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Central Planning: Omnipotence Or Hubris With A "Great Gaping Hole"

Tyler Durden's picture




 

Authored by Sean Corrigan of Diapason Commodities,

Herein lies the great gaping hole at the centre of official policy. Yes, the central banks can increase the stock of outside money almost without limit. Yes, they can make it as unattractive as possible for anyone to hold this (though when we come to think about the impact of negative rates, let us not forget that people are generally happy to pay to have their other valuables safely stored, or that bank charges used to be a routine imposition upon the short?term depositor). And yes, to some extent they can assume that their actions will enhance the relative appeal of things other than money or its partial substitutes.

 

Fed additions have driven the Real Money Supply to an unprecedented surplus over its long-term trend...


 

But what they cannot ever gauge is how much influence they can exert, nor how quickly their will may be done, nor even upon what specific mix of goods, services, or claims their policy will have most impact.

As the great Richard Cantillon pointed out three centuries since, the whole question is highly path dependent and the path actually followed will be the result of an incredible cascade of interactions between individual, subjective choices, each one altering the quantum field in which the next has to be taken. As we Austrians have been saying for the past one hundred years, this affects relative prices much more profoundly than it does average ones.

Crucially, it is in that matrix of relative prices that you find the motivations for all economic actions and the justification or otherwise for both the composition of the capital stock and the distribution and employment of labour. If entrepreneurial uncertainty and personal bewilderment have been major contributors to our ongoing malaise, as many of us have been arguing, it should be clear that we seek to introduce further sources of instability and potential disruption only at our peril.

Nor can our Sorcerer’s Apprentices be entirely sure that, as the demons they have summoned out of  the vasty deep continue to chip away at the foundations of trust in the very currency which they, the necromancers, are charged with upholding, they do not unleash a catastrophic collapse of the whole superstructure of values and contractual chains which towers above them, reducing the whole economic system to chaos in the process.

If you can convince me that any mortal can hold such a complex tangle of possible outcomes within their comprehension, I will allow that our monetary heretics may be right to do away with the combined practical experience and theoretical understanding of all those who have gone before them over the ages. Until you do, I shall be forced to withhold my endorsement and to mutter darkly about the unexpiable sin of hubris instead.

...

Amid all this posturing, it does strike your author as a touch ironic that while the commentariat treats Europe’s persistence with its failed experiment in ‘fauxterity’ as a clear and undeniable symptom of the mental inadequacy of its ruling elite, the members of that same consensus themselves retain what is, if anything, an even more delusional faith in the combined evils of inflation and Big Government as the magical means with which to conjure away all our present woes.

 

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Sat, 05/11/2013 - 17:38 | 3552131 Atomizer
Atomizer's picture

Central Planning Flight 0400

 

A Priest, a Rabbi and a Marxist-Socialist are in an airplane that is going to crash and there are only two parachutes. The Priest says, “I have always followed the word of Jesus, so I should have one of the parachutes.” The Rabbi says, “I paid for the plane rental, so I should also have one of the parachutes.” The Marxist-Socialist says, “I would normally advocate allocating these out according to one’s means, but I’m afraid of dying and would like one of the chutes, please.”

Sat, 05/11/2013 - 17:40 | 3552135 Silver Bug
Silver Bug's picture

Central planners are completely out of touch with reality.

 

http://marcfabersblog.blogspot.ca/

Sat, 05/11/2013 - 18:33 | 3552207 TheSilverJournal
TheSilverJournal's picture

Thanks captain obvious. By definition central planners are out of touch with reality if they think they can allocate capital better than markets.

Sat, 05/11/2013 - 19:05 | 3552247 negative rates
negative rates's picture

Now you're starting to make sense.

Sat, 05/11/2013 - 23:15 | 3552859 Sam Clemons
Sam Clemons's picture

They're not trying to be better than markets.  They're trying to give money to their friends in the central banking cartel.  

