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“Investors are losing confidence in central bank policies. (They) have done all they can do, and these policies may not improve economic growth or may not support financial markets.”

— Anthony Valeri, investment strategist at LPL Financial

Zero rates and QE have stopped working and that has investors worried. Very worried.

If you want to know why stocks have been taking it on the chin lately, look no further than the quote above. Mr. Valeri nails it. The Central Banks have lost their touch which is why investors are cashing in and heading for the exits. This has nothing to do with the slowdown in China, bank troubles in Europe, capital flight in the emerging markets, droopy oil prices, or the deceleration in the global economy. Forget about that stuff. The real problem is that investors have lost confidence in the Fed. And for good reason.

Keep in mind, that for the last 5 years or so, bad news has been good news and good news has been bad news. What does that mean?

It means that every report that showed the economy was underperforming or getting worse was greeted with cheers from Wall Street because they knew the Fed would promise additional accommodation (QE) or continue to maintain zero rates into the future. The Fed conditioned investors to ignore fundamentals and merely respond to the Pavlovian promise of more cheap money. That cheap money helped fuel a rally that tripled the value of the S&P 500 while inflating asset bubbles across the spectrum. But now the impact of low rates appears to be wearing thin which has investors concerned that the Fed has run out of bullets.

Why? What changed?

In the last couple of weeks, the second and third biggest central banks (The European Central Bank and the Bank of Japan) either announced or launched additional easing programs, but to no effect. The BOJ implemented negative rates (NIRP) expecting the yen to weaken and stocks to rally. Instead, stocks fell off a cliff losing an astonishing 7.6 percent on the Nikkei while the yen strengthened by nearly 10 percent against the dollar. In other words, the results were the opposite of what the BOJ wanted.

The same thing happened to the ECB although Mario Draghi has not actually increased QE yet. The ECB is currently buying €60 billion of mainly sovereign bonds per month under the existing program ostensibly to trigger credit growth and boost inflation. Draghi increased speculation that he would boost the bank’s monthly purchases (by €15) at the World Economic Forum in January when he said:

“We have plenty of instruments. We have the determination, and the willingness of the governing council to act and deploy these instruments.”

Usually, a strong statement like that would be enough to send stocks into the stratosphere, but not this time. Since then, EU markets have tanked and the euro has strengthened against the dollar. Once again, the results have been the exact opposite of what was intended.

So the question is: If the promise of easy money and QE is no longer working in Japan or Europe, why would work in the US? Or, put differently: Has radical monetary policy lost its ability to prevent stocks from going into freefall? (The Bernanke Put)

This is what investors want to know.

Keep in mind, QE has not increased inflation in any of the countries where it’s been implemented. Nor has it boosted lending, triggered a credit expansion or strengthened growth. It’s a total fraud. But it has had a big impact on stock prices, which is why central banks love it.

But now that’s changed. Now QE is backfiring and zero rates have lost their potency. Investors know this. They know that monetary policy has run-out-the-clock and that overpriced stocks –which have been outpacing flagging earnings for years–are going to return earth with a thud. This is why the selloff could continue for some time to come.

Of course, now the focus has shifted to “negative interest rates”, the latest fad in central banking that is supposed to boost lending by charging banks a small fee on excess reserves. It’s another nutty attempt to prove that if you put money on sale, people will borrow. But what we’ve seen over the last seven years is that there are times when people won’t borrow no matter how cheap money is. The Fed can’t seem to grasp this. They can’t see to wrap their minds around the simple fact that reducing the cost of borrowing, does not always make it more desirable. Households that are trying to pay down their debts, increase their equity or save for retirement might not want to borrow regardless of how cheap the rates might be.

