"We have a problem with this, and that is central bank hubris. They now think that they are omnipotent, because, essentially the government has said we are going to pass over all control of the economy to the central banks, they say to everybody else including financial market participants that “you don’t know, you don’t understand, we have our models and they are right”. And that kind of hubristic approach is when you sow the seeds of your own destruction."
In recent years, home price indices have seemed to proliferate. Measuring home prices has taken on an urgency beyond the real estate industry because for many, home price growth has become something of an indicator of the economy as a whole. If home prices are going up, it is assumed, “the economy” must be doing well. Indeed, we are encouraged to relax when home prices are increasing or holding steady, and we’re supposed to become concerned if home prices are going down. This is a rather odd way of looking at the price of a basic necessity.
As we noted in Part 1, this central bank fueled boom will ultimately be paid for in the form of a prolonged deflationary contraction. On the morning after, of course, it will be asked why the central banks were permitted to engineer this fantastic financial and economic bubble. The short answer is that it was done so that monetary central planners could smooth and optimize the business cycle and save world capitalism from its purported tendency toward instability, underperformance and depressionary collapse. In Part 2, the whole case for this sweeping and unprecedented Keynesian demand management by the monetary authorities was a crock. Accordingly, the days of the Warren Buffet economy are indeed numbered.
Doesn't get any simpler than this.
No matter what investors SAY they will do, they will almost always succumb to the emotional investment mistakes caused by being human.
The uncertainty surrounding the inevitability, if not the exact timing, of multiple and possibly overlapping volatility drivers is itself a source of volatility. For the average person, these signs can be scary. Taking steps to avoid the circus as much as possible, such as extracting money from the markets, securing personal assets, and waiting out the swings, can be a source of emotional comfort and future financial stability.
As with all good socialists, central banks have locked the global economy onto but a single path without any possibility of choice. The purpose of all this intrusive nature through finance is actually to dethrone the defining quality that makes capitalism so useful in society’s advance – dynamic destruction. Despite the radical alteration as to what is taught in “business” schools, credit is not capital and it will never be. No amount of math will make it so, but the longer it remains operative the greater the potential we all end up with something even worse.
Many have forecast the creation of a new monetary system by which governments and banks gain total control over all monetary transactions. On the surface of it, this may seem an impossible goal, as it would be so all-encompassing and would eliminate economic freedom entirely. Surely, it would not be tolerated. However, we believe that it’s not only relatively easy to create, but it will be sold in such a way that the public will see it as an absolute panacea to their economic woes. Only those who are far-sighted will understand its level of destruction in advance of its implementation.
One of the most pervasive and dangerous myths of our time is that military spending benefits an economy. This could not be further from the truth. Such spending benefits a thin layer of well-connected and well-paid elites. It diverts scarce resources from meeting the needs and desires of a population and channels them into manufacturing tools of destruction. The costs may be hidden by the money-printing of the central banks, but they are eventually realized in the steady destruction of a currency.
Today’s clueless Keynesian central bankers essentially believe that they can keep the pedal-to-the-metal until a 1970’s style inflationary spiral arises. But none is coming because the worldwide central bank money printing spree of the last two decades has generated massive excessive capacity and malinvestment all around the planet. What is coming, therefore, is not their father’s inflationary spiral, but an unprecedented and epochal global deflation. So the central banks just keep printing, thereby inflating the asset bubbles world-wide. What ultimately stops today’s new style central bank credit cycle, therefore, is bursting financial bubbles. That has already happened twice this century. A third proof of the case looks to be just around the corner.
Four and a half years after Brazil's FinMin Guido Mantega first re-introduced the world to the term "currency wars," it appears the Brazilians have admitted defeat. Amid what Goldman calls a sharp decline in consumer confidence - to the lowest level in series history - which could also extend the ongoing macroeconomic adjustment processes and therefore delay the recovery of the economy; Brazil's central bank has announced that it will no longer intervene to support the Real via its Dollar-Swap program. In a SNB2.0-esque move, though somewhat anticipated by the market, Brazil enables the devaluation that has occurred to perhaps extend (improving competitiveness) and removing what was becoming a notable fiscal drag. Implicitly, Brazil just followed the Swiss and admitted defeat in the global currency war...
Currently, a new form of danger arises. The Keynesian pettifoggers at the Fed have painted themselves into an epochal corner. After 78 months of ZIRP they have no idea about how and why they got here; and now, mired deep in the lunacy of free money, they are clueless about where they are going next. There is not a chance the US economy has decoupled from the rest of the world. The great credit-driven boom was universal and fueled by out of control central banks. Now comes the bust phase, and these same money printing central bankers have no clue what to do about it.
Paul Krugman may (or may not) know a lot of economic theory and is a very clever writer, but you should never ever trust him to recount tales of battles between Keynesians and other schools of thought. His misrememberings in this realm are so astounding that they would impress Brian Williams.
Someday, maybe, these central banks will find that secret formula that unlocks the commanded utopia from its monetary prison, but I think it more like what led to the end of the first Gulf War, where continued air raids upon Iraqi positions amounted to destroying rubble. As Colin Powell put it, “we were bouncing rubble with billion-dollar missiles.” That seems to be a fitting, paraphrased description of the European state of monetarism, bouncing economic rubble with trillion-euro debt missiles.