Sat, 05/11/2013 - 17:46 | 3552142 knukles
knukles's picture

Two 10 y/o boys are in hospital for operations, one for a tonsillectomy and the other for a circumcision.  The first asks the second what he's in for and he says, a tonsillectomy.  To which the first says, "No big deal, they'll put you out, snip out your tonsils and then when you awake give you all sorts of ice cream and cold slurpies.  I had it done when I was 8.  You'll be fine. Piece of cake."
So he asks the first one what he's in for and he says to get circumcised.  And the second one looks at him in abject horror and whispers; "Holy shit dude, I had that done when I was born and couldn't walk for over a year."

Sat, 05/11/2013 - 18:08 | 3552162 ACP
ACP's picture

Did you hear Bernanke broke his neck diving into his pool?

He forgot his seasonal adjustment.

 

What's the difference between an economist and a demented old fart?

The economist is the one with the interns.

 

OBAMANOMICS: You have two cows. You have to take care of them, but the government takes all the milk.

 

And finally, an actual quote:

"An economist is a person who confronted with an eight foot high wall, immediately assumes he is ten feet tall."

-John Zanetti, Victoria University, NZ

1971

Sat, 05/11/2013 - 23:55 | 3552940 Abi Normal
Abi Normal's picture

I've always liked the words

necromancer

heretic 

hubris

Quite fitting for the apes in DC are they not!

narcissit is another good one, simply put EVIL men and women who seek to control the destiny of others.  They know what's best for for us yes?

Hell NO, I wont GO!

Sat, 05/11/2013 - 17:38 | 3552133 knukles
knukles's picture

Sorta like the cognitive dissonance of the governments immigration and emigration policies.  People are welcomed into the country, illegally and not held responsible to pay taxes yet collect a myriad of services and benefits while those wishing to leave must pay an estimated tax equal to that which they would have paid if they'd stayed but will be consuming no services or benefits.

Amazing.
Land of the imprisoned and home of the broke

Sat, 05/11/2013 - 18:51 | 3552231 kchrisc
kchrisc's picture

This tax and welfare thing is a misnomer, fallacy and error.

Most illegals PAY taxes and MORE than a citizen (legal subject) of the realm.

How, you may ask?! Well most if not all use someone else's SSN and usually cannot get a return and even if the do they can not get the tax credits that legals get. Others use an IRS "nine number" as their SSN and may or may not get a return but once again no tax credit. So the gov reaps billions in stolen loot that they wouldn't if the workers were legal. One of several reasons the "most powerful government" on earth has chosen not to lock the border--money and power at work again.

As for welfare and "benefits." Well, that "rob Peter to buy Paul" shit shouldn't exist in the first place. To the degree that is does, many illegals cannot and do not get "benefits." Yes some do, and that too is for the same reason that welfare exists in the first place: the pols and crats benefit from the "pass through," (The bigger the budget the more they can skim off, directly and indirectly, for themselves) and are buying loyal subjects as well.

Illegals also pay billions into the SS ponzi scheme with no hope of ever receiving any future "benefits." This is a direct short-term subsidy off SS. Another reason why the border has not been closed.

I did income taxes for a while in the early 2000's and had many illegals come to me for help. In most cases they could get nothing of what they paid in back while a legal with a similar income would receive a return and tax credits.

The ones that were "juicing" the shit out of the system were the spics and niggers, especially the spics. No shit, most of them could not think their way out of a wet paper bag, but gaming the tax, "benefit" and SS system came second nature. I was in awe.

My point is this: if the government is the enemy, then quit buying who they say is to blame, because it and they are all a lie. Also, the priority should be the ones that have destroyed the Constitutional republic and the economy of the American people--let's deal with "Juan" later after we deal with the NDAA, Patriot act, and FedRes traitors.    hujel

Sun, 05/12/2013 - 00:16 | 3552977 Abi Normal
Abi Normal's picture

You are right about the credits no doubt, but your argument goes to shit when many of the illegals are paid cash on the barrel head/  So its a wash.  Also many traffic drugs and drain our econ of billions, not to mention they wreck the productivity of those they sell to.  In addition they also commit crimes at a high rate.  In addition they get free healthcare in emergency rooms, and get welfare...so your argument falls way short of the complete truth.

