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Bad News is Good News

Bad news is good news, at least in stock markets around the world.  If that doesn’t make any sense, you’re far from alone.  But you are on the wrong side of the most important trend around the world right now, which is the fine art of printing (and eventually incinerating) money.

In the last 4 years, central banks in 4 of the 6 largest currency zones (Euro, US, Japan, and UK) have literally printed about $6 trillion, or 5 weeks worth of total production in those places.  Markets are excited by the fact that things look so weak that they are about to print even more.

This might scare the Hell out of an ordinary person, and it should.  But a Depression is generally marked by a lack of capital to get things moving, so printing money is not completely unreasonable.  The fact that so much has already been printed and apparently not helped things is another thing altogether.

The reason why all this money has been printed is to make money more available.  The technical term is “Quantitative Easing”, where a specific quantity of money is sent forth to the world in order to ease the tightness in the credit markets.  It’s contrasted with what central banks usually do, which is to lower rates to achieve the same purpose.  But take a look at the rate commanded by the benchmark 10 year Treasury bill over the last 3 months:

Note that the trend is decidedly downward no matter what.  At the start of this year everyone was betting that interest rates would rise as the economy improved.  So much for that.  The recent plunge to 1.5% on fears of a general Euro breakdown has not held, but the continued downward bias is pretty obvious at this point – interest rates will continue to plummet.

That is the good news.  More money around means that everyone is happy, yes?  The problem, of course, is that these low rates and money printed from nowhere isn’t reaching the general economy.  As it is fed into the international banking system it appears to do remarkably little other than keep the party going.  That is what stock markets want more than anything, so it’s good news – nevermind that it is fueled by bad news and more than a whiff of panic.

Note that the $6T figure does not include overnight loans at zero interest and so on.  This is just money printed up and used to buy US Treasuries, keeping interest rates low and supposedly making borrowing easier.

You may be asking yourself, “Where can I get me some of that money?”  After all, the total amount printed by the Federal Reserve in this nation is $1.6T, or about $10k per household.  That’s the problem with this money – it’s simply not getting out to people who know how to turn a wrench and are willing to get dirty.  Good ideas that could transform the economy are going unfunded because they appear “risky”.  The technical term is “liquidity trap”, and it describes an environment where interest rates are so low that even the smallest risk appears to be too much for a bank to take on.  So they sit on the money instead and invest it in places like JP Morgan – which apparently can lose $3B without even knowing why.

If this definition of “risk” is confusing you, remember that bad news is now good news.

Naturally, if this money is to do good things it has to get out circulating a lot more than it is now.  We’re not talking about giving people fish or even teaching them to fish – we’re talking about giving them a pole and saying, “You know where they’re biting, have at it”.  But that’s not the economy we have right now.  Central banks are captive to the large investment houses which appear able to incinerate a nearly unlimited amount of money.

How much more will the central banks print?  Probably whatever it takes to keep the Euro together and perhaps a bit more to stimulate job growth in the US.  The odds of any of it working are pretty low, because after all we’re much more interested in bad news now.  If this money somehow gets used to make something good happen, why, that’d turn off the central banks’ presses.  The last thing we want is good news because, as we all know, that’s bad.  Right?

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14 thoughts on “Bad News is Good News

    • That did sneak up on us, didn’t it? Hey, the global derivatives market is now $700T, which is also $0.7Q (for Quadrillion). So it could be worse – and might be one day soon.

  1. Bad news is still bad news. We just don’t know how bad yet. I can’t believe how screwed up everything has become. Capital markets make absolutely no sense anymore.

    • They are totally detached from reality. They do not serve any useful purpose. My hunch is that if everything did fail we would hardly notice. That tells me that “Too Big to Fail” is long past.
      Ready for the Revolution?

  2. We’re not talking about giving people fish or even teaching them to fish – we’re talking about giving them a pole and saying, “You know where they’re biting, have at it”
    Gold! 🙂

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