The father of the little Dutch boy who saved Holland was a a sluicer, whose business it was to open and close the sluices to regulate the amount of water that flowed into the canals. His name was Ben Bernanke. He favored opening wide the sluices.
But then the father of the little Dutch boy retired and a new sluicer, this time a woman, took over the job. Her name was Janet Yellen. Janet thought the previous sluicer had been sluicing too much so she began to close the sluices.
The people in the village where the little Dutch boy lived weren’t too sure about this. “What will it mean?” they wondered. They worried that pressure would build up on the dam which surrounded Holland and kept out the North Sea.
And sure enough, one day the little Dutch boy was walking late in the afternoon near the wall of the dam when he saw a leak! This leak in the dam would grow larger unless it was stopped immediately! There would be a contagion!
The little Dutch boy yelled, “Help! Help!” But it was a windy day and no one heard him.
Meanwhile, a neighboring country called Russia had a bullhorn. These Russians liked to point their bullhorn at the people of the dam and bellow all sorts of bloviated thoughts. The big Dutch patroons did not like this. “Hey you Russians, with your bullhorn! Cut it out!” they cried.
But many of the little people of Holland rather liked what they heard from the bullhorn. And so it was that one of these little people, a foreigner named Ersjdamoo who was always grumbling about things, began to even take note of what he heard from the bullhorn.
One day Ersjdamoo went to old Rip Van Winkle and asked him to print some of his notes. Van Winkle was a sleepy character and didn’t like being woken up. But Ersjdamoo insisted and so hundreds of handbills were made.
In this first of the handbills, Ersjdamoo, who was always grumbling, complained about how slowly the Russian bullhorn got around to getting its material onto YouTube, a network of fibers. (Background: Deflation In Gas Prices, Ersjdamoo’s Blog, October 31, 2014.)
When the Russians with their bullhorn heard about Ersjdamoo’s complaint, they bellowed, “Just go to http://www.youtube.com/BoomBustRT!”
Ersjdamoo was very happy about this, for it would help him with his notes.
Meanwhile, the little Dutch boy had put his finger in the dam to plug up the leak. The wind shifted and Ersjdamoo thought he heard a cry, “Help! Help!” But Ersjdamoo was too busy to be bothered.
Happy to have fresh copy from the YouTube, Ersjdamoo went to old Rip Van Winkle and had him print a new bunch of handbills. This one he called, “Is QE Dead?” Some people thought he meant by that that Queen Elizabeth had died and they became afraid. For Rasputin, a Russian staretz, had foretold how when Queen Elizabeth died, all is at the end. (Background: Rasputin’s Prediction For Britain, Ersjdamoo’s Blog, September 23, 2014.)
But “QE” meant Quantitative Easing. That is what the former sluicer, Ben Bernanke, had called his policy of opening wide the sluices.
The Russian bullhorn had been held by Axel Merk, no less than the president of Merk Investments himself. Axel had been saying things about the new sluicing policy of Janet Yellen, who had closed the sluices. “Gold has fallen from 1700 to 1200! If the economy tanks again, QE will rise from the grave!” began the handbill.
Back when Ben Bernanke had opened wide the sluices, QE had compressed risk premium. Risky assets didn’t appear risky anymore. Junk bonds didn’t yield anything, Portuguese debt didn’t yield anything, and the stock market didn’t appear risky anymore. But when Janet Yellen closed the sluices, risk premia now had to rise again. Asset prices would get re-evaluated. “We’ve built the ‘recovery’ on asset price inflation,” said Axel Merk, “so the moment you have a so-called exit, asset prices will be priced lower, causing incredible headwinds to economic recovery.”
Ersjdamoo did not understand any of this, but he loved the marvelous lingo. “Risk premia! Wow! What do it mean?” he marveled.
“Money printing by Mario Draghi will not change anything,” said Axel Merk. “Janet Yellen being less accommodative increases the risk premia so it doesn’t matter what Draghi does. He has his water pistol there in Europe but the problems are structural: there’s only so much a central bank can do.”
Structural problems! Might this mean something wrong with the dam itself? Again Ersjdamoo thought he heard a voice carried by the wind: “Help! Help!” cried the little Dutch boy with his finger in the dam.
“Lower oil prices indicate a weakening global economy,” said Axel Merk over the bullhorn. “The exit from QE is wishful thinking. We have a slowdown in China, a slowdown in Europe, we have a slowdown in Russia. The Japanese economy isn’t working either. Emerging markets are not pulling out either. Everybody’s hoping that exports are going to fix their problems but they’re not. The reason none of these things work is, we have too much debt in the world. To lower the debt, we need to inflate our way out of it. And this exit from QE is not going to get us there. Oil is doing poorly because at this point central banks have taken a breather and the global economy is slowing down. It’s a very pessimistic sign of what’s going to happen around the world in the long term.”
“I see much more volatility in the markets in the months to come,” added Axel Merk.
And so the thought came, “Is QE really dead?” Maybe not. In Japan, like a zombie, it rose from the grave on Halloween. And maybe it could resurrect here too, if there was a structural problem caused at first by a leak in the dam.