This is exactly why low interest rates lead to bubbles and malinvestment. When companies see these low interest rates, they just cannot help themselves. They begin gorging on debt whether or not they have worthwhile projects to invest in. The excess debt does not create as much revenue as is needed to service it despite the low rates. Eventually, this leads to bankruptcies and defaults, as in Spain depicted in the chart above.
The IMF has a poor economic forecasting record. According to the fund, Cyprus needs only €17.5bn, not €23bn and rising, while Greece should have returned to growth two years ago. Since the onset of the GFC, China has relied on a credit boom feeding unproductive projects such as ghost cities and roads to nowhere. This is unsustainable. Moreover, the implication of denying a hard landing is that China is not in the midst of a bubble. None of these entities, whether they be NGOs or central banks, ever spot a bubble forming until it bursts.
For some reason, the BoJ clusters its bond purchases over five or six days of the month resulting in increasing volatility in the market (chart above). The Fed spreads its purchase out over the entire month (chart below).
Mr. Edwards has come to the conclusion that the cheap yen will find its way to markets throughout the world as Japanese investors cash out of their JGBs and chase yield. Interestingly, the euro has appreciated nicely since the BoJ’s announcement, and periphery bond yields have fallen as exemplified by Spain.
The PIIGS have already endured a few years of misery and have a decade of more of the same to look forward to. The euro will break up long before the promised recovery materializes in ten years.
The main point to glean from this article is that Goldman’s profit rise is unsustainable in the face of falling revenue. An artificial bull market stoked by money printing is creating profits in underwriting and investing and lending that will end once the market turns. GS and its TBTF brethren will be in for a rough ride once this happens. Furthermore, expenses have already been cut to the bone, so profit gains from operational cuts will begin to wane as well.