The latest symptom of this liquidity dependency was visible in a CNBC-interview where Edward Yardeni was talking about being a long term bull, encouraged by the no-limit bond buying by the FED. This further shows the naive perspective of big traders on Wall Street. The Golden Investor emphasizes, quantitative easing is a temporary measure and should be used on a Keynesian way in order to be effective and sustainable on the long term. The current trend of unlimited central bank stimulus further shows that all limits are artificial and QE was never meant to function as temporary measure. The FED balance sheet will surpass the ten trillion dollars soon and they are far from over buying-up financial debt from non-viable companies. Traders act like unlimited FED stimulus is a good thing, the big mistake Edward Yardeni makes is that QE is a temporary measure and when used long term is a danger bigger than the current COVID-19 outbreak for financial markets. Mistrust in currencies is something we should be more worried about. When faith in a currency is gone, we are even further away from home.
All the money pumped into the economy has flowed into financial markets, real estate and bank reserves, but central banks still continue with this inequalizing habit. Around 70-80 percent of the US-economy is driven by consumers, the same consumers who are financially scattered to pieces by the current lockdown measures and extreme lay-offs. Unemployment is already higher than during the last financial crisis in 2008-2009. Lets not forget that after lockdown measures will be lifted we will still have to wait for a vaccine before this corona limited society can function normally again. In other words, we won’t see a V-shaped recovery and neither a U-shaped recovering economy in the near future. We will face a socially distant economy for at least several months if not longer. So all the burdens caused by the current full lockdowns are permanent and won’t be soothed by the opening of countries. The global economy will face limited growth due to the remaining viral threat. Combined with the following debt crisis this will evolve in a great recession, which will be bigger than ever due to the misuse of QE-measures in recent decades.
The broken glass fallacy is perfect metaphor for the current market situation. When someone breaks his window, he will pay the glass-repairman to repair his window which will stimulate his business. But the same amount used for repairing the window won’t be spent on something else, moreover the breaking of the glass has led to a loss in overall welfare. By pumping an unlimited and infinite money into the financial system we are not boosting the real economy, we’re rather breaking it. Just like breaking windows doesn’t boost the local economy this pumping won’t heal the real market, it helps financial markets on the short term. But on the long term we will face the consequences and all this postponement of economic malaise will evolve in a huge debt crisis. By then even the glass repairman will default and nothing will be able to help his business, not even breaking windows. The current #QE4EVER-trend is one for the history books and should be history, but for now we stay living with this “silent” threat breaking the windows of our financial system. The financial markets are addicted to quantitative easing, and even though rehab is hard, an overdose should be prevented.
Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.