Things That Make You Go Hmmm... Like The End Of Central Bank Innocence

Tyler Durden's picture

Take a long, hard look, Janet," warns Grant Williams, "the landscape over which you cast your eyes when you accepted the poisoned chalice prestigious role of Fed Chair changed last week." Just two days before you were confirmed in a rather lovely ceremony, in an interview in Mumbai, Raghuram Rajan (one-time Chief Economist at the IMF and current Governor of the Reserve Bank of India) rather UNceremoniously dropped something of a bombshell that went largely unreported (perish the thought, in this era of dogged journalism) but that most definitely queers your pitch in a major way:

(Bloomberg): India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira.


Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world's top developed and emerging markets gather in Sydney. The Fed's Jan. 29 statement made no mention of developing economies. "International monetary cooperation has broken down," Rajan, 50, said yesterday in an interview in Mumbai with Bloomberg TV India, noting how emerging markets helped pull the global economy out of crisis starting in late 2008. "Industrial countries have to play a part in restoring that, and they can't at this point wash their hands off and say we'll do what we need to and you do the adjustment."

Now this is going to be a problem, Janet.

Potentially, a BIG one.

The standout feature of central bank policy over the last five years has been the spirit of cooperation amongst the men ("And women!" — Sorry, Janet, "and women") in charge of the world's central banks.

Whilst this spirit of cooperation has been somewhat unwilling in a few cases (yes, Glenn, I'm talking about you), it has been vital to establish a unified message that would give investors the sense that these guys ("And girls!" — Sorry, Janet, "and girls") were talking (a) to each other and (b) to us from a common perspective, that perspective being low rates and free money forever.

Then came The Taper.


The emerging-market countries that have seen strong inflows as the Fed's QE program sent billions of dollars their way in search of returns, are now in a bit of a fix, as the chart below demonstrates:


Yes, folks, central bankers lie. The job demands it. That means that they join politicians in the category marked "cannot be trusted," and yet investors the world over are not only relying on the promises made by these individuals but also trusting them to be both transparent and honest when the job demands they be neither.

Given that they lie to us, and given that they are making two key representations to us, should we not perhaps take a moment to think about the two inputs to this particular equation?

Politicians across the globe are assuring us that (amongst other lies things):

1) The "recovery" is either here or right around the corner.
In fact, it is neither.

2) Remaining in the EU is the best option for Greece, Spain, Italy (and France).
It is not.

3) Soaking the rich is the answer to a multitude of problems.
It isn't.

4) Raising taxes will generate the necessary revenue without having a negative effect on the economy.
It won't.

5) Future promises of entitlement payments are solid.
They aren't. Defaults are inevitable.

Meanwhile, the central bankers of the world are promising us that:

1) Interest rates will remain low for a very long time.
In the end, it's not central bankers' choice to make.

2) Quantitative easing has no ill effects and can be withdrawn at will without causing any problems.
It can't be.

3) Printing money will not translate into higher inflation.
It will. It just hasn't yet.

4) They will do "whatever it takes," and that will be enough.
There is a limit to what they can do, and it will ultimately not be enough.

5) They are all in this together.
They're not. It is every man for himself now, and the Fed will screw them all.

So here we are.

Having established that, like politicians, central bankers are required to lie to us in order to be able to do their jobs, we are left facing a couple of crucial questions. First, IS tapering tightening, or not? Secondly, what does all this chaos in emerging markets in the wake of The Tighten Taper mean, and where does it take us from here?

Fortunately, the great Albert Edwards of Soc Gen fame took the words right out of my mouth this week:

(Albert Edwards): Tapering is tightening, which inevitably ends in recession, bailout and tears.


Our warnings throughout last year that an unraveling of emerging markets (EM) was the final tweet of the canary in the coal mine have still not been taken on board. The ongoing EM debacle will be less contained than sub-prime ultimately proved to be.


