According to
Richard, the inflationary effect caused by QE has been offset by the
deflationary effect on low wage offer by the workers from third world country.
The same job require USD200 can be done by someone from India for USD5. This is phenomenon is done through globalisation and world trade liberation and the use
of information technology as enabler to control manufacturing process
from the other side of the globe.
+++++++++++++++++++++++++++++++++++
Whatever It Takes, For As Long As It Takes
At the beginning of August, I posted a blog called “When Will The Fed Print Again?”.
Now we know. The answer is now. On September 13th, the Fed announced
that it will create $40 billion per month and use that money to buy
agency mortgage-backed securities in order to push down long-term
interest rates so as to support economic growth. Furthermore, the Fed’s
press release stated, “If the outlook for the labor market does not
improve substantially, the Committee will continue its purchases of
agency mortgage-backed securities, undertake additional asset purchases,
and employ its other policy tools as appropriate until such improvement
is achieved in a context of price stability.”
This round of money creation differs substantially from the two rounds
that came before. During both of the earlier rounds of Quantitative
Easing (QE) the amount of money to be created and the duration of the
exercise were announced from the beginning. This time no limits on
either quantity or time were announced. In other words, this time the
Fed is going to continue creating fiat money for as long as it takes to
bring down the unemployment rate. Some economists have dubbed this
exercise “QE Infinity” instead of QE 3 due to the opened-ended nature of
the Fed’s commitment.
But why did the Fed launch this extraordinarily aggressive program of
open-ended money creation just now? In my August 2nd blog, mentioned
above, I outlined four triggers that would force the Fed to switch back
on its printing presses: 1) a stock market crash; 2) much higher
government bond yields; 3) deflation; or 4) a jump in the unemployment
rate. None of those criteria were met between then and now. Moreover,
the spike in food prices brought about by the US drought should have
deterred the Fed since there is a clear cause and effect relationship
between paper money creation and food price inflation. Nevertheless, the
Fed went ahead anyway. Why?
Some commentators have expressed the opinion that the Fed acted to help
President Obama get reelected. I don’t believe that is the reason. If
the Fed had wanted to help reelect the President, it would have acted
sooner to ensure the economy was powering ahead by election day in early
November. It waited too long for that. It’s going to take more than a
month or two for this measure to begin to meaningfully impact economic
growth.
I believe the Fed acted now because it is afraid – afraid that our
global economy is about to go under. In the past, I have written that it
is useful to think of the global economy as a big rubber raft, but one
inflated with credit instead of air. On top of the raft float not only
all the asset classes – stocks, bonds, commodities and real estate – but
also the world’s seven billion people. So much credit has been created
globally that the raft is now fundamentally defective because the income
of the world’s population is insufficient to pay the interest on all
the debt. The raft is full of holes and the credit keeps leaking out as
one group after another is forced to default on its debt. Therefore, the
natural tendency of the raft is to sink. But, if the raft sinks not
only will asset prices crash, people will begin to die – just as they
did during the 1930s and 1940s, after the credit-inflated global economy
of the Roaring Twenties went down.
Signs abound that the global economy is beginning to submerge. The US
economy grew by only 1.3% during the second quarter. The UK is in
recession. Europe’s economy is in crisis. And Japan’s economy, which has
been in crisis for 22 years, is deteriorating rapidly due to a sharp
contraction in exports. Even China’s great economic boom is over.
Chinese exports grew by only 1% year-on-year in July. It should come as
no surprise that China’s export-led growth model cannot work when all of
China’s trading partners are in crisis.
With the global economy going down fast, the Fed has begun to panic.
Having already cut short-term interest rates to close to zero percent,
it has only one policy tool left to keep the global economy afloat. That
is to create more money and inject it into the raft in order to reflate
it.
The Fed is not acting alone. In recent weeks, the European Central Bank
has announced it will do “whatever it takes” (i.e. print as many Euros
as it takes) to hold down the interest rates on Spanish and Italian
government bonds so that the Eurozone does not disintegrate. And, in
late September, the Bank of Japan announced it would expand its own
version of Quantitative Easing by the equivalent of $126 billion. The
Bank of England has been the most aggressive player of all, having
bought up approximately 30% of all UK government debt with newly created
money.
The central bankers are at emergency stations and manning the pumps.
They are pumping credit into the global economy as fast as they dare. If
they don’t pump in enough, the raft will sink. If they pump in too
much, it will turn into an inflationary balloon and float away.
Will this work? It will – for a while. Then it won’t. So much fiat
money creation would have caused very high rates of inflation long ago
had it not been for one, separate factor: globalization. Because of
globalization, the marginal cost of labor has fallen 95%. It is no
longer necessary to pay a factory worker $200 per day in Detroit to
build a car. That job can now be done with $5 a day labor in India. This
unprecedented collapse in wage rates has been extraordinarily
deflationary; and that deflationary pressure has completely offset the
inflationary pressure produced by the enormous increase in fiat money
creation in recent years.
For the moment, fiat money creation is keeping the global economy
afloat and globalization is preventing inflation by driving down wages
in the developed world. This arrangement is inherently unsustainable,
however. The global economy is in crisis (and sinking) because the
income of the world’s population is insufficient to service the interest
on all the debt. With median income in the developed economies
shrinking because of globalization, it is inevitable that credit
defaults will accelerate, causing the global economy to sink that much
faster.
The only lasting solution to this crisis will be one that causes incomes to rise.
