I have long predicted that our central bank's debt monetization efforts would be of greater quantity and duration than most everyone at the Fed and on Wall Street expected. The reason; it is simply pure economic fallacy to try to engender viable economic growth through the process of creating inflation. Japan is trying the same failed economic strategy as well; and it will end in disaster...just as it will here in the United States.
Here's why. Each of the past five years Wall Street and Washington has repeatedly offered a rosy forecast of a second-half recovery that has not come to fruition. Latest case in point, the NFP report for September (before the government shut down) showed that just 126k private sector jobs were added last month. However, the answer we get from government is to do more of the same thing that isn't working. More debt, more money printing and a further extension of asset bubbles are the only solutions they provide.
It doesn't matter that five years of zero percent interest rates and QE have failed to spur real growth. Their prescription only leads to a zombie economy that limps along because it is based on creating consumption through rising asset prices and not through resolving structural issues like; allowing the economy to deleverage, simplifying the tax code, fixing our educational system, reducing regulations, or through stabilizing interest rates and the value of the dollar.
Therefore, five years and over three trillion dollars later, investors are clamoring to learn if the Fed will finally acknowledge that QE is actually preventing a return to healthy GDP growth; or will it merely persist in the folly of printing money without end.
That vital question was answered in a recent interview with Chicago Fed President Charles Evans on CNBC. Mr. Evans was asked a specific question about the boundaries of money printing and how much new credit the central bank is willing to create. The incredible exchange went as follows:
CNBC: "Does the fed have a limit to its balance sheet? Charlie, is there a limit? You're headed towards $4 trillion. Could it be $5 trillion, could it be $12 trillion? What limits the size of the Fed's balance sheet?" Charles Evans: "Well, I think the Fed needs to do whatever is necessary to help meet our dual mandate objections...is there a limit, I don't really think about it that way because I think there is a tremendous amount of capacity, we can go on as long as necessary..."
The Fed President shares the same sentiment as the soon to be appointed Chairman Janet Yellen. Those statements assure investors that the central bank is far more concerned about deflation than it will ever be about inflation; and that it will not stop printing money until it creates the latter.
So, what will be the effects of ever-expanding money supply and credit creation? Interest rates will be negative in real terms and that condition will only worsen over time. Public and private sector debt levels will explode higher as the artificially-low interest rate environment encourages the economy to lever-up to record highs. Cheap money will continue to force intractable speculation in stocks, commodities and real estate, which will further impoverish the middle class and lead to the exacerbation of asset bubbles that are already at dangerous levels.
While there is some anemic economic growth generation based on the building and servicing of asset bubbles, it is a miserable tradeoff for the massive debt bubble being created--which is setting up the economy for a devastating crash.
The total amount of public and private sector debt already amounts to 350% of our unsustainable GDP. The central bank's monetary policies will cause this level to grow both in nominal and GDP terms. These debt and asset bubbles should all implode in unison once interest rates normalize. It is prudent for investors to ride the asset bubble wave higher for now. But it is also imperative to have an escape plan in place before the inevitable crash occurs.