the system in order to transfer wealth to a specific group of powerful constituents. Let’s just call it political economy, because that’s what it is. The Fed keeps its thumb on the scale so its moneybags buddies can make out like bandits. That’s how it works.

Why does this matter?

Because on Thursday, European Central Bank president and former Goldman Sachs managing director Mario Draghi launched the latest iteration of QE. The ECB plans to buy 60 bln euros ($70B USD) in sovereign and agency bonds per month starting March 2015 until September 2016. That’s roughly €1.1 trillion altogether. So now global investors will be able to profit off stocks in the EU adding to their bulging cash-trove while widening the chasm between themselves and the lowly 99 percent. Here’s part of the official statement from the ECB:

“(The ECB) decided to launch an expanded asset purchase programme encompassing the existing purchase programmes for asset-backed securities and covered bonds. Under this expanded programme the combined monthly purchases of public and private-sector securities will amount to 60 billion euros.

They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below but close to 2 percent over the medium term.” (TEXT – ECB President Draghi’s statement on QE programme, Reuters)

Did you catch that part about how QE will “be conducted until we see a sustained adjustment in the path of inflation”?

That means the bond-splurge could go on forever. It’s completely open-ended. But what Draghi fails to mention is that QE has never succeeded in reaching the central bank’s 2 percent inflation target. Never. Not in the US, not in the UK, and not in Japan. In fact, we can’t be sure that QE boosts inflation at all. Judging from past experience, it certainly doesn’t look like it. So for Draghi to say that he’s going to keep his foot on the gas until he hits his target is like me saying “I’m going to keep step-dancing until Mom gets over her Lupus.”

Is there a connection between step-dancing and lupus?

Nope. Nor is there connection between QE and inflation, except asset inflation that is, which explains why stocks have more than doubled in the last 5 years. But stock prices don’t show up in the CPI, so Draghi can dump as money as he likes into financial markets and it’s never going to show up in the data. Pretty clever, eh?

And there’s no proof that QE lowers interest rates either, so the idea that loading up on government bonds, increases lending is also false. Check this out from economist John Aziz at Pieria:

(The) “presumption that central banks are lowering interest rates is at odds with the evidence. This graph via Matt O’Brien from last year shows that each time the Federal Reserve has commenced a program of quantitative easing interest rates have actually risen. ….:

FedTreasuries2jpg-thumb-615x418-109975

And each time the Federal Reserve has tapered its bond-buying programs, interest rates have fallen back lower.” (Does QE Lower or Raise Interest Rates: the Evidence, John Aziz, Pieria)

Can you believe it? So QE has had the exact opposite effect on bond yields (rates) that it was supposed to have, which makes sense when you realize that investors have just been following the actions of the Central Banks rather than market fundamentals. But –when QE ends– then investors return to the safety of bonds which pushes yields back down again. This has been particularly noticeable since the end of QE3. Yields on benchmark 10-year Treasuries have plunged from roughly 2.70% in October when the program ended to 1.83% today. In other words, it is cheaper to borrow money today than it was when the Fed was purchasing $85 in bonds every month. This is not the way QE was supposed to work.

But here’s the deal: The way QE is supposed to work and the way it actually works, is the difference between public relations and reality. Bernanke and Co. know the difference. You can trust me on this. Monetary policy is not a random, shot-in-the-dark experiment with uncertain outcomes. The reason that inequality has grown to levels not seen since the Gilded Age, is because the Fed knows who is supposed to gain from its programs, and implements its polices accordingly. Nothing is left to chance.

So what’s Draghi’s game? Is he merely flooding the markets with liquidity to push stocks higher and further enrich the investor class or is there something else going on here?

How about the banks? Could EZQE (Eurozone QE) actually be a stealth bailout of the banks?

Check out this blurb from macronomy.blogspot.com:

“Société Générale in their European Banks note from the 9th of January:

“€600bn of lost corporate lending….The European corporate loan book has shrunk by €600bn since 2009, the point at which corporate credit volumes began to retreat. Around €450bn of this shrinkage has taken place in the last three years – the period of austere governments and regulators. Almost all of this correction is down to three banking systems: Spain (€400bn lost from peak), Italy (€100bn lost) and Greece (€30bn lost).

