The Sears Bankruptcy Further Wrecks The QE-As-Equity-Stimulant Narrative

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Posted: Oct 22, 2018 12:06 PM
The Sears Bankruptcy Further Wrecks The QE-As-Equity-Stimulant Narrative

Something strangely beautiful happened this past week, and the catalyst was oddly enough a corporate bankruptcy. Rather than hysterical calls for a federal bailout of Sears to “protect jobs,” or more tariffs levied on “China” in order to falsely protect an iconic monument to the past, there was calm on both sides.

An editorial at left-of-center New York Times pointed out what an editorial at right-of-center Investor’s Business Daily did, that Sears was Amazon before Amazon. Important here is that this simple acknowledgement of reality is what informed the calm. Left and right saw through the bankruptcy of Sears what’s logically true: every business eventually fails thanks to its formerly innovative ways being replaced by something much better, much more profitable, and that pleases customers quite a bit more. Where was this consensus in 2008?

Interesting about all this is that the Times and IBD correctly saw what happened to Sears as a sign of capitalist health in the United States. The Schumpeterian ‘gales of creative destruction’ had taken out Sears to the U.S. economy’s betterment as the stagnant past was wiped away by the dynamic future.

Implicit in their embrace of what’s good is that Sears won’t be the last business giant to fall behind the times on the way to bankruptcy. Hard as it may be for readers to imagine, there will come a day when Amazon is rendered irrelevant by a retailer (?) that wholly revolutionizes how people buy things such that what is now innovative is exposed as hopelessly behind the times.

Crucial about the Sears story is what it says about economic growth more broadly: It quite simply cannot take flight in robust fashion without quite a bit of failure. For commerce to progress the fastest the old must be relentlessly replaced by the new. Stated simply, economies gain essential strength from weakness as the bad and mediocre are replaced by the good and great.

Which brings us yet again to the popular view among economists, pundits and journalists that the Fed’s program of quantitative easing stimulated the economy and the U.S. stock market. On its own, the very notion that the Fed’s purchase of Treasuries and mortgage bonds would boost the economy and markets was a non-sequitur that was too silly for words. Sorry, but the subsidization of government spending in concert with the subsidization of housing consumption could never improve an economy or excite investors always looking into the future. Back to reality, investment is what powers economic growth, yet QE was all about wasteful consumption of precious resources in order to prop up the past.

As for the comical idea that QE stimulated the markets by fostering a search for yield, let’s try to be serious. If such a belief had any merit to it, the years of QE would have been defined by falling bond prices to reflect a rotation out of low-yielding fixed income securities, and into equities. Except that it never happened. Not in the U.S., nor has it happened in Japan amid eleven different doses of QE over the decades.

Of course some say that QE stimulated the U.S. equity markets because the $4 trillion the Fed borrowed from banks was searching for a home, and found its ways to the stock market. The problem there is twofold: for one, equity prices aren’t a supply/demand concept as much as they reflect investor speculation about all the dollars a company will earn in the future. QE would have no impact on the latter, nor would $4 trillion in alleged demand boost stock prices given the basic truth forgotten by the central bank obsessed that for every buyer there’s a seller. For those allegedly tricked by QE to be able express their genuine gullibility in the markets, those not tricked by it would have to sell to them.

That the shares of Sears were never boosted by the wave of equity buying allegedly engineered by QE is yet more evidence that the Fed’s anti-economy and anti-equity stabs at central planning didn’t create an artificial rally. What’s artificial would logically push everything up without regard to quality, except that Sears didn’t rally as its poor fundamentals became more and more apparent. Sorry, but the QE narrative is so easy to discredit. Even better, the bankruptcy of Sears just adds to the evidence that what the Fed-obsessed think happened actually didn’t.

We know this in consideration of the reaction to the demise of Sears. The reaction was positive, and with good reason. For an economy to progress, the bad and mediocre must once again be replaced by the good and great. That the previous assertion is a statement of the obvious is all the evidence we need that the QE narrative was and is wholly false.

We know this because the QE happy talkers were explicit in their assertion that stocks were not rising because of any fundamental reason related to innovation and future earnings, but were instead buoyant for entirely artificial reasons: the Fed’s purchase of Treasuries and mortgages had artificially created a low-rate environment. Implicit there is that the non sequitur that was QE was increasing the value of U.S. equities without regard to their quality or future earnings prospects. They were quite simply going up because the Fed centrally planned such an outcome. As academic James Dorn laughably put it,

A law of the market is that when interest rates fall, asset prices rise. As long as markets believe the Fed will support asset prices by keeping rates low, stocks will be the investment of choice, rather than conservative, low-yield saving accounts, money market funds, or highly-rated bonds.

The problem for Dorn and other central bank-watchers is that economies and markets don’t work in the way that they assume. They rise not because of central planning, but precisely due to a lack of it. Better yet, they gain essential strength from the Schumpeterian replacement of the existing order with something much greater. Applied to Sears, its bankruptcy didn’t spook markets simply because what happened is a healthy indication of markets doing exactly as they should: starving the bad in favor of the good.

Unfortunate for those who were taken in by the QE narrative is that the latter is all about the central planner propping up the present at the expense of the future. If QE had actually stimulated markets, Sears would still be consuming abundant capital at the expense of superior concepts, and such a scenario would reveal itself through collapsing markets. In short, the QE narrative – if real – wouldn’t have stimulated a market rally as much as it would brought on the mother of all crashes for it being all about feeding the bad and mediocre of the past at the expense of the good and great of the future.

So while it’s always sad to see a company go bankrupt, Sears' failure was paradoxically beautiful for the way in which it instructed. Left and right plainly understood through Sears the importance of failure to progress. Too bad they didn’t see this in 2008, and too bad the Fed-obsessed still don’t see that what they believe happened during the Fed’s QE experiment would have collapsed markets if what they so confidently described as having happened actually did.

This article was originally published on Forbes.com.