We have people worrying about the existence of a $9 trillion corporate debt bomb out there. When reality is that the creation of such a high level of corporate debt was the entire point of doing all of that quantitative easing. It’s the very creation of this debt pile that is what was done to lift us up out of that recession, prevented another Depression. Now, not having a Depression may or may not have been a good idea – there are liquidationists out there, Austrian types who think we should just allow that economy to go where it wishes – but this is what the intention was:
A $9 trillion corporate debt bomb is ‘bubbling’ in the US economy
This is what we wanted to happen:
At first glance, it looks like a $9 trillion time bomb is ready to detonate, a corporate debt load that has escalated thanks to easy borrowing terms and a seemingly endless thirst from investors.
Yep, exactly as it was engineered.
So, to offer an idiosyncratic but thereby entirely true view of what happened and what was done about it. As we all know banks create some 95% to 97% of all wide money through their issuance of loans and credit. The central bank only makes that 3% or so which is notes and coin – and, in some tellings, central bank reserves. Great. So, one of the things that worried was that the banks weren’t lending. Not so much because they wouldn’t but they couldn’t, no one wanted to borrow. Thus that multiplier, the manner in which the 3% issued by the Fed gets turned into the 97% by the banks, wasn’t working.
No, the equation for this is boring but just accept it. If we have a falling money supply, as we will do if that loan issuance part isn’t creating money, then we’re either going to have deflation – which leads to a smaller economy – or a smaller economy more directly. We don’t like having a smaller economy. So, what to do?
Deliberately and specifically go out and make people borrow so that the banks lend. Obviously, conventional monetary policy, lowering interest rates, will do this. But we wanted more. So, the Fed – and in other countries other central banks – invented money on the computers in the basement. This was then used to buy government and other bonds. That lowers the interest rate on those bonds. So, we’ve now lowered not just the bank interest rates but also bond ones. Excellent, so more people will borrow.
More people borrowing, more loans being made, our money supply is now growing again – or at least not shrinking – and we avoid the deflation or falling GDP which would by definition be a depression. We’re done, right?
Well, yes, we are. Except where are we when it’s all over? Sitting there with a $9 trillion corporate debt pile. The one we’ve deliberately created in order to not have a depression. That is, we’ve engineered ourselves into this position and we’re likely damn glad we did. Glad because, you know, depressions aren’t fun times.
And now to the worry over it. We deliberately made this debt pile. The Fed knows all about it. So, they’re going to ignore what they did, right? Just not worry about it as they raise rates? Well, no, they’re not. Actually, it’s one of the crucial factors they’re taking into account as they do think about, worry about, inflation. It’s never true that we’ve nothing to worry about in the economy nor its management. But this particular concern yes, those who make policy are aware and are taking it into account.
Don’t Worry, Be Happy.
The language we use matters - it provides clarity to our own thoughts and enables…
It is now generally acknowledged that the structure of the NHS needs to be overhauled…
In the film Apollo 13, a loss of oxygen causes the crew to start inadvertently…
There's an idea out there which seems intuitive but then so many ideas do seem…
When we think about the darkly opaque goals of modern central bankers as they relate…
As the papers recently filled with the distressing images of desperate souls looking to escape…
View Comments
We can say with 101% confidence that QE did not lift the US economy out of depression, otherwise it wouldn't have taken seven years to work, would it? It can be argued that QE prevented the economy from plumbing the depths of depression, though to what extent this is the result of the distortion of GDP data is debatable.