Let's be clear, QE has nothing to do with stimulating the economy. The purpose of QE is to protect the banks. The reason Ben Bernanke baulked from tapering is not because of concern that the economy could not take it, but that the global financial system cannot take it. Central Banks are protecting the banking system at the expense of the real economy.
The initial QE, introduced as the Financial Meltdown threatened to bring the global circulation of commodities to a grinding halt was a rational measure. The Credit Crunch threatened to turn a financial crisis into an economic crisis. It was a similar situation to that described by Marx and Engels in Capital III, in relation to the financial crises of 1847 and 1857, that were caused by the Bank Act of 1844, which prevented the necessary liquidity entering into circulation.
“By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”
The reason for the Credit Crunch in 2008, was that, over 40 years of easy credit, banks and financial institutions had overseen a huge rise in personal debt. In 1960, household debt in the UK accounted for just 15% of GDP, but by 2008 that had risen to 90%! A similar explosion of debt had occurred in the US. It was not bad bank legislation that caused this credit crunch as in 1847, but simply the fact that the orgy of debt had created an unstable condition, where unless the bubble continued to be inflated, it had to burst. Ever more inventive ways had been found to continue to inflate the bubble, by bringing in every more marginal buyers of property, shares and bonds. The introduction of derivatives such as mortgage backed securities, which bundled together the mortgages of people who were likely to default with the mortgage of those who would not, so as to spread the risk by getting investors to buy the overall bundle, were supposed to be one means of achieving that end.
But, as more and more of the mortgages within them became less secure, and as rising property prices made all of the mortgages ultimately less secure – because there was a bigger risk that at some point prices might fall – the more risky the derivatives became, which prompted the development of derivatives to bundle together other derivatives, or to provide insurance against such a default. The inevitable consequence of this Ponzi Scheme was that there comes a point where someone steps off the merry-go-round. Then as happens in a credit crunch, everyone wants to hoard cash in case they can't get any themselves. No bank wants to lend to any other, because none of them know what the real financial health of the others might be. So, interbank lending rates go through the roof. Money is drained from the system, which in turn prevents the circulation of commodities bringing economic activity itself to a halt.
So, as Marx and Engels stated in relation to 1847 and 1857, introducing liquidity is a sensible action. But, the introduction of that extra liquidity in 1847 and 1857 was a short term measure lasting only a few weeks. It is now five years since Lehman Brothers collapsed, and yet the Federal Reserve is introducing more liquidity into the system today than it was at the height of the crises in 2008!!!!
It has not been the introduction of all this money printing that has been responsible for what economic recovery there has been. The reason economies rebounded in 2009 in a typical “V” shaped recovery was the injection of large amounts of fiscal, not monetary stimulus. Similarly, despite large amounts of liquidity, introduced into peripheral Eurozone economies, via the ECB, economies in Greece, Spain, and Portugal have essentially gone into a 1930's style Depression. The reason for that is that additional liquidity pumped into these economies propped up the banks, but did nothing to stimulate economic activity. The introduction of fiscal austerity, is what sent them into their long downward slump. The same has been true in Britain, though with the scale of austerity much less, the Liberal-Tory Government have not yet succeeded in reducing Britain to the same dire state as the EU periphery. But give them time.
In the US, by contrast, the continued fiscal stimulus did result in an improvement of economic activity. The reason it has slowed currently is that the Republicans have limited the fiscal plans of the Democrats, and repeated political crises over the Debt Ceiling, Sequester and Budget have caused considerable uncertainty, that hinders investment decisions by US corporations. Nevertheless, if the effect of the sequester – estimated to knock around 4% off US GDP in a full year – is taken into consideration, US growth has continued to be reasonably strong, and employment growth has continued.
On CNBC last night, as the Federal reserve decision was announced, Chief Economics Reporter, Steve Liesman, visibly hung his head in his hands. “If the economy can't take even 2.8% interest rates”, he declared, “what can it take?” It isn't that Liesman doesn't believe that the economy can take 2.8% interest rates (the yield on the US 10 Year Treasury ahead of the Fed decision) but that he was expressing his puzzlement at why the Fed seemed to believe that was the case.
But, of course, the economy can take 2.8% interest rates, and more. What can't take 2.8% rates, as recent weeks has shown, is the US property market. Having started to rise by double digit percentages over the last year – mostly as a result of speculation – the rise in Bond Yields had brought it to a shuddering halt, as it fed through into mortgage rates. The Fed can't allow US property prices, or stock prices to fall significantly, because when they do, the US banks will be seen to be bankrupt. As with their European counterparts they only appear solvent, because their balance sheets are stuffed with fictitious capital, property, bonds and shares listed at totally unrealistic values.
