A recently published study from the bank JPMorgan gives an overview of changes in the world money supply in recent years. In just the first three quarters of this year the world money supply, as measured by the M2 aggregate, grew from 63 to 66 trillion dollars.
The M2 monetary aggregate includes cash, non-cash money in current accounts, fixed-term and savings deposits, and short-term government securities. This means that in less than a year the world money supply grew by 3 trillion dollars, or 4.6%. It has reached almost 100 percent of the annual world GDP. According to the estimates of specialists at JPMorgan, approximately 1 trillion out of these 3 trillion dollars came from the group called the G4: the U.S., Great Britain, the Eurozone (17 European countries) and Japan The other 2 trillion dollars came from the other countries of the "golden billion" (Canada, Australia, New Zealand, and 10 countries of the European Union) and countries on the periphery of world capitalism. These giant infusions into the world economy create the illusion of, if not economic growth, then at least some kind of economic stability. However, it is nothing but an illusion, since the official GDP figures published by national statistics services embellish the real state of affairs. Adjusted for inflationary price increases, the real world GDP is either not increasing, or is gradually decreasing. The other side of this process is the imperceptible but consistent decrease in the purchasing power of the currencies of various countries. Simply put, money is depreciating.
It is not difficult to figure out, based on the JPMorgan assessments, that for all of 2013 the growth of the world money supply could reach at least 6 percent. Several months ago the international auditing company Pricewaterhouse Coopers (PwC) presented a forecast of the development of the world economy in 2013 (Global Economy Watch 2013). According to the company's estimates, the growth of GDP in the world will be 3.3% (2.0% in the U.S.). If one compares the estimates in the JPMorganstudy and the data in the Global Economy Watch 2013forecast, it is not difficult to understand that the rapid growth of the world money supply in recent years is creating the illusion of economic development. Amid rampant monetarism, statistics services do not measure changes in the production and consumption of goods and services, but simply record the growth of the money supply.
The world money supply is growing mostly thanks to the U.S. Federal Reserve System, which after the financial crisis took up a policy of so-called "quantitative easing" (QE) in the economy, stating that the American economy needs to be revived, and thus it needs a boost in the form of cheap money. And money becomes cheap when there's a lot of it.
Not long ago a key thesis of financial science was the principle of the balanced budget, and using the printing press to plug financial holes was seen as sacrilege. Today in America they are trying to forget about this thesis. And not only in America; there are programs analogous to quantitative easing today in Great Britain, Japan and Europe. On an annualized basis, the money supply produced as part of the American QE program is around 1 trillion dollars. The printing presses of many central banks besides the Fed are also at work, especially that of the European Central Bank (ECB), which has begun a program of buying the debt securities of individual Eurozone countries.
The Federal Reserve has already implemented two QE programs, and a third was launched in September of last year. It calls for the Federal Reserve to provide a monthly money supply in the amount of approximately 85 billion dollars. The money enters the economy through the purchase of securities: approximately 45 billion dollars in U.S. Treasury securities and 40 billion dollars in various "junk" (mostly mortgage-backed) securities from banks. Thus the quantitative easing program is aimed at boosting not the real sector of the economy, but the U.S. government and the banking sector.Of course, the Fed's money can make its way into the real sector of the economy eventually, but not right away and in very limited quantities. Where does it go first? In the case of the purchase of treasury securities, the money goes to military expenditures and paying interest on the state debt. In the case of the purchase of "junk" securities, it goes into the financial markets. It is unlikely that such a "boost" will help the American economy completely overcome the consequences of the financial crisis. It is more likely that, on the contrary, it will create conditions for a new one.
Federal Reserve chairman Ben Bernanke has already made several cautious statements that the QE program might begin to taper off. Of course, he always added: if the U.S. economy shows signs of rallying. These statements always caused agitation among financial market participants; they understood the consequences of a drop in the revolutions of the printing press. By autumn 2013 not even the most inveterate optimists had any hope that the U.S. economy would rally. And Bernanke stopped frightening everyone with talk of tapering off the QE program. And really, why should he start that kind of experimentation so close to the end of his career as the chairman of the Federal Reserve?