The simple fact is that US and global profits growth has now reached a tipping point and the unfolding EM crisis will push global profits and thereafter the global economy back into deep recession. Our thesis on how EM would be pushed to crisis was simple, especially as we saw close parallels with the 1997 Emerging Asia currency crisis.


We saw yen weakness further undermining an already weak balance of payments situation in the emerging world as a direct replay of 1997. A strong dollar/weak yen environment is typically an incendiary combination for EM, and so it has proved once again. Having reached tipping point the yen will often rally strongly as it has now and as it did in May 1997. This may or may not delay the impending EM implosion for a few weeks. Indeed the Thai Baht, the first domino to fall in the Asian crisis, briefly rallied strongly (vs the US$) in early June 1997, reassuring investors just ahead of its ultimate collapse.


There has never been any shadow of doubt in my mind that tapering = tightening, and I marvel that the Fed convinced anyone otherwise. A Fed tightening cycle inevitably plays a key role in triggering the next crisis (see below). Plus ça change, hey?


1970 Recession/Penn Central Railroad
1974 Recession/Franklin National Bank
1980 Recession/First Penn/Latin America
1984 Continental Illinois Bank
1987 Black Monday
1990 Recession/S&L and banking crisis
1997 Asian currency collapse/Russian default/LTCM
2007 The Great Recession/Collapse of almost the entire global financial system
2014 Emerging Market collapse/deflation/recession/another banking collapse etc.

Albert is right, of course.

Not only is tapering most definitely tightening (don't listen to what they say, watch the results), but we have likely seen just the beginning of the fallout from the Fed's new course.

Will they stick to it? No. They won't be able to. They MAY taper another $10 bn in March when Janet Yellen's first rate decision is announced, but I suspect that by then markets will be in such a state of disrepair that excuses will be made as to why the taper has been suspended. You can bet your bottom dollar that there will be some frantic calls put in to Ms. Yellen's office by her peers around the world between now and March 20, all of which will be begging calling for an end to The Taper.

Ultimately, QE will continue to be expanded until it implodes in a fireball the like of which has never been seen before. There's no choice, I am afraid, because the alternative would involve the telling of some very harsh truths by politicians and central bankers and the bestowing of some serious pain on an electorate that already holds them in contempt.

Think those truths are going to be volunteered?

Me neither.

The splintering of central bank policy is just the beginning.

This is the end of the innocence.

Full must-read Grant Williams letter below:




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Occams_Chainsaw's picture

Who needs charts and bullshit reports when you can print money?  MOAR!!!!!!!

Pool Shark's picture




In the Land of Banking where the Shadows lie.

One Fed to fool them all, One Fed to grind them,

One Fed to trick them all in the darkness blind them.

In the Land of Banking where the Chairmen lie.


The Dunce's picture

Nobody talks about the 800 pound gorilla in the room.  We're an offshored economy.  Doesn't matter what the FED does.  The jobs are going, going, gone.  Bitches.

SafelyGraze's picture

in an EM country, people who want dollars have to get them from the EM's dollar reserves

those reserves are running out

which means people who want dollars will simply not get them

at which point they will begin to discover that *other* forms of currency exist

who knew?

sufficient tapering will force the emergence of other reserve currencies

kind of like squeezing a pimple makes the pus emerge



Kirk2NCC1701's picture

Gooch, that's a "National Shave" in French speakeasy.

As in "a slight fat-finger slip" between National Savings and Shavings.  :-)

dtwn's picture

Seems like Grant is extra snarky in this letter.  I like it!

Jendrzejczyk's picture

Don't even we, the unwashed masses, know that they really aren't tapering?

$95billion-$85 billion. What's the difference?

acetinker's picture

We think so, but there's no accountability in their world, so who knows?  More important (to me, at least) is why did Rajan say what he said, when he said it?  Because surely, the CONS themselves know that once CONfidence is lost, the CON is at its end.

Professorlocknload's picture

My take, the Taper talk was to appease those who started asking 'If the economy is doing so well, why does QE continue?'

