In November 2013 we will see the fifth birthday of Quantitative easing or Money Printing. The first of the Money Printing started in November 2008. Let us take a stock of the situation right from the rising bubble of the 1997 to the dot com crash and the peak of the sub prime mortgage lending to the Lehman crash, with a continuing Global Economic Crisis. The height of every thing is that after the dot com crash no one on earth realizes the importance to avoid similar crashes. The Law makers made several mistakes and all of them were repeat of the same mistake. Some of the questions arise:

Why were the dubious banks bailed out continuously after the Dot Com Crash. Bailing out once was quite responsible step from the law makers. But the same banks kept making mistakes after mistakes giving rise to speculation and confirmation that law makers have vested interests in the Banking Systems across the world. The Prime and the Sub Prime Crisis are classic examples of how the banks misbehaved even after several bail outs. The collapse of one or four major banks would have led to a domino effect to take away and close many of the leading Global Banks. Perhaps this was the best remedy to the Financial Crisis. To allow the Banks to close down. What we face today is 10 times more worse than the Great Depression and crisis of 1929 just because of the unpleasant steps taken like Quantitative Easing or Money Printing.

The Banks continue to misbehave themselves as long as they are cushioned and supported by the law makers who are just printing money to continue the Banking Systems of the world. While every one knows that this is a immense threat to the financial system of the world, I write that it is a threat to the Humanity. The support to the Money Printing was given by Venture Capitals and Private Equity Funds who have been pumping money in the Stock Exchanges, which now has no value. With the kind of Money Printed, it was felt by the law makers that it will not only relieve the stock markets but it will also take it past 22000 on Dow Jones. Despite several efforts, the Dow Jones have managed to climb to life time highs however till 15658.36 achieved on 2nd August, 2013. The talks of the Dow Jones crossing this mark and touching 17000 is absolute rubbish. While it is seen that the selling pressure from all the retail investors was high, maximum people chose to exit the stock markets, and take out the cash as long as the funds are being pumped in to the systems by the Banks / Financial Institutions. Now it is seen that 83% of the US stocks are held by just 1% of the people, it is scary for the 1% of the people since they have no chance of exit. Hence we see that when ever the Fed tries to announce tapering, that sends the markets in tail spin.

Now the Fed is in Trouble, apply Edward Murphy law to Fed or ‘Chakravyuha’ in Mahabharata in Hindu mythology. The Chakravyuha was a special defensive formation during the war times and to penetrate and break the formation was not known to ‘Abhimanyu’. He had partial knowledge of how to penetrate the Chakravyuha but did not know how to exit from it during the time of danger, which led to his crash. The Fed has done it all wrong and now there is no exit seen. The only people who know the exit should be brought in to picture and allowed to operate the Global Financial Systems without any interruption or interference from the Fed. Recently heard that Japan’s Abenomics will go in for more and more Money Printing as has UK already done it. How is this most deadly and dangerous and how does this threaten the Global Economy, how does it threaten the entire Humanity on earth?

Equity markets have survived the last few years on the strategy that ‘bad news is good news’. Each time GDP slowed, unemployment rose or confidence crumbled, stocks surged. The reason for this bizarre behaviour is money printing. The worse the news feed looks, the more money will be printed. And the more money, the more stocks levitate. Just to make the impact obvious, every time the money printers stopped printing, stocks fell. Lately, even a hint that the money printing will be reduced has been enough to send the market tumbling.

If you want the stock market to go up, just print money. All the other stuff like GDP, employment and confidence isn’t really relevant. But why does the stock market matter more than GDP, employment and confidence in the first place? That is a question economists have an answer for. It’s called the wealth effect. People who own shares that are going up feel richer and can spend more, but never do. As we discussed 83% of the US stocks are owned by 1% of the people. Does that improves GDP, employment and confidence? The bit we don’t understand about this wealth effect nonsense is that people need to get their hands on the money to spend it. While the rich people’s money is piling into the stock market, people can’t spend it and add to GDP. They have to sell their shares first. That will set the stock markets tumbling, since there is no buyer. There has to be buyer for every seller of the stocks

The amount of cash flowing in and out of the market has to be equal. So a levitating stock market can’t help consumption. Long story short, the wealth affect has it backwards and makes no sense as well. Apart from that, a rising stock market is the result of a healthy economy, not the indicator of one. If you goose stock market prices, you aren’t making the economy improve any more than messing with your speedometer improves your commute time. Despite its fabulous effects on the stock market, for some reason even the most ardent supporters of money printing reckon it can’t go on forever. So they’re waiting for good news from the economy to begin pulling back their money printing.

For some unknown reason, we’re now at that point. ‘September Taper’ is in the air. In other words, there is a chance the American central bank will reduce its QE program in September. This has reversed the ‘bad news is good news’ strategy. Good news is now bad news. An improvement in GDP, employment and confidence signals the end of money printing and thereby the end of stocks surfing a wave of dough.

Rather than relying on money printing, stocks will have to reflect economic reality. That’s going to be a rather rude shock. If the Fed tapers, as printing less money is known these days, stocks will drop. If they drop far enough, can you guess what the Federal Reserve will do? Print money in the name of the wealth effect, of course. That’s what it’s done each and every time tapering led to a fall in the stock market over the past few years. Around and around we go.

In other words, even if the Fed does taper, it will be short lived. Economic reality is just too harsh. Making economic reality irrelevant to the stock market is just the kind of distortion that makes money printing so dangerous. It completely obfuscates the signals the economy relies on to function. In this kind of environment, the important thing is to look like you know what you’re doing. Nobody really has a clue anyway, so you might as well look the part. Sticking your head in the sand has never helped anyone, but putting your wealth in Gold is a proven strategy for preserving it.

The one thing you shouldn’t do in an environment with so much uncertainty is go into debt. Why is debt so dangerous? Well, Global Economy is slowing down. And debt is very difficult to pay off if your economy is slowing. In fact, debt only really works out well if the money you borrowed is invested in productive assets – the kind that increase your productivity and ability to pay off the debt. Unfortunately for the Global people, they invested much of the money in apartments / properties / real estates that now stand empty.

Now debt has a binary outcome. You either pay it off, or you default. If Global growth slips below the level it needs to manage its debt load, the Global slowdown will turn into a death spiral. Economist Irving Fisher called this debt deflation – where defaults trigger a collapse in the money supply, which makes it even harder to pay off debt.

Hope the Fed ends the Money Printing soon and start building up the Economy and face the reality rather than just apply a band aid.

Regards,

Shrikant G. Shete

Gold Coast – QLD 4215

Australia