The total euro area banking system has shed €7tn in assets since 2008. The first chunk of assets fell away in 2008-09 (typically non-lending assets – subprime, etc.). The second chunk of assets has been falling away since 2011.

At the total balance sheet level, it is actually Germany that has seen the lion’s share of the balance sheet decline. This is largely linked to the non-lending assets that fell away in 2008-09.

(Credit–Quality Street, Macronomics)

EU banks have lost “€7tn in assets since 2008″?

Wow. It looks to me like the entire system is still in trouble six years after Lehman Brothers crashed. Could that explain what’s going on? Could that explain why Draghi has pushed so hard for QE; to bailout the banks?

Indeed. And while most experts agree that QE will do almost nothing to stimulate growth or reduce soaring unemployment, they also agree that it will push bank stocks higher, intensify their gambling operations, and help them to conceal their lack of capital. The EU banking system is seriously undercapitalized and needs to be restructured so the debts can be written down.

QE helped to avoid that painful remedy in the US. Draghi hopes it will work in Europe as well.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].

(Republished from Counterpunch by permission of author or representative)
 
• Category: Economics • Tags: Federal Reserve, Wall Street 
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  1. anon • Disclaimer says:

    If you try to reduce unemployment and boost growth by doing something completely unrelated to the problem itself, like dumping trillions of dollars into financial assets, then you’re not going to get the results you want.

    QE is a massive lie. All they’re doing it slowly bailing out the black hole of toxic debt inside the banks by transferring it to the public.

    #

    (A hopefully simple explanation.)

    The banks have trillions in toxic mortgage backed assets on their balance sheets**.

    QE is the central bank printing money to buy those toxic assets off the banks and transferring them to the public so effectively it is a massive transfer of wealth from the public to the banks.

    It’s history’s biggest robbery and trashing the entire global economy just so a few thousand banksters don’t have to pay their own gambling debts.

    #

    (**The assets are toxic because the collateral is mortgages that would be underwater if the interest rates weren’t being kept negative.)

    (**The reason the toxicity is in the trillions rather than billions is because the shortfall is not just due to mortgages being underwater if interest rates weren’t zero it is because those mortgages were also used as the collateral on securities. A mortgage for a million might be the collateral for 100 million in securities so if the value of that mortgage drops to only 1/2 million then the bank isn’t in the hole for just the lost 1/2 million on the mortgage it is actually in the hole for 50 million from the securities using that mortgage as collateral.)

  2. anon • Disclaimer says:

    A few further points.

    1) The USUK banks have been QEing for some time now while until this week the Euro banks were held back (rightly) by the Germans. I don’t know how close the USUK banks are to having completely shipped their toxic debt to the public but either way I assume they have or will have completed the process before the Euro banks. They might wait until the Euro banks have caught up before they pull the plug or they might not.

    2) As demand is shrinking (as a consequence of everything the banksters have done over the last 30 years) there is nowhere for all the money being pumped into the banks to go except into a new asset bubble which is currently stocks i.e. the current stock market boom is an asset bubble created by the method (QE) that banksters are using to fix the consequences of their previous housing asset bubble.

    3) What this means is when the banks’ balance sheets are finally fixed – after the transfer of vast sums of public money – and both QE and ZIRP come to an end then not only will the housing market crash (due to the end of ZIRP) but the stock market will crash too (due to the end of artificial QE funding).

    The collapse of the stock market will take all the pension funds with it (as they will be last out of the stock market crash) so as well as millions suddenly becoming underwater on their mortgages even more millions will find their pensions will be wiped out too.

    It’s going to be much worse than the 30s.

    The few thousand banksters who caused it all will be fine though – so that’s all right.

    • Replies: @leftist conservative
  3. @anon

    YOU WROTE:

    The collapse of the stock market will take all the pension funds with it (as they will be last out of the stock market crash) so as well as millions suddenly becoming underwater on their mortgages even more millions will find their pensions will be wiped out too.

    not my federal pension. Mine is in the G fund–bonds, not stocks.

    And I own no stocks. I am all in cash.

    No mortgage, either.