Nice try tho, brah!

Sun, 05/12/2013 - 13:35 | 3553781 kchrisc
kchrisc's picture

My main point was and is this: "Juan" didn't destroy the economy or pass and sign NDAA or the Patriot act, or make "kill-lists" or create elaborate "violent" hoaxes at schools and at sporting events to support their repugnant agenda. And welfare, which is looting used to support dependency, shouldn't exist in the first place.

To take their bait and focus on "Juan," and Muslims for that matter, as the cause of all the ills affecting the American people is to become one with them when what we should be doing is lining up against them, the real source of our miseries and dim future.

It is about priorities. We can deal with "Juan" when the thieves and murderers of the US government, at all levels, and their bankster masters are removed and taken care of.

The Four R's: Rejection; Revolution; Retribution and Restoration of the Constitutional republic

         hujel

Sat, 05/11/2013 - 17:46 | 3552144 Stuck on Zero
Stuck on Zero's picture

Not central planning.  Central theft.

 

Sat, 05/11/2013 - 18:44 | 3552222 TheSilverJournal
TheSilverJournal's picture

What else is central planning other than central theft? Steal producers of capital's ability to allocate the created capital so the central planners can instead have the power and control to allocate that stolen capital. Not only do they steal from the producers of capital, but they steal from all humans as those resources are no longer being distrubited efficiently by the market and now the world has less overall.

Sat, 05/11/2013 - 19:39 | 3552293 Melin
Melin's picture

Confiscation Corps

(or Confiscation Corpse, depending on the abilities of the orator)

Sun, 05/12/2013 - 05:34 | 3553187 falak pema
falak pema's picture

empire building ducky; gone global. Not easy but then the stakes are high!

Its humanity's destiny on the line now.

That's what we are witnessing and they are succeeding. We now have a world oligarchy and "the people's meme" is now totally controlled by crony government. 

This Pandora's box is reaching runaway momentum. So many conflicitng tensions of high expectations that "bang" becomes a likely outcome when thieves fall out from their global Olympian pedestals.

Gang banging is alas much in fashion in Bengladesh today and elsewhere tomorrow; all for consumerists on borrow. 

Sat, 05/11/2013 - 17:48 | 3552147 W T F II
W T F II's picture

Hey, this doesn't sound like a serious potential problem, does it...??:

"they do not unleash a catastrophic collapse of the whole superstructure of values and contractual chains which towers above them, reducing the whole economic system to chaos in the process."

NAAaah...!!

Central bank obstinence reminds me of Gov. George Wallace barricading the doors of the University of Alabama to bar the free-market's exercise of qualified individuals partaking in their chosen future..."QE then, QE now and QE forever...."

How'd THAT work out...? Can you imagine the Crimson Tide's record as a "Whites-only" squad..??

So, how can the Fed direct human actions for very long..??

Sat, 05/11/2013 - 17:56 | 3552159 buzzsaw99
buzzsaw99's picture

entrepreneurial uncertainty and personal bewilderment my ass

Sat, 05/11/2013 - 17:59 | 3552160 Atomizer
Atomizer's picture

Breaking Wind:

G7 to press on with bank reforms, gives Japan free pass

AYLESBURY: Group of Seven finance officials agreed on Saturday to press on with measures to deal with failing banks and gave a green light to Japan’s efforts to galvanise its economy. British finance minister George Osborne said the finance ministers and central bankers meeting outside London focused on unfinished banking reforms.

The emergency rescue of Cyprus in March acted as a reminder of the need to finish an overhaul of the banking sector, five years after the world financial crisis began. “It is important to complete swiftly our work to ensure that no banks are too big to fail,” Osborne told reporters after hosting a two-day meeting in a stately home 40 miles outside London.

“We must put regimes in place ... to deal with failing banks and to protect taxpayers and to do so in a globally consistent manner,” he said.

