Should We Let the Crash Happen?

09/05/2012 1:00 pm EST

Focus: MARKETS

Harry Dent

Author, The Demographic Cliff

Comparing the relative fortunes of Japan and Iceland shows the dire consequences of stimulating an economy with no endgame, says Harry Dent.

Today, we are talking about central-bank stimulus with Harry Dent. Harry, what are some of the limits to some of these programs that you see?

Not only have we seen over $2 trillion in QE1 and QE2, and we are probably going to see another half a trillion plus, we have seen $5.4 trillion...well actually about $3 trillion-plus in QE and then a bunch of other bailouts and things in Europe. This is massive, and it’s massive because of the downturn, and the debt that is deleveraging is so massive, and they are working against the demographic trends.

So people see every time we have more stimulus in the market and they say good. I call it the market is on crack. Anybody on crack wants more crack. The markets, all they care about is are we going to get a QE3. They ought to be caring about the fundamentals and the risk and they are not looking at the risk.

QE3 is a short-term easing that helps deal with the pain; it doesn’t deal with the problem long-term. So you get more and more debt, especially in Europe—most of the stimulus there is debt—so it is adding debt to countries like Greece and Spain that are already too much in debt, which means there is no way they are ever going to come out of this.

So it does fail at some point; it takes more and more stimulus to get less and less effect until the stimulus kills us. As we have said before, Europe is already at that point. Not the US yet, where the stimulus really doesn’t work very long and you are back in trouble.

The US is working less and less, but it is still kind of working. I think Europe is starting to fail and is about to blow up. I think by mid to late 2013, we get one more QE3 and the stimulus is going to fail.

Now, you get broader stuff, though; they haven’t just bailed out and thrown money into the banks to keep them alive, they have guaranteed everything—deposits for everybody and all this stuff and companies. OK, if things really melt down again, how much can the government guarantee? Can they make all depositors good in this country? No, they can’t. So you have to worry a bit about that.

I would say be in sure things, but spread them around. You know, the thing I like best, I don’t want to be in insured cash and savings accounts, I want to have my own account at a brokerage firm where I can be in T-bills or any investment and it is my account; it’s not a deposit that a bank has to make good on or that a bank can lend against.

I want to have my own money and my own account, but I don’t know if the government can make good on all of this, even the FDIC. That is the first thing they will protect, but I don’t know if they can make good on any of it.

Now a moment ago, you mentioned this addiction that the markets have to QE, and that has been true around the world. Are equity markets going to have to get used to the idea that this will end at some point?

Well, you know, Japan has been doing this already for almost two decades. Where are they? They never came out of their downturn; 22 years later, real estate is still down 60% and never came back, stocks were still down 80% and never came back.

They avoided the debt deleveraging; we call it the winter season. Therefore, they are not moving into spring where you have growth again. So that is the penalty if you keep doing this.

The difference is Japan came into their crisis before us in the late 80s and early 90s, and we predicted that downturn on demographics alone. With budget surpluses, trade surpluses, we came in with the opposite: we have been accumulating budget deficits since the 70s, we have been accumulating government deficits consistently except for three or four years since the early 70s, and we have been building the greatest debt private bubble in history since the early 80s.

This is not QE1 or 2, it is just to keep the bubble going—from imploding. We have been addicted to debt now for 40 years; you can’t do that. Debt has grown in the private sector almost three times the economy since 1983. So this is going to take a major restructuring of debt, a major shift in entitlements, and the sooner we deal with it the better.

There are countries like Estonia and Iceland that let the crisis happen, and a couple of years later they are coming out of it stronger than ever. Meanwhile, the rest of Europe keeps falling in recession. We keep having one QE cup of coffee and then boom, back down to zero again. It doesn’t work over time.

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