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September 17, 2013

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Home » Opinion » Foreign Views

US Fed-manufactured GDP growth not sustainable

By Shawn A. Mesaros | September 17, 2013, Tuesday | Print Edition

THE United States has made a huge mistake predicting the end of quantitative easing (QE).

First of all, the QE was not set for a specific end date, and given all of the “manufactured GDP growth” that occurred specifically through the credit creation mechanism, the growth created was and is in no way sustainable. 

Given the fact that most of the debt came in the form of mortgage loans to drive home prices higher and then to allow cheap car loans and then student loans... these are all very low, long-term contributors to sustainable productivity.

Cars are a deadweight loss as they don’t create productivity in a system that has too many cars and these same cars depreciate so quickly that they become a large capital loss immediately after being purchased.

Mortgages that are artificially low only drive returns for a select few people who buy and flip properties which again, benefits a select few people who are not part of any broader class of less entitled people. 

Mortgages at low rates that drive housing prices higher only in turn drives rental costs higher and furthermore, on a backdrop of increasing unemployment, common middle class citizens don’t get to buy cheap houses during a housing bust.

BlackRock and Och Ziff hedge funds go in, buy up thousands of low-priced houses with free money from the government, drive prices up, and middle class Americans are the last people to slowly save money, put a sizeable down payment on a house, and buy the house with money that was allowed to bear a reasonable interest rate from their accumulated cash savings. 

The wealthy invested in hedge funds that bought residential real estate and commercial property during the bust.

Bernanke famously said: “Middle class Americans are buying lots of cars” — aka middle class Americans are buying wasting assets that have zero residual value, while the wealthiest Americans are acquiring (real property) assets that possess, relatively speaking, permanent value.

Finally, student loans at 0 percent have been largely responsible for the tuition inflation at America’s finest colleges.

Aside from the abuses in this system, add the fact that over 25 percent of the trillion in student loans are in default.

We note that the fact remains that repayment of these loans actually destroys capital since that capital isn’t in circulation anymore, so the student loan debt as spent for tuition is also not more than a passing contributor to GDP growth.

Thankfully, with a rapidly rising quantity of renminbi or yuan swaps with other developed countries, yuan-based foreign trade is becoming commonplace in China.

This makes China less dependent on foreign direct investment to thrive.

Given the sad state of affairs in America, and the recent statistic that food stamp usage just hit another historic high, with US unemployment also hitting another high, we can see that the credit growth in America cannot actually mask the rot from within.

The Bernanke-Krugman solution to the financial crisis left America US$5 trillions more in debt, without any improvement in food stamps or unemployment. It also left the United States out of borrowing capacity.

Since pre-announcing the end of QE or “the taper,” we have seen the yield of 10-year US debt rise by 50 percent. The world is already vividly aware of who the buyer of last resort has been for American debt.

The world watches to see who is willing to fill the shoes of an unlimited purchase mechanism called the Federal Reserve.

Between Japan, which is buying US$100 billion a month with its own Japanese kamikaze financial experiment, and Europe whose marks are imploding even as technocrats are calling “recovery,” the only buyers left who possess sovereignty are Russia and China.

The author is managing director of Pacific Asset Management. Shanghai Daily condensed the article.

 

Foreign Views


 

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