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The biggest magic trick ever played on all of us

Herve Utheza

I am not an economist, but I call for them to look at my data, rebuke it, and maybe improve it.

I am a business executive with, I hope, some common sense.

I want to write today about what I see as the biggest magic trick played on all of us by the US Federal Central Bank... and now the European Central Bank (BCE, or ECB).

Maybe it's a good trick, after all, which has propped us all over, and avoided a catastrophic collapse of the world's economy, after the 2008 bank failures and the sub-prime crisis.

My argument is simple.

Quantitative Easing ("QE") is a currency devaluation which does not say its name.

QE is a program which was started in 2008 to basically help the balance sheets of the banks, by replacing, through a set of accounting entries by the Fed, monetary and debt instruments by "cash". This article here explains it well, in somewhat simple terms.

However, and this is the key to my argument, the Fed did not have "cash" attached to gold. It simply created "cash" line items in their books by "buying" Treasury instruments with money it did not have, but could create because of who they are.

My argument is that QE is basically adding to the monetary mass, thus devaluing the Dollar currency.

In the past, devaluations were a hard pill to swallow, because the emotional impact on the public was known. People's assets, purchasing power were hurt. Demand would be hurt. More importantly, public policies, politicians, would be affected by this "penalty", the plague of the last century, which would lead to social unrest and riots in the streets.

The magic of QE is that we have been devaluing the dollar, and thus the world's assets, without integrating the emotional consequence and pain of doing so.

By how much have we increased the US monetary mass?

By this much:

Now, are you still with me?

Let's now look at the parallel evolution of the stock market, and the monetary mass changes, all mapped to their levels of January 1st, 2008. To track the stock market, I look at three indices: the Down Jones Industrial, the NYSE, and the Nasdaq, and compare them to the monetary mass equivalent devaluation coefficient, all indexed at 1-1-2008.

As one can see, the stock market started going down by 30% to 40%, scaring investors and the public authorities. QE1 was put in place, and its effects soon take hold, helping the stock market recover from the collapse.

Crisis averted.

But by now, the banks and financial institutions had understood they could replace "treasury notes" by actual cash holdings. And they were hooked.

Note how Q2 helps a bit... and when it stops, the stock markets fall again.

But the stock markets recover on their own, after the end of QE2.

And yet, QE3/4 were put in place, and continue to this day.

Were QE3/4 really needed? I posit not.

However, their continued effect means that the true value of the currency continued to devalue. If we multiply the average of the 3 stock market indicators by the monetary mass growth as an indicator of the currency devaluation, below is the real performance of the stock market since 2008: "only" 40% average growth in equivalent currency value from the 1-1-2008 levels, instead of an "optical" gain of 20% (NYSE), 40% (Dow Jones) and 100% (Nasdaq).

And that is what the Fed and the central banks do not want the consumers to see, or realize. We have diluted asset values, in equivalent 2008 levels, by a huge percentage. 80% to be exact.

The Fed, and QE, have thus fabricated an artificial consumer sentiment that "things are returning to normal", just to keep us buying.

The sense that the stock market is going up greatly again is a complete mirage.

People know it in their bones: they do not see their purchasing power increase... they sense it's decreasing... and they're right.

This is the source of a major, extremely dangerous "divorce" between the public and the elected officials. Until someone will stand to explain all this, and be a statesman (or stateswoman), the politicians will continue "pretending" that their policies will have effects.

When in fact, the Fed and the ECB are the true guides of the world's economy.

To put a final sharper pencil on the picture, I compare the US GDP growth and the US monetary mass since 1970.

One can argue that the controlled monetary mass rise was supporting a transition from an industrial society to a services society, with more financial instruments supporting this transition.

But 2008 marks a departure. Mind you, I do not argue that QE1 was not needed, or a clever way to stop a catastrophic collapse of the stock market.

But I argue that the politicians and consumers, who cannot understand what QE is really about, got fooled by the financial world, who got hooked on QE.

I argue that when the US GDP is multiplied by "only" 3.4 since 1970, the monetary mass should not be multiplied by 64.

Alas, the ECB has started following suit since January 2015, which immediately caused the slide of the Euro by 20% to 30%, a devaluation which does not say its name.

I feel that our large economies are now in a silent race to the bottom, in terms of asset devaluations... with the currency markets and fluctuations just representing how much faster we're all sliding down the slippery slope.

Three questions remain:

- what is at the bottom of the slippery slope and are we at the brink of the collapse of another financial institution, artificially propped up by QE, with no realistic grounding in true financial performance, with the risk of a snowball effect ? 

- what could consumers do to put pressure on the politicians to force the regulator to rethink their strategy? Do they even understand this enough to have this power?

- who will be the winner in this picture? China? Or will there just be losers?

I look forward to your comments, refinements, challenges, and answers to those three questions.