- There have been 606 global rate cuts since LEH
- $12.4 trillion of central bank asset purchases (QE) since Bear Stearns
- The Fed is operating a zero rate policy for the longest period ever (even exceeding the WW2 Aug’37-Sep’42 zero rate period)
- $6.3 trillion global government bonds currently yielding <0%
- $20.0 trillion global government bonds currently yielding <1%
Where is the “hyperinflation”?
Venezuela has two immediate bond payments due this and next week amounting to $3.5 billion. Where did the near-insolvent country obtain the funds needed to make these debt payments? The answer: it has been dumping its gold, which its former ruler Chavez worked hard in 2011 to repatriate from London, and which its current president Maduro, just four short years later, is busy sending back to its creditors.
For years, a rather pointless argument has been ongoing amongst economists - that of inflation vs. deflation.
Far from being some trivial problem that can be fixed by pressing "print", central banks operating from a negative equity position face the possibility of i) losing their independence as they have to be recapitalized at the behest of the government, ii) being forced into policy decisions (or, perhaps more appropriately "in"decisions) that they might not otherwise make, and iii) losing the ability to control the narrative, thus heightening market concerns about the loss of omnipotence.
Gold can be useful as a hedge against inflation but it's been consistently so only in the long run.
Global central banks have made a Faustian bargain with our economic soul selling our future for a false stability today. At this stage, absent continuous intervention, a large deflationary crash in the global economy is inevitable. The next Lehman brothers will be a country. The real ‘shadow convexity’ will not come from markets but political unrest or war. Peace is not the absence of conflict. Global Central Banks have set up the greatest long volatility trade in history. Buy the fear and you will be protected from the horror.
This has infuriated the Fed and is forcing it to take more and more aggressive measures to trash cash.
"Central banks alone cannot be relied upon to deliver all the policies necessary to achieve macroeconomic goals. Governments must also act and use the policy-making space provided by conventional and unconventional monetary policy measures. Failure to do so would be a serious error and would risk setting the stage for further economic disturbances and imbalances in the future."
The Dow-Jones Industrial average closed over 17,000 today, for the first time since August. Do not misinterpret this recent rise. Happy Days are not here again.
If Western governments didn’t want a refugee crisis, they shouldn’t have been so eager to topple those governments and destabilize those countries. The refugees should camp out in the backyards of the individuals who run those governments.
Having government control over the levers of the economy can have advantages. For example, by taking prompt action, the Chinese government was able to pull the economy out of the recession remarkably fast, basically by fire-housing the stimulus package that was equivalent to 12% GDP. That’s the advantage. The only problem is that these kinds of short-term advantages come with long-term, painful consequences.
Never have markets carried so much risk. And never have markets been as vulnerable to an abrupt change in perceptions with regard to central banker competence, effectiveness and capabilities. At the minimum, global markets will function poorly, but risk is now high for a disorderly – Party Crashing - "run" on financial markets, as faith in central banking begins to wane.