    As for when or how this casino capitalism game of musical chairs will end, I have no idea.

    I do know that I am not in the game.

    • Replies: @David
    , @annamaria
    , @annamaria
  4. unit472 says:

    There is an explanation as to why the 10 year rate falls when QE ends and it is a rotation out of risk assets into bonds when the Fed is no longer pumping money into the markets.

  5. phil says:

    Sorry, “government directed investment” a la Keynes does not, by itself, increase the money supply and in most cases does not much increase the overall demand for goods and services. For the most part, it simply involves more government spending, with those who lend to the government now having that much less to spend.

    Quantitative easing (QE) had a modest, but positive impact in the US. The impact was dampened by banks’ reluctance to lend. QE might possibly have a stronger impact in Europe; in the US the Federal Reserve pay banks a positive amount to hold excess reserves. In Europe, banks in effect pay a storage fee if they hold excess reserves; they have a stronger incentive to lend, other things equal, than American banks.

    Longer term, both places need to reduce government debt and tax collections, and stop discouraging saving and investment Both places depend far too much on entitlements. In the US far too many people seem to believe that everyone should go to college, when a good many people should simply develop practical skills — if computer science or engineering is not feasible, learn a trade.

  6. Bitcoin pressures the system to operate more effectively, it doesn’t replace the system.

    http://www.bloomberg.com/news/articles/2015-01-27/venture-capitalist-draper-bets-400-000-more-on-bitcoin-revival

    The more centralized things are the less secure they are. Swarming finance is going to spread. It’s not if you win or lose, it’s if you beat the spread.

    “Please note, however, that spread betting in the financial world is not legal in the U.S., although it is in Britain and most other countries that trade stock and securities. Ironically, spread betting in the finance world was invented by an American in the 1940s. It came to prominence in Great Britain in 1974 with the advent of spread betting on gold. However, pundits believe that you can get around it as a U.S. citizen if you register a company offshore and use it to trade in markets, such as Britain, where it is legal.”
    https://www.udemy.com/blog/spread-betting/

    Wall Street should use it like Britain. If the stocks lose the economy gains. US work around may be to become an Estonian e-citizen.

    • Replies: @MarkinLA
    , @MarkinLA
  7. Last week Estonia invited anyone, anywhere, to become an e-citizen of the Estonian digital society, open a bank account in Estonia, or start a business. By the end of the year, anyone with an internet connection will be able to live their financial life in Estonia, all without being physically present.
    https://www.cryptocoinsnews.com/become-e-citizen-estonian-digital-society/

    US is offering credit card use in Cuba. Live your financial life in Havana.

  8. Those who are clever, who have a Brain, never understand anything. – Winnie the Pooh
    https://e-estonia.com/case_studie/safer-streets-through-technology/

  9. War for Blair Mountain [AKA "Bill Blizzard and his Men"] says:

    The passage of the 1965 Immigration Reform Act=importation of highly racialized high fertility Democratic Party Voters=nonwhite scab labor=includes the nonwhite immigrants +their US born nonwhite geneline=massive expansion of the labor supply=1)declining real wage for The Historic Native Born White American Working Class+2)massive transfer of White Working Class $$$$$$$$$$$$$$$$$ and power to the White Liberal Greedy Cheating Class Psychopathic Mega-CEO=White Liberal Greedy Cheating Class Psychopathic Mega-CEO=Demigod Creature with Life and Death Power over millions of Native Born White American Working Class Stiffs.

    It is…no more complicated than this…..Never forget this:flexible labor markets=The passage of the 1965 Immigration Reform Act….Counterpunch Superstar Noam Chomsky is an enthusiast for this.

  10. MarkinLA says:
    @rustbeltreader

    http://www.bloomberg.com/news/articles/2015-01-27/venture-capitalist-draper-bets-400-000-more-on-bitcoin-revival

    If this scam doesn’t have an official name, I will give it one. Call it the “In for a pound, in for a penny” scam. Some dumbshit true believe has already dropped a ton on some useless “investment” usually a fraudulent stock. He is trying to lure other suckers in with a tiny bet and a big mouth hoping he can get others to trade places with him and he can cut his losses.