Germany has previously come under pressure to give more support to a banking union in the eurozone. The plan could help strengthen the single currency area, but Berlin worries it may pay too much for future bank bailouts if it signs up to a scheme to wind up failing banks. As at previous international meetings, Japan escaped any censure for printing money on a scale that has pushed the yen sharply lower.
Osborne said the G7 - the United States, Germany, Japan, Britain, Italy, France and Canada - reaffirmed that fiscal and monetary policy should be aimed at domestic concerns, not currency manipulation “We will not target exchange rates,” Osborne said at the end of the meeting at the 17th-century Hartwell House. “I would say that the statement by the G7 of earlier this year was a successful statement and one that has been held to.” Some countries are concerned Tokyo is engineering an export-led recovery that could hinder other regions’ ability to grow.
The yen hit a four-year low against the dollar on Friday, beyond the psychologically important 100 yen mark, driven in part by Japanese investors shifting into foreign bonds, a move that had been expected since the Bank of Japan unveiled a massive stimulus plan. But having urged Tokyo for years to do something to revive its economy, other world powers are not in a strong position to complain now that it is doing so. Then there is the fact that central banks such as the Federal Reserve and Bank of England have printed money in the way the Bank of Japan is.
Debate has also heated up about the need for governments to ease up on austerity, something Germany, Britain and Canada view as a mistake but Washington, Paris and Rome are in favour of. Osborne said there was less disagreement about whether governments should focus on debt-cutting or growth-boosting measures than is commonly assumed.
“Everyone is clear that there needs to be credible medium-term fiscal consolidation ... We also agreed that there needs to be flexibility,” he said. Several officials from visiting delegations questioned why Britain had called the meeting so soon after the IMF discussions in Washington but Bank of England Governor Mervyn King said the informal nature of the discussions had paid dividends. reuters

http://www.dailytimes.com.pk/default.asp?page=2013%5C05%5C12%5Cstory_12-5-2013_pg5_19

Sat, 05/11/2013 - 18:22 | 3552196 Spigot
Spigot's picture

British finance minister George Osborne said the finance ministers and central bankers meeting outside London focused on unfinished banking reforms.

The emergency rescue of Cyprus in March acted as a reminder of the need to finish an overhaul of the banking sector, five years after the world financial crisis began. “It is important to complete swiftly our work to ensure that no banks are too big to fail,” Osborne told reporters after hosting a two-day meeting in a stately home 40 miles outside London.

We must put regimes in place ... to deal with failing banks and to protect taxpayers and to do so in a globally consistent manner,” he said.

~~~~~

So, by George, they are swiftly completing "overhauls" and "puting regimes in place" ... in order to make sure they are ready to "protect tax payers" ... so that ALL BANKS REGARDLESS OF SIZE , UPON FAILING ...can be "delt with".

Let me translate:

"We, the world ruling elites will confiscate ALL DEPOSITS FROMALL DEPOSITORS in order to ASSURE that ALL FAILING BANKS (and they will all fail) can survive, WHILE YOU DEPOSITORS ARE FUCKED IN EVERY HOLE AND A FEW WE WILL MAKE FOR THE OCCATION..."

~~~~~

TILT - End of Game

Sat, 05/11/2013 - 20:06 | 3552349 bunnyswanson
Sun, 05/12/2013 - 06:37 | 3553203 css1971
css1971's picture

We must put regimes in place ... to deal with failing banks and to protect taxpayers and to do so in a globally consistent manner

Bail ins - globally. Funnily enough they're doing nothing, but very loudly. The mechanism has been in place for 200 years to confiscate the assets of depositors when a bank fails.

 

Sat, 05/11/2013 - 18:13 | 3552179 Aurora Ex Machina
Aurora Ex Machina's picture

Diapason Commodities?

In musical tuning theory, a Pythagorean interval is a musical interval with frequency ratio equal to a power of two divided by a power of three, or vice versa. For instance, the perfect fifth with ratio 3/2 (equivalent to 31/21) and the perfect fourth with ratio 4/3 (equivalent to 22/31) are Pythagorean intervals.