In the last 6 months, despite the continued large scale money printing in the US, Japan, and Britain global interest rates have continued to rise. US, UK and German bond yields have doubled in the last six months. I've set out why that is elsewhere – The Rates Of Profit, Interest and Inflation. Bernanke made clear in his statement that the Fed had also had an eye on the effect of its policy in other parts of the globe. In Britain, George Osborne is doing all in his power to keep a house price bubble inflated, and even to inflate it further. He's doing so for the same reasons, as well as for electoral purposes. Across most of Britain, despite the low interest rates, and government bribes, house prices continue to fall, as workers drowning in debt, seeing their real wages fall as money printing pushes up inflation, are in no position to bid them up. Only in parts of London, where the money of foreign billionaires, and of the small percentage of the rich who benefit from the inflating of asset price bubbles, are house prices rising, and that in itself is causing its owns set of huge contradictions in terms of a whole raft of bifurcations.
Bernanke is clearly concerned that as the money printing is slowed, it will be a signal for Bond investors to pile out of their current holdings, which will push up yields, and wider interest rates. That spells the end of the property bubble in the US, UK and parts of Europe. With it will go the banks. As I've set out before - The Great Property Market Conspiracy , its reported - by Moneyweek - that Deutsche Bank has exposure to €55 trillion of global derivatives, and its suggested that,
“ There are concerns that some banks are up to their old tricks. Instead of directly loading up on debt, they are concealing their borrowings through complicated derivative contracts.”
That exposure of Deutsche Bank is equivalent to the entire global GDP! Most of its exposure is in relation to European property debt, but all the other European banks are in a similar position. British banks are second only to French banks in exposure to European household debt.
The reality is that the money printing is not going into the real economy. The largest corporations are already stuffed with cash, as they have built up huge cash hoards from the massive profits they have made over the last 30 years. On the other hand, the small companies are not good prospects for the banks to lend to. In Britain, around 150,000 companies have been identified as zombie companies, only able to repay the interest on their loans. Banks have little reason to lend at currently low interest rates to such companies, and risk not getting their capital back. Similarly, there are 260,000 people on interest only mortgages do not have a strategy to repay their mortgage. The average shortfall stands at a staggering £71,000, according to the FCA. 300,000 home-owners in Britain are not paying their mortgage at all and Nick Hopkinson calls forbearance “a sick joke” – mortgageintroducer.com. This is one reason that many people are then forced to rely on the Pay Day Loan sharks. For these people there already is a credit crunch! In the US, the TARP programme sought to protect the banks in a similar manner and keep property prices inflated, by helping the banks avoid foreclosing.
A collapse in bond prices will crash property markets in the US, UK and Europe, and thereby expose the banks as bankrupt. So far, the outflow of funds from Bonds has been limited. Interestingly, where money has come out of Bonds, it has not gone into equities. No wonder, when the bond bubble bursts, interest rates rise, and that collapses the property market, which exposes the bankruptcy of the banks, but that will have a ripple effect across the financial system. The banks continue to be a significant component of equity markets. Higher bond yields will increase the amount investors demand as a return on their shares too. That means that price-earning ratios will need to be significantly de-rated, sending share prices overall down by a huge amount. Some indication has already been seen of that earlier in the year as stock markets fell sharply as Bond yields rose.
But, such a financial crisis, apart from its immediate impact on the real economy would be likely to have longer term benefits for the real economy, for the reasons Marx set out.
"As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)
As I've set out before, a crash in property prices will make housing once more affordable for workers, whether they buy or rent. It will remove the need for huge amounts of Housing Benefit to be paid, thereby reducing the tax burden on other workers. A huge fall in the price of building land will make it once more worthwhile for builders to build houses that people can afford. A fall in the price of shares and bonds, will mean that workers pension contributions will buy far more of these financial assets, thereby significantly increasing the income into their pension pots. Both will reduce the value of labour-power increasing real wages, whilst providing the potential for an increase in relative surplus-value and the rate of profit.
In other words, as Marx sets out such a crash would be in the interests of the real economy. But, Bernanke's policy is not aimed at benefiting the real economy, it is aimed at protecting the banks and financial capitalists. Seeing the potential for even a minuscule reduction in monetary heroin to the financial system to cause that financial system to go into paroxysm, Bernanke baulked to protect the interests of the bankers over the interests of the rest of the economy.
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