Economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping.
The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect. Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings. The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.
We are living in a time that can only be considered monetary chaos. The media and the policy pundits may focus on the day-to-day zigs and zags of central bank monetary and interest rate policy, but what really needs to be asked is whether or not we should continue to leave monetary and banking policy in the discretionary hands of central banks and the monetary central planners who manage them.
Monetary policy 'rules' are no more accurate at determining interest rates than meteorologists are at forecasting the weather. The only difference between the two is that weathermen are precise on occasion, whereas the federal funds rate under the Taylor Rule is, at best, less wrong. Setting the price of money and credit in the name of unleashing the economy’s supposed potential output is the equivalent of enacting price controls on milk to unlock its full buying power. It’s a fallacy that cannot be achieved. The sooner the Fed pawns off its printing press, the sooner its market distortions will be lifted; and the sooner that each individual will be able to make rational decisions that make sense for not only himself or herself, but for the economy at large as well.
So how do you grow household wealth by $18 trillion in the face of these dismal real world trends? In a word, with a printing press. But what happened today is that Draghi showed he is out of tricks and Yellen confessed she is out of excuses.Yes, this sucker is going down. And this time all the misguided economics professors turned central bankers in the world will be powerless to reverse the plunge.
There is no doubt that another major market reversion is coming. The only question is the timing of such an event which will wipe out the majority of the gains accrued during the first half of the current full market cycle. Assuming that you agree with that statement, here is the question: "If you were offered cash for your portfolio today, would you sell it?" This is the "dilemma" that all investors face today.
Will they, won't they, should they or shouldn't they? Those are the questions being hotly contested by the mainstream media on a daily basis. Of course, the reality is the Federal Reserve faces the huge obstacle of weak global growth and deflationary pressures which could very well keep them on hold well into 2016. The potential loss of credibility in the Fed by the markets could be the bigger issue to be concerned with. For now, we wait.
"But they won’t, you know. Yellen and Draghi believe in the Taylor model and the Phillips curve. Gresham’s law will be found in the history books, but his corollary has little chance of making it into future economic textbooks. The result will likely be a continued imbalance between savings and investment, a yield curve too flat to support historic business models, and an anemic 1-2% rate of real economic growth in even the most robust developed countries."
Fed chief Janet Yellen’s hesitations and the market turmoil since August seem to validate that it is impossible to stop the accommodative monetary policy, unless you accept that doing so would trigger a new global crisis. The Fed is aware that raising interest rates too fast and too high could have the same effect as pressing the nuclear button. The whole system could collapse and it cannot be taken for granted that the central banks would be able to extinguish the fire this time. Their strike force has weakened because their balance sheets are exposed to market fluctuations and their credibility was seriously damaged because the measure they have taken have failed to strengthen the economy.
We’re all Dr. Evil today, thinking that one million dollars is a lot of money, or that one second is a short period of time, or that we are individually smart or capable in a systemically interesting way. We use our small-number brains to make sense of an increasingly large-number investment world, and as a result both our market fears and our market dreams are increasingly out of touch with reality.