  11. MarkinLA says:
    @rustbeltreader

    How is spread betting any different than writing naked calls and naked puts depending on the situation. The stocks (and indexes) have plenty of strike prices and expiration dates? Years ago I used to write tons of puts at the next expiration two strikes below the current price. They almost always expired worthless. Then you write a covered call at the same strike.

    I got hammered in 2008 but made a lot of money 2001-2007. I just got tired of being glued to the monitor all day long waiting to put in the next trade to try and cash in on the white noise of the stock’s movement.

  12. David says:
    @leftist conservative

    That’s funny. Your pension is nothing but a claim on future production. None of what you hope to live on exists yet. You are very much in the Game.

  13. Wally [AKA "BobbyBeGood"] says: • Website

    Whitney said:
    “… the likes of which could be easily remedied by following Keynes recommendation of “government directed investment” … But instead of putting people to work building bridges and fixing roads …”

    This is breathtakingly uninformed.

    “Government directed investment” is Marxism under another name, Fascist economics at best. The government would still be picking the winners & losers and of course will expect something in return.
    True, it would probably redirect SOME* of the taxpayers’ money into a different socio-economic group, but it is still money that the government steals or makes out of thin air at the expense of citizens.

    * And you think Wall Street doesn’t & won’t game the construction industry?

    Leftist/socialist systems, the most failed systems in world history and which got us into this mess in the first place, cannot be tweaked, overhauled, or fixed. Those have all been tried with increasingly poor and dangerous results. Significantly reduced governments must generally stay out of the economic affairs of it’s citizenry, there is no other remedy.

  14. War for Blair Mountain [AKA "Bill Blizzard and his Men"] says:

    Capitalist success stories:Haiti…El Salvador…Carniege and Frick Steel Mill wage slave operation…Henry Fords’ Rouge River Industrial Slave operation complete with death squad goons. Your either evil or insane….or your Glenn Beck who is both evil and insane….

  15. Art says:

    We are missing the big picture. When are people going to get it – when these central bankers print money (Greenspan, extra) they give it to their people to buy and manipulate real assets (Boeing, GE, extra) – when the whole thing crashes (happy days for them) – they end up owning all the hard assets of the country.

    With every bobble they transfer more real wealth to themselves! Is this not happening before our very eyes?

  16. Joe Webb says:

    Friday , Jan. 16, 2012, p. A13, WJ.

    A Ruchir Sharma has a column…”How Spending Sapped the Global Recovery.” The burden of his story is that the emerging economies of China, Russia, and Brazil “….have tried a full throttle experiment in stimulus spending and it failed.” The fiscal spending worked for a year or two and then stalled in late 2010 after have doubled the rate of growth of GDP in that year. Since then it has been bad news for all three economies.

    And, the public debt has risen sharply, and “state banks” made many bad loans to companies which are going south. Sharma then hammers the liberal Larry Summers and his Keynesian views.

    Mexico’s Carstens, head of the Mexican State Bank told the writer that fiscal and monetary policy “cannot create growth.” Well, what can? (hint, money in the hands of ordinary people who will frivolously buy washing machines, clothes , food, etc.)

    So now what? First, all these countries are notoriously corrupt. Second, other factors should be taken into account, etc.
    ———
    I have recommended an economics package here previously. It boils down to not a gov’t stimulus which borrows public money and raises debt, and is spread around by cronyism. It uses private capital that is parked next to the curb idling and doing nothing but frustrating investors and enraging ordinary folks.

    I mentioned in my earlier post, that a banker friend who has been around for decades observing banking and finance generally, estimates that there is 5 trillion dollars or so parked and producing nothing in the US economy. (The GDP of the US is about 16 trillion dollars per year.)

    Confiscation, not Nationalization. To nationalize Capital means another set of job seekers grabs the money and Jobs. If , say, one-third of 5 trillion dollars were confiscated and returned immediately to job holders (no welfare payments) making under $100K a year, that would be the Mother of all Stimuli producing a massive amount of purchasing of Real consumer things, including housing.
    Presto, the economy is up and running, and Capital has been disciplined by the State to do what it should be doing: investing in America.

