Upping the Ante Again

What’s the sound of desperation?

The whirring of a printing press.

When the global financial systems melted down in the U.S. and Europe in late 2008, central banks produced the strongest short-term printing of money in history. They did it to keep the banking and financial systems liquid. No one wanted to see a meltdown like in the early 1930s.

When U.S. growth slowed again in late 2010, the Fed cranked up the printing press for QE2.

When rising bond yields in Greece, Portugal, Spain and Italy threatened the euro in late 2011 and early 2012, Mario Draghi of the European Central Bank (ECB) followed suit.

Remember his infamous “I will do whatever it takes to save the euro, and believe me, it will be enough” comment?

The ECB committed to a $1.3 trillion money printing program to cover all the European banks’ losses until 2015. More importantly, Draghi threatened to shoot down any traders that tried to short southern European government bonds.

Do you know what you should have done when you heard this… what you should do if you ever hear anything similar?

You should take your shotgun shells and canned food, and run for the hills!

Central Bank actions the world over are signs of desperation, not “new enlightened Fed policies” as Ron Insana said to me once while we debated with Maria Bartiroma on CNBC.

In fact, such actions are counter-productive, as the Bank of International Settlements (BIS) in Switzerland said recently in a statement. It was such a breath of fresh air to hear some sound thinking in an irrational world that I did a special issue of Survive & Prosper for you yesterday. If you missed my call, listen now.

As the BIS pointed out in its statement, and as we’ve been saying for years, just like any other act of desperation, quantitative easing could never be a long-term solution. It’s more like a couple of Band Aids over an amputated arm.

When the U.S. economy weakened for a third time in mid-2012, the Fed announced QE3. A couple of months later, it tacked on QEternity. Just like the ECB’s stimulus efforts, each new money-printing program has begun to have less impact…

Europe’s in recession.

The U.S. has stagnated.

And Japan’s a hot potato.

In fact, the latter is fresh proof that loose monetary policies do more harm than good because they prevent the winter economic season from running its course.

Japan’s prime minister, Shinzo Abe, and his cronies at the Bank of Japan, decided it was a good idea to triple their QE3 program in an attempt to jump start inflation and spending again.

Really?

The economy’s been in a coma for 23-years now. Trying an insane money printing trick at this stage in the game is like using a defibrillator, on maximum setting, to restart the heart of a man who’s been dead for 24 hours.

All you’ll achieve is wasted resources, the increased risk of the corruption of your expensive apparatus, and the slight smell of burned flesh.

Desperation.

Now China has come up with its latest new “ante up…” going bigger than the U.S. and Europe… bigger even than Japan.

It has already overbuilt its infrastructures, housing and industrial capacity for over a decade. Now it is going to double down with a policy to move 250 million people from farms to high rises in more urban areas in the next 12 years!

China has already used much more government investment to spur its economy and infrastructures than any emerging country in history. I don’t deny that such investment is absolutely necessary, up to a point. But China is so well beyond that point; it’s in an entirely new universe.

Emerging countries in Southeast Asia did half as much, for half as long, and they still saw a major bubble burst between 1997 and 2002.

We know why China’s doing it. And honestly, the theory here is great…

If the world economy were to grow as fast as in the past decades, moving people from rural to urban areas, which tends to double or triple their incomes and spending, is genius. Even more so for a country whose demographic trends are slowing.

China also knows it can’t rely on ever-growing exports, which currently drive more than 35% of its economic growth. It knows it needs to convert rural people into urban spenders to create a more local, consumption-driven economy.

Like I said, that’s great in theory.

But the world’s economy’s not going to grow at the same rate it has in the recent past. China won’t have the luxury of a continued export boom, which it needs so it can make that transition over the next 12 years.

China’s economy and exports are already slowing and we see a much greater crisis and crash ahead, by early 2014 at the latest.

This is a Very Bad Bet

China’s making a mistake.

It is taking self-sufficient, albeit low earning and consuming people, off their farms… then paying them a short-term stipend so it can tear down those farms and build new high rises for those newly displaced people to live in.

In the short term, that will create construction-related employment for some of those people. But what happens after that?

If the global economy and China’s exports don’t continue to grow – as we forecast they won’t – the country will end up with even more low-skilled, rural-migrant workers sitting in cramped high rises with no way to make a living.

And those people are going to be more pissed than ever when they realize the government took away their only means of supporting themselves – their land and farms!

Would you want to be in China when the greatest government-driven bubble in history collapses?

Imagine the level of civil unrest there’ll be when hundreds of millions of migrant workers, unemployed, angry, and without the minimal entitlement benefits and job security that longer city dwellers have, take to the streets.

How will the richest Chinese that control 60% of consumer spending fare when real estate collapses, as they own almost all of it?

How will the global economy do when the final leg of the global table collapses in China?

Holy crap! Things could get even worse than we’re forecasting.

Keep listening to us, not the mainstream puppets of denial.

Harry

 

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In our new infographic What Killed the Middle Class?, we take a look at some shocking numbers to show how bad it’s become and what has been fueling this middle-class revolt.

 

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Categories: Markets

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.