Wednesday, August 29, 2018

Central banks validate the law of diminishing returns as 10 years of stimulus show it had little impact to the real economy

If there is anything that has been learned from the way information has been distributed to the masses over the past two decades it is that controlling the narrative, and using propaganda to push agendas, is more important than the truth.  And in no place has this been more apparent than from the central banks following the Financial Crisis of a decade ago.

In fact two of the most important 'narratives' that the Federal Reserve, ECB, Bank of Japan, and Bank of England have pushed over the past 10 years to justify their use of money printing (Quantitative Easing) and low interest rates is that the economy has recovered, and that inflation remains low.

Unfortunately for them however, these narratives only worked out for a short period of time because one of the more interesting consequences of their policies has been the rise of political extremes, both on the right and the left, which are now threatening several nations with populist and socialist change.

When we take a serious look at how the infusion of tens of trillions of dollars into the financial system has affected the general economy, we come to a rather interesting conclusion.  And that is that while the 'shock' of ZIRP, NIRP, and QE helped stave off a complete implosion of the system, over time its effects were limited to creating bubbles in the Housing, Equity, and and Bond markets while achieving absolutely nothing in the real economy.

In a report called “A report card for unconventional monetary policy,” Deutsche Bank has analyzed the impact on the economy of “unconventional” monetary policies, quantitative easing and negative interest rates. 
They have analyzed the impact on manufacturing indices from the beginning to the end of these measures, and have found the following results: 
1. In eight of the 12 cases analyzed, the impact on the economy was negative 
2. In three cases, it was completely neutral 
3. It only worked in the case of the so-called QE1 in the US, and fundamentally because the starting base was very low and the US became a major oil and gas producer. 
As Torsten Slock, the analyst at Deutsche Bank, explains, that in eight out of twelve cases the impact was negative speaks for itself. - Diacalle
 As I mentioned above, QE1 was successful ONLY in helping the U.S. to stave off complete insolvency in their financial system after 2008.  However subsequent QE measures accomplished virtually nothing for the real economy as seen in the chart below.

Law of Diminishing Returns


In the end even the controversial economist John Maynard Keynes got it right when he said that the use of credit to stimulate an economy could only work in the short term (approximately six months), and then it would begin to create negative consequences such as inflation and declining growth.

Just like the years of the Dot Com Bubble, and followed a few years later by the creation of the Housing Bubble, Americans were programmed to believe that the economy is working when the value of their primary investment assets are growing faster than their wages or real GDP.  And this narrative learned by the central banks has led them to push people to focus on them once again here in the second decade of the 21st century since the only thing that has seen growth under central banks stimulus has been that of housing and stocks.

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