In any event, negative rates (NIRP) have already been implemented in Europe and Japan where the results are mixed. Here’s how Nomura’s chief economist Richard Koo summed up the phenom in his recent newsletter:

“In my view, the adoption of negative interest rates is an act of desperation born out of despair over the inability of quantitative easing and inflation targeting to produce the desired results. That monetary policy has come this far is a clear indication that both ECB President Mario Draghi and BOJ Governor Haruhiko Kuroda have fundamentally misunderstood the ongoing recession…..” (“Macro and Credit…The Vasa Ship”, Macronomics)

Indeed. Now compare Koo’s comments to those of OECD Economic Committee Chairman, William White, who was asked what he thought the effects of negative rates would be on the economy in a recent Bloomberg interview:

William White: “The truth is, nobody really knows. The thing about these experiments, is that they’re experiments. We have no historic precedence for this kind of behavior by central banks at all. EVER. So the answer is: We don’t know. The general idea is that if you charge negative interest rates on the reserves that the banks hold at the central banks that somehow this will translate into lower lending rate and more stimulus for the economy. But you have to realize that these negative rates will actually squeeze the banks margins, squeezing bank profits. This is something we actually don’t want because we want them to make more money so they can build up capital buffers. So what are the banks going to do?

Well, one possibility is that they lower the deposit rates for customers. That’s possible, but then people might take money out. The other possibility is that you simply raise the rate for people to borrow, which is the exact opposite for which the policy was intended. So, I repeat, this is all experimental. We’ll wait and see how it turns out. But I’m rather skeptical.”

(“OECD’s White Says More Wage Growth Attention Needed“, Bloomberg)

In other words, it’s just not a very well thought-out plan. Either the banks take the hit or the borrowers do. Either way, the plan won’t boost lending, generate a strong credit expansion or grow the economy. After seven years of this same nonsense, we should be willing to admit that reducing the price of money will not lead to an economic recovery. Of that, we can be 100 percent certain.

So, what will generate a strong recovery? This is the question Bloomberg put to White after he expressed his reservations about negative rates. Here’s his advice:

“Those who have fiscal room to maneuver, should use it.

I think there should be more attention paid to wage growth, which has been too low and so spending has been too low in consequence.

We need much more public infrastructure which is an asset to go with a government liability.

We need more systematic approaches to debt reduction and debt relief.

And we need a lot more structural reform to get that low hanging fruit to allow the economy to grow faster and to allow debt service to be more easily managed.” (“OECD’s White Says More Wage Growth Attention Needed”, Bloomberg)

Fiscal stimulus? Wage growth? Debt relief? Progressive reforms?

In other words, we’ve piddled-away seven-long years on radical monetary experiments that have achieved nothing and led us right back to where we began, at plain-old Keynesian fiscal stimulus, the only reliable way to put people back to work, stimulate growth, and get the economy back up-and-running.

Better late than never, I guess.

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. The system set in motion by President Wilson in 1913 requires ever increasing debt. They call that “growth”. Inevitably the time arrives when debt cannot be expanded further. We have arrived at that time. The system will now collapse to the great detriment of the people of earth. The men who created the banking cartel we know as the FED new very well that they were creating a monster (The Creature From Jekyll Island). It was not an experiment. It was an exercise in avarice.

  2. In other words, we’ve piddled-away seven-long years on radical monetary experiments that have achieved nothing and led us right back to where we began, at plain-old Keynesian fiscal stimulus, the only reliable way to put people back to work, stimulate growth, and get the economy back up-and-running.

    I don’t know which FED officials Mr. Whitney has been listening to. I’m going on seventy and for decades I have been hearing them say that monetary policy was no substitute for fiscal policy, i.e. there was only so much they could do. I’m no fan of the bankers, but I’ve never heard them claim they could provide anything but short term fixes.

    I have no doubt that we will go for “plain-old Keynesian fiscal stimulus” the pigs just have to settle who gets what place at the trough and the slop will flow. The naive Tea Partiers who think we can still save the Republic are dwindling every day and as the choices get more stark they will fall silent or their voices just be drowned in the cries of “DO SOMETHING!”

    BUT do not be deceived, fiscal stimulus, no matter how great, will not solve the problem. We will spend billions on infrastructure to put people to work, we will sanction those who apply “unfair” trade tactics and bring manufacturing jobs back, but that will not solve the problem.

    Nature will not tolerate unending exponential growth – that is the problem.

    • Replies: @MarkinLA
  3. Fiscal stimulus? Wage growth? Debt relief? Progressive reforms?

