Will 2015 be the year of the Great Payback?
Abraham Lincoln once famously said you can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.
For the past 5-6 years, many have been fooled into thinking that indiscriminate and unlimited money printing is the answer to inflating collapsing economies (notwithstanding Japan's failure on this count for more than 20 years) but I worry that this cannot last for much longer. In a recent Hock Lock Siew article I wondered whether 2015 would be the year of The Great Payback, when markets that have grown overly complacent about risk finally pay the price for this complacency. In my view, it is a very real possibility and cannot be lightly dismissed.
Wall Street has enjoyed a tremendous run, thanks mainly to the Fed's massive liquidity injections which started with TARP and ended with QE. In between the money printing took on many guises - TAF (term auction facility), PDCF (primary dealer credit facility), CPFF (commercial paper funding facility) and so on, but they essentially had the same aim, namely to a) ensure the system had sufficient liquidity to continue functioning and as a result, b) to propel the stock market up in the hope that a rising market would eventually take the economy up with it. That US equities have risen is undoubted - it seems like every other day that we hear of the Dow or S&P 500 closing at a new high. But has the economy really improved and if it has, can it really be attributed to the Fed's expanding of its balance sheet to more than US$3 trillion? In my opinion it cannot - if reviving stalled economies could so easily be accomplished by printing money and handing it to the financial sector via buying bonds, then it suggests to me that all countries that hit an economic wall need to do is print their way out of trouble. And if it doesn't work the first time, just keep doing it until the numbers improve. So if $500 b isn't enough, then no problem here's another $500b. Can it really be so simple?
Would the endgame come when interest rates, already artificially depressed for many years, start to rise thus prompting a collapse in bond prices? Can the Fed simply abosrb these losses, shrug their shoulders and move on?