Via Mark J. Grant, author of Out of the Box,
“Yes, in this immense confusion, one thing alone is clear. We are waiting for Godot to come.”
-Samuell Beckett, Waiting for Godot
It seems these days that we are all waiting. Waiting for some European Moment, waiting for the American elections and waiting for some central bank to propose the next new thing and flood the world, once again, with liquidity. The world seems askew.
There has been the thought, in place for decades, that the greatest danger lay in rapidly escalating Inflation and that governments could ruin the populace and devastate the purses of everyone if Inflation was allowed to run rampant. This was counterbalanced by the fear of Deflation which may have an even worse effect. These two twin evils have been viewed as the mainstay of things that could go wrong and they have each been battled in various ways for the last hundred years. Some missions were successful, some not, but the battle raged on from one administration to another.
Now I wonder if some new infant has not been born to join them. This morning I will name this new baby; “Intervention.” What has become clear to me is that while the worlds’ central bank cannot print money off-world is that we cannot invest money off-world either. They are stuck and we are stuck but the central banks have the advantage. They can print money in an open fashion such as at the Fed or they can do it in some hidden fashion, such as with the ECB and their Euroloans but the world is flooded with liquidity in either case and something must be done with the money. The stuff does not slosh around in giant jars and we are paid to make sure it is put to some kind of useful purpose. Hence the irrational behavior of some markets; they rise because they are forced to by the spigot of liquidity opened by the central banks.
In prior days we would have thought that the consequence would have been an increase in Inflation as the off-set of this scheme but we have now learned otherwise. By lowering interest rates just off Kelvin’s Absolute Zero and holding them there the incremental amount of Inflation that one would have expected is minimal as being so close to the temperature of freezing makes the response sluggish and anemic. We find ourselves in a new dynamic where investors are penalized, where it is possible to re-finance government debt at very low levels, where new debt is sopped up by liquidity and where fiscal cliffs and events that would have been defined as catastrophic are muted, dulled by the belief that the central banks will inject ever more liquidity to overcome the problem.
The new sibling, “Intervention,” has over-ruled both Inflation and Deflation by the use of liquidity so that all of the newly printed money soaks up not only the issues at hand but the normal reaction to them. The financial world has become muted and the rise in the equity markets and the compression in the bond markets finds a rational explanation along with why the reactions to Greece, Spain and the rest have not provided the devastation that we would have once thought. We are currently living in an oddly twisted world where the next new bad thing will be countered by some central bank providing ever more money which will cure the problem so that markets remain flat or rise with any new tragedy as it will bring the central bank running out to clean up the mess.
Mommy will make it all better.
So the central question becomes; can this go on forever? Is this a never ending story or is there now some pin that could prick the whole affair and send it wildly spinning out of control? Europe has been the best at the scheme creating an enclosed circle where money is minted, flows to the banks and other institutions who buy the ever increasing debt that is required to keep this plan in motion and so money out becomes money in and the assets of the European banks increase by 7% and the sovereign debt is placed and the circle is enclosed. America and China have also engaged in this game though not to the extent of Europe but the circle remains because it has become a global affair where the limit is where money can be invested and, again, off-world is not an option. It is a curious affair that gets curiouser and curiouser the more I ponder it.
I believe we find ourselves in unchartered territory and without a decent compass. Some ponder the question of what happens when the largesse of these central banks stops as I wonder why it would ever stop. If there is to be a point of embarkation from the current global scheme then it would ratchet up interest rates and why would the central banks head in that direction unless forced to by very different circumstances than our present ones. In the meantime, because they can, the governments of the world add ever more debt that is financed by the new money that they have created. The game continues but is there an end to it and what are the consequences of it ending?
I continue to muse. I have no answer at present. I continue to wonder.
“Take some more tea," the March Hare said to Alice, very earnestly.
"I've had nothing yet," Alice replied in an offended tone, "so I can't take more."
"You mean you can't take less," said the Hatter: "it's very easy to take more than nothing."
"Nobody asked your opinion," said Alice.”
-Alice in Wonderland