The Day QE2 Ended
Americans had something to celebrate this Independence Day. QE2 – the Feds’ $600 billion money-printing program – ended on Friday. And guess what? The world didn’t end with it.
Instead, the stock market gave a loud ‘yahoo!’ The Dow rose 168 points. If QE2 is going to be the death of the US economy, the stock market doesn’t see it.
Not that stock market investors always have 20/20 vision. These were the same people who were buying Lehman Bros. and mortgage lenders stock just before the company collapsed.
So, we’re not saying that today’s prices will necessarily be the same as tomorrow’s. The market may know the price of everything at every moment. But it doesn’t know the value. So, as it discovers value, it changes its mind about the price.
Still, we find it mildly disturbing that the Fed can cut off a $100 million-a-month buying program without upsetting investors’ sangfroid. It doesn’t make us wonder about the Fed…but about investors. What’s wrong with them?
But since it was a national holiday, we decided not to worry about it.
Instead, we’d spared a little pity for the US Senate. The poor senators decided to stay in session this 4th of July. They thought it was important to pretend to solve the US debt crisis.
As you know, from the day of its founding – that is, July 4th, 1776 – to the present day, the feds have run up approximately $14.3 trillion of official national debt. And since Congress has only authorized $14.3 trillion of debt, they’re running into a problem. Either they pass a new law, raising the debt ceiling. Or they cut spending so they don’t have to borrow more money. Or, they treat the debt ceiling law like the US constitution, and simply ignore it.
We know which choice we would make. But nobody asked our opinion, so we’ll keep it to ourselves.
The debt ceiling is distraction. It’s just an American nuance to a genuine problem that is plaguing all the mature democratic/capitalistic economies. Greece, Britain, Ireland…dozens of other countries…and the US.
As regular readers of this Daily Reckoning know, It is a problem with the funding of the modern social welfare state…and the ‘social contract’ itself. The bargain is this:
The people give up 20% to 50% of their output…and sometimes, their lives…to their government.
In return, the government promises to make their lives better than they would be otherwise.
But how can the feds make the common citizen’s life better? If it gives them back in services only as much as they’ve paid in taxes, what’s the point? In fact, the government can’t even do that. It is a poor capital allocator. And there’s a huge amount of inefficiency and friction in the system. So, the government spends money unwisely. It gets a poor return. If people get half of what they pay for it will be a miracle.
When the system was first invented, in the 19th century, it worked well enough. GDP growth rates were high. Old people, regulations and government-provided services were few.
But as the system matured, over 150 years, it became zombified. That is, the friction, misallocation of resources, fixed costs, old people and parasites increased. The feds spent more and more. People got less and less for it. They didn’t want to raise taxes…because the voters would feel they weren’t getting their money’s worth. But the voters still wanted more and more ‘services.’ So, from approximately the end of the “30 glorious years” following WWII…in about 1980…to the present, the government was only able to expand services by borrowing.
And now, borrowing is becoming a problem. Wise…or lucky…countries such as Greece and Britain (not necessarily in that order) are now being forced to cut back. Either because they can’t borrow now…or they fear they won’t be able to do so in the future. Naturally, the zombies don’t like it. They’ve taken to the streets in Athens as well as London.
In London, the schoolteachers “interrupted” services all across England last week. In Greece, they didn’t even have to strike; they weren’t supplying much service anyway.
Where will this lead? We don’t know. But it’s a serious question. And we don’t think about serious questions on a national holiday. Besides, it’s probably against the law.