GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT
Ever since the Queen of Australia found that there was competition for the abbreviation QE there has a been growing parade of phrases with “QE” bolted on.
- QE 1, QE 2 and QE 3
- QE for Wall Street
- QE for Main Street
- QE for the People
- Bankers 4 QE 4-evah!
- QE for the Asset Rich.
Never one to miss a merchandising opportunity, and with a large stock of slogan ready T-Shirts gathering dust, the Glass Pyramid is pleased to announce the imminent arrival of QE for Debtors into the meme market place.
What is QE for Debtors?
QE for Debtors is essentially a bank approved form of QE for the People which itself is being promoted as the inevitable replacement for the original versions of QE which amounted to QE for the Bankers/Wall Street/Asset Rich etc.
To understand why QE for Debtors is on the way, a quick tap dance along the QE evolutionary yellow brick road is necessary.
QE original edition
The original QE circa the GFC had two objectives. The first was to allow the Federal Reserve to provide a home for a bunch of stinky financial assets that the US banking sector was having trouble shifting to unsuspecting international banks, Australian local councils, foreign pension funds etc and in doing so prevent the value of those ‘troubled’ assets collapsing completely. This worked a treat as a dud asset is not a dud asset if a central bank is prepared to pay good money for it. Plus the Fed even made a buck as some of the ‘troubled’ assets were less troubled than others and the ‘haircut’ on those assets made the exercise worthwhile.
The second objective was to address the pressing problem that much of the sentient population of the world immediately decided after the GFC that debt was about as socially acceptable as various communicable diseases. Unfortunately slashing Central Bank overnight/target rates to near zero was good but not enough of a cure for sudden onset debt phobia so the Fed decided to drive down rates right across the event horizon by wading into many markets for public and semi-public securities and buying them up in multi billion dollar quantities month after month.
In the case of debt related to home mortgages the US govt simply took over Fannie and Freddie and turned the entire home mortgage sector into a QE distribution network.
Nothing like free market capitalism done the Ben Benanke way!
The only catch with the original QE was and continues to be that even though debt is now practically free to all and sundry “insiders”, most normal people got the message of the GFC and continue to avoid debt like the plague and much of the productive sections of the business world who supply goods and services to normal people know this and thus they too are reluctant to gorge on debt to ramp up production capacity to a miserly bunch of consumers.
QE – Blue green algae bloom
However, there is of course a specie that thrives on cheap debt in much the same way as pond scum thrives on fertiliser run off. The FIRE sector and the attendant speculators and their sucker fish service providers have simply loved playing asset price roulette with the bottomless well of cheap debt. Right across the globe speculators with ‘insider’ access to cheap debt on the best terms have been having a whale of a time, pumping debt into real and financial assets and trading them in faster and faster cycles as the prices of those assets rise supported by even more even more lower priced debt. Even mom and pop investors (and increasingly their kids and grandkids) have gotten up to dance with the big boys and are busily gambling their wealth on the debt driven asset price music never stopping.
This is why the original QE became known as QE for Wall Street, QE for Bankers, QE for the Asset Rich among the pitchfork clutching classes across the globe.
While by no means a leader of the pack the Reserve Bank of Australia has been a fully signed up supporter of the QE for Wall Street model, in its efforts to drive the Aussie Household Debt Machine harder with an ever punchier blend of “bait rates”. Seven years after the GFC the RBA has managed to engineer household debt back to new nose bleed records.
Well done fellas your central banking buddies are proud of you!
So why stop the QE for Wall Street party? – it rocks!
Good question and one that is asked over many a cocktail and fine vintage in the throbbing hot spots favored by the FIRE sector.
The problem is that QE for Wall Street eventually kills its host because at some point even the demand (from all but the most risk taking folk) for near ZIRP debt starts to dry up and the absence of real demand in the broader economy (due to a lack of income and an unwillingness by the general public to swallow anymore ‘bait rate’ debt), bunches of unemployed or under employed people and closed shopfronts becomes a political problem – that even the spin cycle, circuses and the soap opera of drama queen politicians cannot deflect.
The best sign of the impending death of the host economy is the increasingly more shrill talk about ‘confidence’ or ‘animal spirits’ by Central Bankers, politicians and the usual gaggle of economic commentators who are either clueless or thoroughly impregnated with a particular neo-liberal view of the world after a career of reading banking sector press releases and advertorials.
No amount of “have a go” talk by economic “good times” fluffers like Mr Hockey is any substitute for cash in the wallets of the general population.
QE for Wall Street as done little for Japan over 20 years beyond hold the line, has required a mountain of debt for a feeble and failing recovery in the United States and Europe is still the sick man of Europe.
It is one thing to flog the Greeks, Cypriots, Portuguese, Spanish, Irish, Icelanders…. etc as suffering from some moral stain and being the authors of their own demise but eventually some bright young politicians or political parties will realise that there are lots of potential votes in calling for an end to QE for Wall Street and instead start trying something novel like QE for the People – i.e. getting money into the pockets of people who can use the money to spend or pay down the debts clocked up under the “bait rate” model inherent in the QE for Wall Street model.
