Not Again

Yes, again. It is clear we are in yet another liquidity-induced bubble, as the ECB expands its balance sheet – prints money – which promptly finds its way across the pond and into US markets. The ECB’s balance sheet is now proportionately larger than the Fed’s as Draghi follows Bernanke and the BoJ into the liquidity trap that John Hussman has so well described.

These interest-rate strategies are slowly strangling the world economy.

The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years. And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.

Which analysis doesn’t even take into account the distortions caused by massive speculative inventories of commodities held against the specter of inflation, but paradoxically deflationary in effect, by reducing end user demand and therefore employment and growth.

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