All the intervals between the notes of a scale are Pythagorean if they are tuned using the Pythagorean tuning system. However, some Pythagorean intervals are also used in other tuning systems. For instance, the above mentioned Pythagorean perfect fifth and fourth are also used in just intonation. [wiki]

 

If you can convince me that any mortal can hold such a complex tangle of possible outcomes within their comprehension...

 

That's why computers are so useful, especially the new qubit ones.

Strange vibration to this note within the weave, full of purple prose and attempts to drawn the quantum in.

Venus, Jupiter, and Mercury are converging for a beautiful sunset conjunction. The show begins on May 11th and climaxes two weeks later. Get the full story and a video from Science@NASA.[Space Weather - the Sunset Triangle for the full moon of the 25th is going to be rocking]

 

Nice to see the Golden Hall throwing an opinion in, all said and done.

Sat, 05/11/2013 - 19:07 | 3552253 negative rates
negative rates's picture

Thanks but i'll stick to Earth for now.

Sat, 05/11/2013 - 19:08 | 3552255 kito
kito's picture

you speak with forked tongue......

Sat, 05/11/2013 - 19:44 | 3552264 Aurora Ex Machina
Aurora Ex Machina's picture

Are you requesting a translation? If you don't get the references, that's an easily solved matter. Ask and ye shall receive.

 

I've already told you that I'm not a fan of the Apep myth, which is where your language originates, however many years and creeds you add to it. And yes, I find it amusing that your claims to originality are non-existent, as the "Chosen Ones", who then moved to "the Son of God". (??????? ??? ?? ???????? ??????? ??? ?? ??? ???? ?? ???)

Time to change the music.

 

Oh, and lest you hide behind Hollywood: The Native American translates as "two tongues", not "forked tongue". They didn't share your mythology, although those who translated felt it necessary to attach it to your primal myths. And then they were wiped out. To make it simple for you, it's called "appropriating culture", as if those you committed genocide upon actually shared your values.

It's the historical / linguistic / mythological version of pissing on someone's grave, and you should feel shame that you use it, without knowing these truths.

 

 

So, next time you want to even attempt to link my posts to the concept of lying, don't, unless you have significantly upgraded your abilities, or can prove it. Now wriggle away, Apep worshiper.

Sat, 05/11/2013 - 21:34 | 3552561 kito
kito's picture

You are at best..... Interesting.......

Sun, 05/12/2013 - 11:31 | 3553546 Aurora Ex Machina
Aurora Ex Machina's picture

Look at the thread's title, then work the joke out. As a hint, Golden Halls links to Josef Strauss: Music of the Spheres, Waltz / Música de las esferas, vals, op. 235

New Year's Concert of the Vienna Philharmonic, conducted by Franz Welser-Möst, at the Golden Hall of the Musikverein in Vienna, Austria on January 1, 2013.

 

You'll note the author of the piece self-identifies as a member of the Austrian Economic school. There's more to the joke (knowledge of Pythagoras, golden ratios, planetary alignments & their rarity and so on will help), but meh. I also threw it together within a couple of minutes and whilst drunk, so at best it's whimsical.

 

You are at best....... Humorless.......

Sat, 05/11/2013 - 19:02 | 3552241 blindman
blindman's picture

Frenchfries With Gravy
http://www.youtube.com/watch?v=Y-1T-xrYI8Q
.
somewhere around minute 10. if this photo is real
and not altered then that is that.
.

Sat, 05/11/2013 - 19:12 | 3552259 exartizo
exartizo's picture

You underestimate them.

Sat, 05/11/2013 - 19:20 | 3552270 polo007
polo007's picture

According to Bank of America Merrill Lynch:

http://fs1.hidemyass.com/download/h8Cqx/1s3nkvl62fipb7krsefh0bajr1

Easy Fed policy: too much of a good thing?

The costs of easy Fed policy

Fed policy is aimed at stimulating economic activity, which involves incentivizing households, businesses and investors to take more risk. Investors have obliged, resulting in low rates, tight credit and mortgage spreads, and new all-time highs for major stock indices. But some worry the Fed is causing a dangerous search for yield that could lead to new asset bubbles and financial instability. Our assessment is that Fed policy has not led to an increase in systemic risk.

