Tapped Out

Lisa Simpson, "What happened?"
Homer Simpson, "Difficult to say sweetie.  The town blew up, I built our house and you showed up.  All we know for sure is, I'm completely blameless."  
An excerpt from the video game Tapped Out featuring the Simpson's television show characters in which Homer has just blown the town up through his negligence at the nuclear power plant.

Reading about the EUs next attempt to stimulate by printing more money and the Federal Reserve's discussion on possibly moving to negative interest rates it seems that the central bankers of the world are rapidly becoming tapped out.

Looking at Japan it seems that they are finally reaching their breaking point as more monetary stimulus is having no impact other than to make the world start to wonder if they will ever be able to pay back their current debt.  The loss of confidence is not only affecting their currency but is also having a negative impact on their consumers and this is feeding into negative consumption reports.  China too is having limited success mainly due to the fact that large swathes of money that is being forced into the economy is ending up with deadbeat state run companies.

As I have repeatedly written about in this blog, debt does not solve a world's economic woes.  Taking on debt is at best a short term solution that should be used in cases where budgets are temporarily unbalanced or to put a stop gap under a financial crisis but it is not a long term solution.  Piling ever more debt onto an already massive pile does nothing other than sink the economy.  When that economy is large like the United States, it takes a lot of debt weight to sink it however, when it is small like Zimbabwe it does not take much.

One way that countries escape from this burden is to let their currency devalue and this creates opportunities to grow through exports however it also has the effect of creating inflation as global goods like oil become more expensive.  This inflation makes the overall debt level become more manageable assuming that the debt is based in the local currency and not in dollars.  For countries with debt based in dollars this depreciation can be the final death knell as has been witnessed in some South American economies but in developed nations currency depreciation is frequently used.

One way to depreciate a currency is to lower interest rates.  The result of this is that investors leave the country and move their money to countries where currency appreciation is expected along with higher interest rates.  So lowering your interest rate below zero should therefore do the trick however even this is not working as everyone is now playing that game at the expense of savers and investors the world around.  The idea that negative interest rates will stimulate by forcing investors to make their money work or by channeling debt to companies so that they can grow is not having any impact as companies and consumers are either already awash with debt, cannot obtain it or have no place to invest it; so adding more debt is never going to have the impact that the Federal reserve thinks it will.

So if lowering interest rates is not working and adding debt has not worked essentially the world is rapidly waking up to the fact that the central bankers of the world are tapped out.  And while the markets rallied today on the back of the US's stimulus package it is once again false hope.  Until there is some form of global inflation based on capacity constraints due to sustainable global growth as opposed to fictitious growth from monetary stimulus, these market rallies will be short lived and are a sucker bet.