Anyone suggesting that things are unraveling in fundamental ways quickly encounters a standard reflex response: "same as it ever was."
- Environmental degradation? Same as it ever was: humans have been trashing the environment for thousands of years.
- The influence of money in politics? Same as it ever was: money has always been the mother's milk of politics.
- The dominance of central bankers? Same as it ever was: the banks and the Federal Reserve have been colluding for decades. Income inequality? Same as it ever was: there will always be rich and poor, etc.
- The rise of the National Security State/Empire? Same as it ever was: Manifest Destiny, etc.
History lessons are all well and good, but this constant refrain of "same as it ever was" is actually a pernicious form of perception management, i.e. propaganda. The desperation is obvious, and so is the agenda: mask the reality that things are unraveling, and that it's no longer "same as it ever was."
Would printing the cash to fund pensions for low-income retirees trigger inflation? It's more of an open question than we might imagine at first glance.
It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough.
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
The Fed's capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve. However, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness. Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP)...
The Fed's Broken Piping In One Chart: JPM "Purchasing Dry Powder" Rises To All Time High $550 BilllionSubmitted by Tyler Durden on 10/11/2013 11:54 -0500
As of the most recent data, which saw JPM's deposit holdings surge by the most ever (except of course for the inorganic "acquisition" of WaMu in Q3 2008) or $78 billion in just one quarter, while loans continued to be flat, we now knows that JPM had marginable power to chase risk higher to the tune of $552 billion, an all time record in excess deposits over loans!
Billionaires and political lackeys alike have been falling all over themselves in the rush to praise the Federal Reserve's unprecedented monetary intervention since 2008. That billionaires and political hacks, apparatchiks and toadies cannot laud the Fed's Cargo Cult enough is no surprise: the billionaires and the government that feeds them both gained handsomely from the Fed's policies. As the Fed-induced asset bubbles in stocks, bonds and real estate follow the inevitable Supernova track to implosion, that we've reached Peak Federal Reserve will be obvious - in hindsight.
"A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money ."
- Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, November 21, 2002
The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.
Emerging markets have tanked but some of the reasons for their underperformance will prove overblown, providing opportunities for long-term investors.
There are signs that China's economy may have a short-term uptick but that shouldn't detract from what remains a poor long-term outlook.
There's never been coordinated global money printing of the scale of today and it's likely to end badly. Here's how you can protect your investment portoflios from what's to come.
There's never been coordinated global money printing of the scale of today. It will end badly and investors need to prepare accordingly.
If we shed our fixation with the Fed and look at global supply and demand, we get a clearer understanding of the tailwinds driving the U.S. dollar higher. I know this is as welcome in many circles as a flashbang tossed on the table in a swank dinner party, but the U.S. dollar is going a lot higher over the next few years. In a very real sense, every currency is a claim not on the issuing central bank's balance sheet but on the entire economy of the issuing nation. All this leads to two powerful tailwinds to the value of the dollar. One is simply supply and demand: as the global economy slides into recession, trade volumes decline, and the U.S. deficit shrinks. (It's already $250 billion less than was "exported" in 2006.) That will leave fewer dollars available on the global market. The second tailwind is the demand for dollars from those exiting the euro and yen. The abandonment of the euro is already visible in these charts.
The Fed Doves are not thinking of that outcome. If they did, they would be not so confident on their ability to control the outcome. That, or they're bluffing.