    In other words, we’ve piddled-away seven-long years on radical monetary experiments that have achieved nothing and led us right back to where we began, at plain-old Keynesian fiscal stimulus, the only reliable way to put people back to work, stimulate growth, and get the economy back up-and-running.

    Better late than never, I guess.

    Wrong. It’s over. Our political and financial institutions are rotten. Things rot AFTER they die.

  4. MarkinLA says:
    @another fred

    Uh but it did work. Stocks are bought and sold all the time. The market moves when there is an imbalance between the two. Right now the people the Fed supported for 7 years have sold a lot of their stock to the poor working slob and they have no interest in buying the stock back until they can do so for half of what the working slob paid them for it originally.

    The program is working exactly as intended. The stupidity is in believing the prices on the stock market reflect anything more than the betting done after the flop, turn, or river in a game of Texas Hold’em.

  5. “In other words, we’ve piddled-away seven-long years on radical monetary experiments that have achieved nothing and led us right back to where we began, at plain-old Keynesian fiscal stimulus, the only reliable way to put people back to work, stimulate growth, and get the economy back up-and-running.”

    AND doubled the national debt in the process.

  6. So let’s see if I have this right:

    Keynesian fiscal policy says “spend lots of money.”
    What money?
    Oh, you want to BORROW more money, by issuing more debt.

    Is there no limit to the amount of debt, of IOU’s, that can be issued? “We” issue more debt, debt is money, money is used to pay taxes to cover the coupon on the debt….rinse and repeat….rinse and repeat….
    ————————–FOREVER?

    It must require a brilliant mind, far higher than my measly IQ, to believe in such folly. That’s it, I’m simply NOT SMART ENOUGH to understand economic policies.

    Eventually we can get to a point where all goods and services are sold to the central government for distribution, right? Paid for by issuing ever more debt, right? And if the Federal Government is the Buyer, doesn’t the Buyer dictate what is to be produced? Only that which can be sold can be produced, right? Otherwise what is “produced” is material for a landfill, right?

    This is the largest folie a plusiers in history.

    We are in the 3rd, or 4th or even 5th decade of the largest Popular Delusion and Madness of Crowds in recorded history, dwarfing England’s South Sea Bubble and France’s Mississippi Scheme of John Law combined, and raised to the 10th power.

    Never in history have more people believed holding someone else’s IOU’s made them rich. Never has the OCEAN of IOU’s (The Bond Ocean) been filled this wide and deep, teetering on catastrophe because manic collective trust has kept the capital value of all those IOU’s at nearly face value (near-ZIRP.)

    Credit Booms (bubbles, in this case) cause vast mal-investment. The purpose of an economy is to provide signals coordinating the use of capital (including people’s skills) and time to produce what is most needed from axiomatically scarce inputs.

    This decades’ long credit tsunami warped the signals. Governments have borrowed like mad and provided vast “demand” for medical services, education services, military materiel, etc., far beyond what a market could have coordinated.

    People have invested their very LIVES in becoming part of this production process, but in doing so they were pulled from other avenues of endeavor, avenues that would have been revealed in the absence of artificial, political spending of borrowed money.

    The money was spent, but the debts remain. The debt is considered an asset, however, so people have the collective belief that they can consume their cake yet still have the wealth (debt) incurred to eat it.

    This is a logical impossibility.

    We are drowning in logical impossibility, and all we await is its inevitable, eventual recognition. The inverted pyramid that is VAST wealth in the form of IOU’s of increasingly untrustworthy issuers will eventually collapse in pancake fashion, one layer at a time, from the top (shakiest) to the bottom.

    This is the denouement for every credit mania in history.

    • Replies: @another fred
  7. @dc.sunsets

    It’s like the old Woody Allen joke. Upon being told that masturbation would make him go blind, he vowed that he would only do it until he needed glasses.

    We’ll stop one day, just not today. This is not the right time.

    One day the music will stop, but it will be in the midst of an “existential crisis”. And money (debt) will be no object. Another “New Deal”.

    War will follow soon after.

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