Risk-taking is good; systemic risk is bad

This piece provides a guide for monitoring financial stability and the linkages between asset markets, financial institutions and the real economy. We believe the ultimate question is whether the Fed’s policies have increased systemic risk.

This depends on the following, which we address in the note:

- Do market valuations appear overstretched and are there signs of asset
bubbles forming?

- Is there an increase in leverage in the market or an overreliance on short term funding? Would systemically important institutions be at risk of failure?

- How are the beneficiaries of easy credit using the proceeds? Are they using debt to fund risky investments, buy homes they can't afford or go on a consumption spree? Or is issuance going toward improving their balance sheets and lowering their vulnerably to the eventual rise in interest rates?

Risk transfer underway, but systemic concerns muted

We argue that Fed policies have encouraged a transfer of risk from borrowers (indebted households and corporations) to creditors (investors) who are willing to accept lower risk premiums. Increased real money participation in credit markets mitigates the systemic implications of this risk transfer. Corporate and household balance sheets are healthier, thanks in part to easy Fed policy, but signs of increased appetite for leverage in the corporate sector bear close monitoring.

Fed to stay the course

Our survey of financial conditions and systemic risk supports our base case that the Fed will maintain its asset purchase program at the current pace of $85bn/month through March 2014, followed by a 6-8 month tapering period.

QE will limit the upside in yields

The potential for a sizable rise in yields will be limited if the Fed maintains QE well into next year as we expect. We forecast a gradual rise in 10y rates by year-end.

Sat, 05/11/2013 - 19:48 | 3552312 WTFUD
WTFUD's picture

" corporate and household balance sheets are healthier "
It's sad, so sad, it's a sad sad situation and sorry won't do.
The corporates b/s maybe due to massive layoffs are healthier but households are dying a slow death. Energy & food inflation (+10%) cannot be covered up so why the B/S Amigo?

Sat, 05/11/2013 - 20:14 | 3552345 essence
essence's picture

What a weenie. That's right, I call Sean Corrigan of Diapason Commodities just that.
I call him a weenie, as well as all the other 'in the system' hypocrites ZeroHedge regularly presents offering lukewarm potshots as folk who can't quite call a spade a spade; for to do so  might impact their income stream from entrenched status quo customers.

They're like some dilettante who decides to get a tattoo, but not someplace publicly visible.
Oooouu   ....tres avant garde.
Chicken Shit.

Decide where you stand and hold your ground.

Sat, 05/11/2013 - 20:18 | 3552373 enloe creek
enloe creek's picture

what does "unexpiable sin" mean?

Sat, 05/11/2013 - 21:30 | 3552548 Element
Element's picture

Unforgivable sin. (it's really inexpiable)

But as sin is an invention created to scare and brain-wash generations of children to life-long obedience to child-molesting and hypocritical priests, just disregard, you're forgiven.

Sat, 05/11/2013 - 21:35 | 3552563 Things that go bump
Things that go bump's picture

It means you can't atone for it. No forgiveness for you, chum.

Sun, 05/12/2013 - 07:32 | 3553233 Boxed Merlot
Boxed Merlot's picture

Expiation is a term we don't hear too much but is critical in the idea of justice and recompense.  Forgiveness just gets a person to gound zero.  Expiation actually deposits merit or favor into the account of the person.  In Christianity, this is the act of appropriating the righteousness of Christ into the account of the believer, providing the needed justification for communing with God.

Sat, 05/11/2013 - 20:32 | 3552411 Ban KKiller
Ban KKiller's picture

When the LSMFT market starts to approach PCP or LSD levels tell the BLTS ASAP. 

Sat, 05/11/2013 - 23:30 | 3552896 Abi Normal
Abi Normal's picture

I seem to remember a picture of Benny boy by Will Banzai...what a big head he has and those eyes, scarey I tell ya.

