Culture clash

May 4, 2016 09:28 AM

Oh this sounds too good to be true. Just print the money! Well to be honest, a politician – and a central banker – should admit that increasing joblessness must be paid for somehow.

Raising taxes (not lowering them, Donald) is one way. Issuing more and more debt via the private market is another (not a good idea either in this highly levered economy).
A third way is to sell debt to central banks and have them finance it perpetually at low interest rates that are then remitted back to their treasuries.

Money for free! Well not exactly. The Piper that has to be paid will likely be paid for in the form of higher inflation, but that of course is what the central banks claim they want. What they don’t want is to be messed with and to become a government agency by proxy, but that may just be the price they will pay for a civilized society that is quickly becoming less civilized due to robotization. There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die.

Private banks can fail but a central bank that can print money acceptable to global commerce cannot. I have long argued that this is a Ponzi scheme and it is, yet we are approaching a point of no return with negative interest rates and QE purchases of corporate bonds and stock. Still, I believe that for now central banks will print more helicopter money via QE (perhaps even the U.S. in a year or so) and reluctantly accept their increasingly dependent role in fiscal policy. That would allow governments to focus on infrastructure, health care, and introduce Universal Basic Income for displaced workers amongst other increasing needs. It will also lead to a less independent central bank, and a more permanent mingling of fiscal and monetary policy that stealthily has been in effect for more than 6 years now. Chair Yellen and others will be disheartened by this change in culture. Too bad. If there is an answer, the answer is that it’s just that way.

Investment implications: Prepare for renewed QE from the Fed. Interest rates will stay low for longer, asset prices will continue to be artificially high. At some point, monetary policy will create inflation and markets will be at risk. Not yet, but be careful in the interim. Be content with low single digit returns.

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