Five Decades Of Systemic Shocks And Policy Responses

Tyler Durden's picture

Via Pictet,

With the decision of the Federal Reserve to continue its policy of asset purchases (QE) as long as US employment remains depressed, we can say that inflation targeting as a tool of monetary policy, introduced in the early 80s under Paul Volcker, has finally been buried. Central banks are now moving towards a policy of targeting asset prices and other economic variables, primarily nominal GDP. The consequences of this monetarist revolution on asset price formation are difficult to assess. However, we cannot overemphasise the potential disruption to the correlation and volatility regimes to which investors have become accustomed. In such conditions, proven investment strategies may prove obsolete. More than ever, investors will need to be able to challenge and fight against preconceived ideas. Lastly, and fundamentally, it is to be hoped that the policy of quantitative easing (QE) does not last too long, because, ultimately, it could lead to a massive distortion in the allocation of capital. However, as the charts below illustrate, every decade has been characterised by a different economic, monetary/fiscal policy, and investing environment.


Forthcoming shifts in monetary/fiscal policy

Since the early 1980s, monetary policies throughout major developed nations had been focusing on inflation, evolving in the early 1990s into specific inflation targeting, but the sub-prime crisis in late 2008 prompted central banks to take pragmatic emergency steps. Inflation targeting gave way to quantitative easing.


This particular approach to monetary policy cannot be regarded as a transient phenomenon though: after all, its primary objective has, purely and simply, been to prevent the whole financial edifice from crumbling. We will see a shift away from quantitative easing over the coming years. But what will the new monetary policy look like? The answer to this question is self-evidently unclear. However, the persistence of below-potential economic growth, high unemployment and high debt levels simultaneously in the developed world do seem to point to two possible paths:

  • firstly, a return to virtuous growth would help to mop up unemployment and provide a virtuous route to paying down all the accumulated debt;
  • secondly, quickening inflation, ideally to a limited extent, would also help to lighten the debt burden. Taking those two factors into consideration, monetary-policy stances geared to nominal GDP targeting or nominal income targeting must be regarded as serious candidates. The implications for the major asset classes – i.e. accelerating growth and/or inflation to a limited degree, i.e. not exceeding 4%-5% p.a. – would be positive for equities, but very negative for sovereign bonds regarded as the safest of havens (Bunds and US Treasuries) and positive for peripheral eurozone government bonds (Spain, Portugal, etc.).

Since 2008, several, if not all, developed countries have been pursuing a Keynesian fiscal policy mix. This has betrayed its limitations. To start with, governments’ financing capabilities are close to being exhausted. Secondly, the spending spree by governments has failed to deliver virtuous economic growth, as stubbornly high jobless rates show. Worse still, once government spending is reined back, growth immediately slows and drops permanently below potential.

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Cookie's picture

A bank staing the bleedin' obvious...shock, horror!

SheepDog-One's picture

Yea and they had no complaints when they were all broke and begging for free suddenly theyre all 'OMG'?

Panafrican Funktron Robot's picture

Key things wrong with this analysis:

1.  A govvy bond blowup blows everything up.  No incentive to do this.  These bonds are the transmission mechanism for wealth transfer.  

2.  Nominal GDP/income targetting.  As long as nominal GDP is slightly positive, they don't give a shit.  And they super duper don't give a shit about income.

3.  Inflation bleeding higher.  Yeah, no.  Money actually has to be circulated in the real economy for this to occur.  Why bother with that when you can fortress a shitload of cash risk free at the Fed, and use the rest to "support the markets".  

Snakeeyes's picture

Look at the chart of the Fed Funds effective rate, the 10 yr Treasury CMT, mortgage rates and the Fed Balance Sheet. It looks like the countdown to zero in the movie "Independence Day."

Water Is Wet's picture

"[QE] could lead to a massive distortion in the allocation of capital"

I thought that was the point.

yogibear's picture

 "could lead to a massive distortion in the allocation of capital"


That's an understatement. It has led to a massive distortion in the allocation of capital.


Moved from production to financialization.


Look at how many banks there are. Everywhere you turn is a bank.

mrktwtch2's picture

maybe by 2015 they finally lose control and the great reset happens..(a modified ww3)

SamAdams's picture

I'm afraid you are correct.  Those that are tied closely to American land will try to maintain their power through war. 

At any rate, I still get a kick out of economists practicing their trade without consideration of reality.  Similar to the antiquated "corporate fundamentals are important when choosing investments".  We know how this ends, the question is, when?  Until then, I'm long guns and gold.

Lohn Jocke's picture

What if we tried minting a tin foil coin, worth one trillion Axis and Allies Industrial Production Credits...

NidStyles's picture

With that screen name and comment it's impossible to take you seriously.

NidStyles's picture

The problem resolves around one tiny little detail that makes the belief in psuedo-economics possible. That the GDP is a meassurement of something real.


Anytime the Quantitative economist speaks about growth, he is speaking about numerical increases in GDP, which is largely made up of government spending. Expenditure is not growth, no matter how you cut it, it's expenditure and only expenditure.

Winston of Oceania's picture

More to the point now expenditure requires debt so every misallocated dollar spent creates a drag on actual growth.

buzzsaw99's picture

below potential?

Yeast does well in a warm moist environment in the presence of plentiful food. However, once the corporate yeast exports all the smaller yeast's jobs overseas the big yeast gets even bigger and starts shitting all over the little yeast. Then when the big yeast starts to starve the central banker yeast comes along and feeds it with copious clownbux thus maintaining growth. the end.

fuu's picture

And now we know why they call it bread.

disabledvet's picture

Now play me a little Guitar Man. I always loved that song.