Sun, 05/12/2013 - 01:02 | 3553020 polo007
polo007's picture

According to Deutsche Bank:

The lack of confidence in final demand that seems to justify corporate reticence has a mirror image in the financial sector’s liquidity trap – the fact that corporates prefer to save and not to leverage and invest. And it seems reasonable to justify the lack of confidence in the context of ongoing and unresolved fiscal tightening; household savings rates that are “naturally” capped not to go to zero or below this time; and a global sector that seems decidedly weaker. In other words, of all the Keynesian circular flow of income external drivers there are none doing any driving except corporate investment. But the Catch 22 is that corporate investment itself is restrained by the fear for the lack of the other drivers! The answer might be waiting for a pick up in the external sector; it might be seeing through the fiscal austerity and or at least suspending or reversing some of it; or it might be further improvement in the household balance sheets via housing. However all of these likely need time.

In this context we can then handicap central bank reaction functions. While we wait for something to give positively in favor of a stronger recovery, policy stays unusually easy. This then creates the dichotomy of buying more time in the near term through easier policy to deliver a proper recovery whilst potentially running the risk longer term of too much inflation the other side. The pent up monetary stimulus that exaggerates a liquidity trap now becomes a challenge to control on the other side. This schizophrenia has been played out numerous times since 2008. And it defines the unusual dislocation between ultra low real yields and high inflation expectations (inflation risk premia) that is also known as financial repression. Financial repression being one of the metrics that is supposed to encourage more risky lending and to break the liquidity trap.

The consensus of course is that after a certain amount of financial repression, the world will sufficiently improve and central banks have the tools to contain inflation so that the bulk of financial repression is contained to ultra low real yields rather than ultra high (realized) inflation. In this spirit Bernanke and now Kuroda are extremely confident. However we would actually go one stage forward. In the current low growth equilibrium there is a good chance that there is jolt to higher growth because the fiscal dynamics can never be resolved. This is particularly true for peripheral Europe and Japan; less true for the US but then partly depends on the willingness to address structural contingent liabilities. Absent that, the US might well be in the same boat as the others. In this case, the only solution is for the central banks to end up holding the majority of government claims and to consolidate their balance sheets with the government. In one fell swoop, cumulated deficits that may stretch back several years are ex post deficit financed. This would almost certainly break the liquidity trap in that it would represent a massive relief to expected fiscal tightening for the private sector. The central banks would quickly need to use their “tools” to contain a splurge in lending and control inflation. Ex post however there is no reason why inflation would materially rise, as long as liquidity was tightened commensurately with the debt relief implied by consolidated balance sheets of the central banks and the government. Moreover if G3+ acted synchronously, at least for the currency majors there may be little fall out.

So the interesting question is why not? Is there any cost of consolidation when we are otherwise in an eternal liquidity trap? The answer is, unfortunately yes. This would have to be a one shot game. Going forward governments’ would unlikely be able to borrow from the private sector for a long long time precisely because it threatened financial repression, even if only in the kind of negative real rates ex ante rather than even more negative ex post. Instead, government would be obliged to run balanced budgets. These authors don’t think this is necessarily a bad outcome. However it does mean that if and when consolidation comes, as much as possible needs to be consolidated otherwise fiscal policy would be on a perpetual tightening path to run the extant liabilities down. If you are going to consolidate, do it big because you are likely to have only one chance. It may seem extraordinary to think about consolidated balance sheets but there are plenty of examples in history, particularly during wars, of deficit financing. And however outlandish and non consensus it is, remember that a few years ago we talked about QE never ending, which at the time was also outlandish. Consolidation sounds an anathema to consensus but it is a logical conclusion to the liquidity trap and the probability rises each day that growth disappoints.

Sun, 05/12/2013 - 04:44 | 3553171 amanfromMars
amanfromMars's picture

The future, but not as you know it  ........ http://www.ur2die4.com/?p=4090 ?! 

Go on, deny it, and allow its stealth to work ITs Magic Phormulae.

You do know what phorming is, don't you?  The result of smarter phishing with more advanced application of intelligent programming, which would not disagree with those who would imagine it to be IT brainwashing of the masses/virtual machines.

 

Do NOT follow this link or you will be banned from the site!