    Second, about one third of the 5 trillion should be confiscated and invested directly in infrastructure, something that all economists agree needs help. This would be scrutinized by economists who believe in the country, not the Internationalist sorts who like to hang out at Davos.

    Third, put the other third of the 5 trillion to work paying down the national debt and bolstering social security and medicare funds (I hear some folks gasping).

    This is a way to Stimulate the economy and Discipline Capital at the same time, while not increasing public debt.

    The liberal managers of the Global Capitalism will gobble and squawk. Let them, there is no other place for them to go. When the economy picks up, they will maybe then focus on investments other than real estate and finance…really a waste of resources. This would be a nationalist economics that is simple, and has no particular moralistic politics. It is just an economics program that is Good for the Country and all people who work and consume. Welfare and other wastes would be contained.

    Joe Webb

  17. annamaria says:
    @leftist conservative

    You envision an orderly functioning society after the great majority of the citizens will be reduced to “biomass,” to a life of misery and indignity. Most likely, the crisis will tear the societal fabric apart in multiple places.
    The banksters have bought both legislature and government, weakened the system of laws to a breaking point, and became inseparable from war profiteers. The Vampire Squid is profoundly asocial. If there are persons deserving guillotine, they are the Masters of Financial Universe in the US/UK.

  18. annamaria says:
    @leftist conservative

    You envision an orderly functioning society after the great majority of the citizens will be reduced to “biomass,” to a life of misery and indignity. Most likely, the crisis will tear the societal fabric apart in multiple places.
    The banksters have bought both legislature and government, weakened the system of laws to a breaking point, and became inseparable from war profiteers. The Vampire Squid is profoundly asocial. If there are persons deserving guillotine, they are the Masters of Financial Universe in the US/UK.

  19. Sam J. says:

    Let’s just use a little simple arithmetic to put this whole mess in perspective. The government gave an estimated 29 trillion to bankers. We know for sure 16 Trillion from Rep Ron Paul so we’ll use the smaller number. (16 Trillion/300 Million Americans) multiply times (4 per family) = 213,333. Now where I come from you can buy a decent house for this. So we would have completely solved the housing crisis and housing costs would have dramatically fallen for Americans. Think that would provide stimulation? Let’s look at the payment difference for 30 years at 4.5%. At 4.5% $1,080.93 a month. At 0.01%
    $592.68 a month. Big difference. The truth is the whole collapse was probably engineered anyways. Just another shaft to the middle class.

    • Replies: @Joe Webb
  20. Joe Webb says:
    @Sam J.

    I seem to recall that Uncle Sam got paid back with interest. Joe Webb

    • Replies: @MarkinLA
  21. MarkinLA says:
    @Joe Webb

    I seem to recall that Uncle Sam got paid back with interest.

    Yeah with the money the Fed gave them when they took their worthless mortgages off their hands at par.

  22. All of the economies controlled by the western bank cartel–Australia, Canada, US, UK, Eurozone, and Japan—are suffering from chronic lack of demand, the likes of which could be easily remedied by following Keynes recommendation of “government directed investment”.

    Followed by a sprinkling of magical pixie dust, some sunlight and unicorn farts, and *poof!* prosperity for all!

    Do you know a single system in the biosphere where consumption can precede production? And do you know what fuels production?

    Government spends trillions in the economy and has highways and bridges all over the place with paving contractors crawling all over them. All those trillions have to come from somewhere, which means they can’t be elsewhere. All government spending is just a transfer of wealth. You can print the money, you’re still just pulling future production forward for present consumption, and you’re that much poorer in the future.

    TANSTAAFL.

  23. anon • Disclaimer says:

    Followed by a sprinkling of magical pixie dust, some sunlight and unicorn farts, and *poof!* prosperity for all!

    The only thing wrong with this argument is the people who use it don’t seem to understand this is exactly how the banking system currently works – inventing money out of thin air for consumption that hasn’t been paid for but will have to be paid for *with interest* creating an illusion of prosperity followed by economic collapse and/or stagnation depending how big the false boom was.

    The “hard headed” conservative argument is *exactly* the same as the soft headed liberal argument just with different taps/faucets – and at the end of the day not even different taps as the Keynesian method borrows from the banks anyway.

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