AccreditedEYE's picture

Exactly. Santelli just had a great rant. Equity markets don't reflect economic reality anymore. How much of corporate profits come from overseas? How much production of major corporations is accomplished overseas? Where are large corporations looking for their next BIG growth markets? Yup.. overseas (BRIC's) The U.S. equity markets are no longer tied to U.S. prosperity and therefore can't be used as a mechanism to measure domestic prosperity. JUST BUY THE F-ING DIP.

NidStyles's picture

I like the way you worded that, but I can not agree with the premise. I have been to these countries that are said to have stolen all of these jobs that from what I can tell never actually existed here in the US under any profitable guise.


The rest of the world is currently getting shafted hard by the Fed's money printing. It has nothing to do with outsourcing anything other than inflation. Job's merely go to the cheapest labor when you don't allow the labor to go where the jobs are at. This is why protectionism doesn't work. This is why assuming that the balancing of wages against their actual value has little to do with recessions and economic downfall in the country the jobs are leaving from.


If half of you understood how wrong most of what you have come to believe is you would understand why things do not get better.

Cognitive Dissonance's picture

The puppet masters at play.

This is a very old game going back hundreds, if not thousands, of years.

Winston of Oceania's picture

"Worse still, once government spending is reined back, growth immediately slows and drops permanently below potential"

That's what they said would happen at the end of WWII, and in fact once the Gub'ment got out of the way EVERYTHING improved. It was not WWII that ended the depression, but rather it was the death of Roosevelt himself and the end of his policies. Truman did not persue them and once the money was in private hands being put to PRODUCTIVE uses we embarked on a path of TRUE growth.

SheepDog-One's picture

They've monetized the debt which is always the last act of all failed nations, and now just can't figure out how to go forward since the next step is the bigest civil war in world history....and I think they realize they're going to lose control and lose. Just my take. 

Bicycle Repairman's picture

It was the fact that the USA had the only productive resources after WWII scorched the earth everywhere else.

Japan and Europe spent a generation painfully restructuring their economies.  We need to start that process now.  Start by lowering $$ spent on foreign energy and foreign adventures.

NidStyles's picture

That is simply another fallacy. The US economy was more capable productivity wise than just about everyone else's even before WW2 started. The problem was the government was off misallocating capital and resources for FDR's New Deal nonsense.

Bicycle Repairman's picture

The world was suffering from excess capacity.  Destroy Europe, Japan and the USSR.  Capacity problem solved.  A chimpanzee could have been US president after WWII.  America's problems were over.

Until the rest of the world finished restructuring around 1970.  The loss of this tremendous advantage is one of the most underrated failures of the 20th century.

NidStyles's picture

They said that for the same reason they say it now. Quantitative pseudo-economists run the Academia and the government budgeting offices. Those are the people that believe in the GDP myth.

AccreditedEYE's picture


disabledvet's picture

Hmmm. "preconceived ideas." liiiiiiike "price only moves in one direction"(higher)? original. I'll keep that in mind as "bubble blowing" turns into "base building." (in a market sense. Not that real bases (military) aren't being built too. From "flyover" to "fly into country." who could have seen that coming...

SheepDog-One's picture

And we're not supposed to realize that it IS inflation behind making stocks 'higher'...while barely treading water with a collapsing currency as they print faster, harder.

JR's picture

Speaking of targets, as media mouthpieces for NWO gun grabbers go viral so goes Alex Jones. Lew Rockwell today presents "Alex Jones on the Piers Morgan smackdown":

Alex Jones: I Made CNN Producer Cry by Paul Joseph Watson

Radio host Alex Jones says his CNN confrontation with host Piers Morgan last night was so volatile that one of the producers of the show burst into tears during the commercial break.

According to Jones, the fact that the showdown became so out of control and off-script overwhelmed CNN staffers and sent them into a tailspin, including Piers Morgan Tonight producer Rachel Burstein, who began to shed tears.

Jones was supposed to appear in a third segment on the show to debate lawyer Alan Dershowitz, but CNN managers and Morgan himself were so outraged at his refusal to play ball that they changed the format of the whole program on a whim.

After the second segment, Morgan told Jones, “You’re done,” to which Jones responded by accusing Morgan of chickening out of the confrontation.

“We will defeat you,” Jones told Morgan, to which Morgan responded by snickering.

Jones said he also confronted Dershowitz on his support for creating warrants that would allow police and security services to torture suspects, adding that Dershowitz was not interested in debating Jones.

Before he even arrived at CNN center in New York, Jones described how he and cameraman Rob Dew were being followed around by undercover police.

Watch a video of Jones’ account of what happened after the cameras stopped rolling below, as well as the debate with Morgan itself.

yogibear's picture

Drugs and banks have flooded the airwaves.

Stick you with massive loans and then we'll drug ya up.

busted by the bailout's picture

Due to a lack of interest and bound by the limits of ZIRP, recessions are hereby forever banished from the Land of OZ.

-- Signed, Your most accomodating Wiz, Ben

NidStyles's picture

They shall no longer be called recessions, from henceforth they will be called abuses of economy by capitalists.




philosophers bone's picture

Why Gold "until 2015" which implies no Gold after 2015?  Is there an explanation for that?

glenlloyd's picture

I would guess it's because that's alegedly the end date for the Fed holding interest rates at zero...which it won't be.