The real economy of the U.S. has not recovered from the financial crisis,but there are clear signs that bubbles are forming on the financial markets. This is very reminiscent of the situation in the late 1990s. Many investors and financial analysts believe that the Federal Reserve is not saving the American economy; it is pumping up financial bubbles which one of these days will burst. The consequences of their "popping" will be much worse than the consequences of the crisis on U.S. markets at the turn of this century. At that time there were countries with so-called "transitional" economies which served as a safety valve for many investors on the American securities market. Today the situation in countries on the periphery of world capitalism (PWC) is extremely unfavorable. Any scaling back of the American quantitative easing program could lead to the most catastrophic of consequences in these countries. The ministers of finance and even the prime ministers of several PWC countries are asking Washington and even the chairman of the Fed personally not to taper the QE program. For example, in late August of this year the governors of the People's Bank of China (PBC) and the government of the People's Republic of China showed great concern about Ben Bernanke's statements on the tapering off of the QE program and proposed a special discussion of this issue at the G20 summit in St. Petersburg September 5-6. Of course, discussion of the issue was cut short because Syria came to the forefront in St. Petersburg. In a word, the end of quantitative easing could turn into a rough economic "landing" for countries on the periphery of world capitalism.
The formation of bubbles which has begun on America's securities markets means that stocks circulating on the market and financial instruments linked to real assets are losing their connection to the situation in the real sector of the economy. The economy is running in place or even going down, but stock market quotes are moving in the opposite direction. This theater of the absurd is supported by the Federal Reserve and its quantitative easing program…
Many media outlets have quoted former Federal Reserve governor Robert Heller, who has stated in no uncertain terms that the stock market is "perilously close" to a new bubble, while the Fed's asset buying program has not had a noticeably positive influence on the real economy. The statement of Lawrence Fink, CEO of Blackrock, the world's largest money management company with assets of over 4 trillion dollars, did not go unnoticed either. He also confirmed that a bubble is starting to form on the U.S. stock market.
A more detailed explanation of the situation was given by Michael Gayed, chief investment strategist at investment advisers Pension Partners. He noted the similarity of the current U.S. market environment to that of the late 1990s. At that time there were massive gains followed by a catastrophic drop in the indices on the NASDAQ exchange, where stocks for high-tech companies are traded. He emphasized that the Dow Jones, S&P 500 and Russell 2000 indices once again reached record highs in late October. In addition, the trend toward an increasing gap between the state of the real sector of the U.S. economy and stock and securities prices leaps to the eye. A key indicator of this gap is the ratio of a stock's price (the current market capitalization of the company) to the company's real return. This P/E (price/earnings) ratio has been skyrocketing for a number of stocks in the U.S. in autumn 2013. Like in the late 1990s, the P/E ratio record holders are high-tech companies, especially in the telecommunications and Internet fields. These are companies with very big names: Facebook, LinkedIn, Yelp, Pandora andTesla. The P/E for LinkedIn is 746, for Tesla it is 267, and for Facebook it is 120. The head of Tesla, Elon Musk, admitted in an interview with Bloomberg that the current level of the company's stock price is "more than we have any right to deserve".
As the authors of the JPMorgan study have noted, some investors are already beginning to get out of stocks and reinvest in other assets, for example, in treasury securities. As an example, they cite one of the largest sovereign wealth funds in the world, the Government Pension Fund of Norway (800 billion dollars). For instance, in the third quarter of this year it stopped buying stock, becoming purely a seller. At the moment 63.6% of the fund's assets are stocks, which is greater than the target of 60%. It is logical to expect further sales. In the opinion of the JPMorgan experts, other sovereign wealth funds, which belong to the category of conservative investors, will follow suit. These are the first swallows, harbingers of the coming financial storm.