Once those ‘radicals’ get enough people to understand that the slow growth, threatening deflation, idle economic capacity and rising unemployment has got nothing to do with aging demographics or sex robots and everything to do with an economic model that outsourced management of the money supply and economy to the debt issuing decisions of the private banks, the politics for reform are likely to advance quickly.
QE for the People – in all shapes and sizes
QE for the People is an idea that comes in many shapes and sizes and often fans spend too much time debating the differences between them rather than gulf between them and the current broken model.
What they all have in common is the idea that if you want to ensure an economy is running at its potential the important thing is to get the means of mobilising economic resources ‘money’ into the right hands – household or government – rather than rich speculators and simply hope that the crumbs from their rising asset wealth manages to keep everyone busy waiting their tables, shining their shoes or handling their asset transfer transactions and asset maintenance requirements.
A common feature of several of the forms of QE for the People is that the creation of money will no longer be primarily limited to private banks issuing debt with a trailing commission attached. By returning the creation of money into public hands and getting the debt free newly created money into the economy via a fiscal deficit generated by lower taxes or government spending, the bottleneck of relying on private banks creating money by issuing debt is removed.
Huh so what is this QE for Debtors thing?
QE for Debtors is a mutant bank approved form of QE for the People.
The banks or more accurately the neo-liberal ideologues who think a monetary system running on debt issued by the private banking sector is the highest form of economic management will never tolerate QE for the People in its pure form.
The idea that resource allocation decision making might be shifted primarily to households and government is bad enough – it simply reeks of democracy.
The possibility that banks might become little more than financial intermediaries between savers and borrowers feels them with dread. They will fight tooth and nail to stop it and as they are currently making squillions from running the current economic model and drenching the world in bull dust as to its compliance with laws of nature, you can be sure that they will spend billions in protesting any serious change.
However, as noted above the bank run QE for Wall Street model must be modified because it is slowly but steadily killing its host economies around the world. So modifications to QE for Wall Street will be proposed by the banks and their buddies eventually but they will be highly selective.
The most likely modification that the neo-liberal / private bank / private debt centric ideologues will be willing to tolerate is some highly limited and targeted forms of QE for the People which is essentially limited to providing people with assistance paying their bank created debts.
In a sense we are already seeing this with the constant encouragement to Central Banks to cut interest rates as lower “bait rates” help keep debtors afloat and the demand for the products of Debt Merchants alive.
From the bankers / neo-liberal perspective the only real problem with the current model is that people are having problems paying their bank debts and are resistant to taking on new debts.
So if they are ever willing to talk about fiscal deficits being a good thing and any money being handed over to little people you can be sure it will only be on the strict condition that it is used to pay interest owing and to restore the capacity of an individual to take on fresh debt.
Is it that hard to imagine bank approved government policies along the following lines:
- Debt Forgiveness – let Joe pay off 10% or more of your debt for you!
- Interest deduct-ability that exceeds 100% – for each dollar of interest you pay you can claim a 105% or more deduction – this should get the demand for debt products moving.
When finally QE for Wall Street runs out of gas and the talk of QE for the People gets louder and louder and impossible to ignore pay very close attention to anything bank economists or their pals in the mainstream media have to say because it is likely to amount to some form of QE for Debtors as a substitute for a real program of QE for the People.
The point of all of this is to ensure retail interest rates don’t rise. Once you consider whatever steps are required to keep cheap debt cheap, you will be able to predict their next step.
You see, if interest rates rise, the banks know that it is over. The people who were tricked into taking on all that fake debt money created by the banks (instead of actual money created by collecting raw resources, manufacturing, and trade) cannot afford an interest rate rise. At all. Significant interest rate rises would mean widespread defaults, and soon after that the end of the banks.
The interest is the unfortunate mechanism by which the banks stay alive, it is also the unfortunate mechanism that keeps nonproductive debt (debt that isn’t used to increase resource collection/manufacturing/trade’s capacity) from being able to go to infinity and beyond. It is an inbuilt governing mechanism that the banks are really wishing would go away right about now.
But it can’t, and never can.
The unfortunate thing about interest is that it is the fundamental lifeblood of the banks and they can’t get rid of it. They also can’t make it zero, or less than zero – at least for the people who own their debt and pay the interest. They can make it zero and less than zero for trading debt amongst themselves, no problems, and that’s QE, so long as the debt that’s traded eventually is given to some unsuspecting rube to pay the interest on it.
So yes, I think you have got it, but I find your writing style hard to follow sometimes.
But I don’t agree that QE for the people is a thing. It would mean that the banks are directly repaying their own interest, and that isn’t going to happen. Maybe a UBI – governments borrow money from banks and then give it to the people so they can take on more debt and/or pay the interest on their existing debt…
This is probably what will happen next in my opinion. It won’t fix anything, but it will allow the banks to exist for a while longer. Governments have a large debt capacity, and they can print money to pay the interest. All good.
