Everett Dirksen was a Republican politician from Illinois who served in both houses of Congress from 1933 to 1969. He was the Senate Minority Leader from 1959 to 1969. He helped write and pass the Civil Rights Act of 1964 and the Civil Rights Act of 1968. This man was a professional politician and a conservative, who recognized that the government’s spending habits were turning into a compulsive disorder. Dirksen is quoted as having said, “A billion here, a billion there, pretty soon, you’re talking real money.” Although there is no direct record of the remark, he is believed to have made it during an appearance on The Tonight Show Starring Johnny Carson.
In today’s world, this observation needs to be amended to, “A trillion here, a trillion there, pretty soon, you’re talking real money.” That’s the kind of money that fiscal and monetary authorities around the world have been spending to keep the world turning. It certainly has been spinning the heads of conservatively inclined people, like me. However, as I often have observed, in our business we can’t afford to be preachers. We don’t do right vs. wrong. We do bullish vs. bearish. So far, the policy-making trillionaires have been wildly bullish for asset prices. They’ve been able to be so because powerful structural forces have been keeping a lid on price inflation, so much of their trillion dollars in spending has gone into asset inflation.
Yet it is somewhat disconcerting to see that despite everything they’ve done to boost economic growth, which was presumably their main goal, the policy-making trillionaires haven’t delivered as much bang per buck, euro, yen, and yuan as was expected.
Consider the following:
(1) Trillions of yuan. In China, bank loans have quadrupled from $4.4 trillion at the end of 2008 to a record $17.5 trillion during August (Fig. 1). By comparison, US commercial bank loans increased $2.1 trillion to a record $9.3 trillion over this same period. On a 12-month basis, Chinese bank loans are up $2.0 trillion through August, the fastest pace on record (Fig. 2).
How well did all that cash stimulate China’s economy? Not so well. Since the end of 2008, Chinese bank loans rose 284%, while industrial production rose 126%. The ratio of loans to production, which had been relatively stable around 100 from 2000-2008, soared to 174 during August (Fig. 3). The y/y growth rate of industrial production declined from just over 20% during early 2010 to roughly a third as much this year (Fig. 4).
(2) Trillions of dollars. Here in the USA, the federal government’s spending rose to a record $4.0 trillion over the past year through the end of Q2-2017 (Fig. 5). That’s according to the US Treasury’s data. According to the Bureau of Economic Analysis, federal government spending on goods and services, which is included in nominal GDP, has been flat around $1.3 trillion since 2010! The difference between the two is federal government spending on entitlements, i.e., on redistributing income. It rose to a record $2.8 trillion over the four quarters through mid-2017. Outlays on income redistribution now account for a record 70% of total government spending (Fig. 6).
How well did that work out? Not so well. Real GDP has been lumbering along at a y/y growth rate of about 2% since mid-2010. In the past, this pace was called the “stall speed” because the economy always fell into a recession after growth had slowed to it (Fig. 7).
(3) Trillions of high-powered money. The three major central banks have weighed in with their trillion-dollar QE programs. During August, the balance-sheet assets of the ECB, BOJ, and Fed were all at record highs, of $5.1 trillion, $4.7 trillion, and $4.4 trillion (Fig. 8). That added up to a record $14.1 trillion, up 249.5%, or $10.1 trillion, since August 2008 (Fig. 9).
They’ve succeeded in stimulating subpar growth in the US, Europe, and Japan. So far, they’ve averted another financial crisis. They’ve been frustrated in their goal of boosting their inflation rates to their targets of 2.0%. The core CPI inflation rate for the G7 industrial economies has been below that target and hovering around 1.5% since late 2011 (Fig. 10).
Debbie and I find it hard to view this “miss” as a serious problem. However, the central bankers view it as such. They are mostly maintaining their ultra-easy monetary policy, although there is increasing evidence that their economies don’t need it. The main beneficiary of all this monetary largess continues to be financial markets. The All Country World MSCI (in US dollars) continues to soar into record-high territory (Fig. 11).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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