Keeping the Economy Alive with QE and Cheap Credit

I think it’s very useful to think of the global economy as a big raft, but instead of being inflated with air, this raft is being inflated with credit. And on top of the raft you would have all of the asset classes; stocks, bonds, commodities (including gold), plus you have the world’s population of 7 billion people.

The problem is the raft is now fundamentally defective; it is full of holes and the credit keeps leaking out the holes. Well, the natural tendency of the raft now is to sink and when it starts to sink, the stocks go down and the property goes down and the commodities go down and gold goes down and people start to get their feet wet. And the policy makers understand rightly that if the raft sinks it’s not going to be a matter of simply a stock market crash, people are going to die as they did in the 1930s.

And so there’s only one possible policy response and that’s to pump in more credit and that’s what they’re doing through the large budgets and through the Fiat money creation, quantitative easing. And when they do that, the raft reflates and all the asset prices move up together and the people, once again, have their dry feet and they’re happy.

But then once they stop with the quantitative easing, with the liquidity injection, the credit starts leaking out the sides again and the raft starts to sink and so they have to repeat quantitative easing.

We’ve had QE1, QE2, QE3; when QE3 stops, we’ll have QE4 and probably QE5. Now the reason why the raft is fundamentally defective is because at this stage of creditism, so much credit has been created globally that the income of the 7 billion on earth, at least as it’s currently divided, is not adequate to continue paying interest on all of the debt that they have borrowed and so they keep defaulting.

Whether it’s in Ireland, or Greece or the subprime disaster here, the banks in Japan suing the banks in China, someone defaults and the credit leaks out and the raft starts to sink and the only way to respond to this is by pumping in more credit and that’s why we’re on government life support.

Take away the government life support and the world as you know it won’t be here.

The Daily Reckoning