The next step in this journey will be the governments insisting that the last couple of decades where they tried to reduce debt and gain a surplus was just wrong and misguided, and sensible governments love debt.
What this does is increases the amount of slack in the debt market. What people are scared about is the size of the debt and the sensitivity to interest rates not necessarily the monthly payment (i.e they are concerned about risk hence they don’t want more debt).
QE for the people works on the principal side of mortgage affordability not on the interest rate side meaning you can more money for the same risk level. It will reward debtors massively; something that CAD countries would love for sure.
Not sure what you mean by ‘slack in the debt market’ – do you mean a declining demand for debt?
If so, I agree that certainly appears to be the case and is the reason why the RBA has been dropping the target rate and why APRA has been so willing to allow banks to borrow off shore from ZIRP/NIRP environment lenders.
To keep credit growth positive they have been forced to keep cutting the price of debt. Their power to control credit creation can be seen in how APRA seems to have been quite active in the last few months clamping on the supply of credit to the housing market – especially to investors. The sudden slow down in capital flows from China has probably caught them a little by surprise and they may be worried that the slow down is now overdone.
Even though borrowers tend to focus on the monthly repayments and thus are willing to borrow more if the rates are lower as the loan size gets larger and larger they require more and more inducement to enter the loan contract. In other words the credit growth from a given rate cut starts to decline as borrowers start to get twitchy as the size of the principal gets ever larger.
Considering how low mortgage rates are credit growth should be off the charts but it isn’t and that says something. Even though mortgage rates are getting close to zero the demand for debt is struggling.
Probably the only thing that is keeping it going in Australia is the lack of a recession for over 20 years and the belief amongst most Australians and policy makers that we are different. If that mindset was to shift to a more gloomy one the impact on the demand for credit could be quick. Once the consumer of debt lose their taste for it – they could lose it for a lifetime. The depression era generation were suspicious of debt for the rest of their lives.
Whether QE for the People helps existing debtors or not really depends on what form it takes.
As i note above I think there is a very real risk that the banking sector will argue long and hard that any QE for People should be targeted to helping people meet their Bank debt obligations.
A bit like Kellogg’s asking that food stamps can only be redeemed for coco pops.
But if it does take a very narrow form like that it is unlikely to do much for the general level of economic activity anyway.
The only thing that is going to make a difference is getting more money into more wallets but that is hardly the objective of the neo-liberal vision splendid.
That is the main reason so little has happened since the GFC – the ruling ideology simply cannot accept it is wrong and is heading in the wrong direction.
As we can see from Japan – that ideology can be very stubborn. The BOJ has resisted any attempts to get more money into wallets for over 20 years. Incredible.
Change probably has to come from the USA which has a proud history of doing exactly the opposite of what it recommends everyone else should do.
So what would a legitimate QE for the people look like?
It could take many forms but one approach might be as follows.
Increase the tax free threshold so that more income is left in the hands of those who are working. An increase in the income support payments of those not working may also be appropriate. I think both are better than simply posting ‘cash splash cheques’.
Spending by govt on projects where benefits exceed costs may also be warranted as they will help ensure that more people are employed and thus benefit via the higher tax free threshold than via income support payments.
At the same time restrict the inflow of unproductive capital to the economy in the form of the big 4 banks using wholesale loans from off shore parties to support mortgages and govt selling bonds offshore. This will result in some upward pressure on interest rates without the RBA actually changing the target rate. Those slightly higher rates will encourage those with debts to deleverage. The RBA can fine tune this with the target rate. It will also put downward pressure on the exchange rate as the demand for $AUS from unproductive capital is restricted – this will help remove the effective tarriff on Australian industry and workers due to unproductive capital inflows from currency manipulating trade rivals and allow export and import competiting sectors to recover.
The goal is to offset the contraction in the money supply due to deleveraging due to the higher rates with injections to the money supply of debt free money in a broad based and equitable manner. Naturally, the process must be conducted carefully as inflation will be a limiting factor.
Where will the govt get debt free money? By issuing non-transferrable zero interest rate securities to the RBA who in return will make some credit entries in the Treasury exchange settlement account.
If one wanted to make a start on ending endogenous manner creation by the private banks also reintroduce reserve ratios and slowly start increasing them.
The positive/soveriegn money proposals are all variations on this general theme though the specifics vary.
The important thing is to get this debate moving so we end the tendency where public policy is directed only to policies that keep debtors afloat and the value of the assets securing their debts inflated. The objective should be to encourage the deleveraging of households back to a more healthy levels – circa 30% of disposable income.
QE for Debtors would be yet another “debt life support” policy as it would limit the use of ‘debt free’ money to helping debtors pay the banks interest trailing commissions and principle. Sounds crazy I know but think how many policies and the aporoach of the RBA are currently directed to supporting the business model of the private banks rather than the economy directly.
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