Fed Jawboning is all it is. It's what they do. As stated above, "What choice do they have?"


BringOnTheAsteroid's picture

The Fed has never been audited. They can do whatever they like as long as, just like Bernie Madoff, the quarterly statements and reports have in them what people expect. The Fed, I am certain of this, will be saying they are tapering while behind the scenes creating money in quantities vastly greater. Why wouldn't they. They have no compunction, no integrity, no accountability. Just as the majority of us, if given the chance to steal with absolutely no possible way to get caught, will steal. Just a little bit. Then after awhile that amount of stealing doesn't seem that bad so we'd steal a bit more. Soon you've established a group called the Federal Reserve. All these actions of accumulating more and more wealth is just the primordial ape in us who needs to collect more food, more skins, more weapons to ensure survival, further to provide that sense of comfort that survival is ensured.

Wouldn't it be paradoxical if the outcome of the collapse of the economic system is so bad, so unimaginably bad, that once entering the twilight zone of fabricated reports, fabricated company earnings, fabricated GDP numbers, fabricated debt, fabricated employment statistics, we never leave. I wonder if it's possible and for how long the facade could be maintained keeping in mind no matter how bad things are now, they would just be infintely worse if the curtain was pulled back. Just like the frog in the slowly boiled pot, to finally realise its predicament would be to jump from the pot into the fire. Maybe we'd just all prefer to be slowly boiled than face the unimaginable.


prymythirdeye's picture

Great comment BOTA.  Very well spoken.  Thanks for your insights!

Thought Processor's picture

Yep.  Though if they keep trashing the dollar the markets will keep rising, a la Zimbabwe and 99% of america will think all is well.  Expect veiled price controls on US goods somewhere in the future in order to extend the pretend.

Oh and those other countries that are having minor currency issues now.  We'll just call that collateral damage.


SilverIsMoney's picture

I just hope i'm ready when it all comes apart...

The Gooch's picture

"Chance favors the prepared mind"

acetinker's picture

That ain't no shit Gooch.  Any preparation you do/make/accumulate physically is a potential anchor.  The mind is totally portable.

FilthyPhil37's picture

So, I guess the outcomes in the flow chart will definitely tell us nothing about "Do Nothing," as no one seems to be trying that option. Can I have what is behind door number three, please?

KickIce's picture

The innocense ship sailed a long time ago for these bastards.

MagicMoney's picture

Yup. FX rates become volatile in a internatinal when one central bank decides to change policy course, it effects other countries in the process. The impact of such changes is capital evaporating. Could the era of floating FX be coming to the end, or just more hermit kingdoms with closed off economies? 

i_call_you_my_base's picture

I can't imagine that Yellen gives one shit about India. Draghi either. Draghi pretty much said so in his press conference last week.

marathonman's picture

I don't know that she honestly cares that much about the US.  Keeping the banksters in the chips is what its really all about regardless.

Tinky's picture

Grant Williams is consistently one of the clearest and best guest posters on ZH.

Raging Debate's picture

Edit: Dupe see below why the double posts? Latency?

Raging Debate's picture

Tinky: +1,000

 We pay politicians to lie for us. They have been so drastically overpaid they actually believe they are bigger  then the people themselves. Reality of the pecking order:

 1) Citizenship

 2) Government

 3) Central Bank

  It is an inverted pyramid as we speak is it not? The good news is modern communications. Reorganization on a global scale can happen in several years instead of world wars. The bad news is stagflation feels like death and such slow growth REALLY pisses me off, especially seeing those profit from misery in the bust and creating social inequality past 2008. Thanks for reminding me of the dark nature of our species, stealing my TIME in labor I will NEVER get back and acting as if you assclowns are immortal gods when in reality you sit on the shitter same as the rest of us a couple times a day. The gold plating doesnt make the bowl movement any more interesting fellas. We're a few decades from literal immortality and your mastubating yourselves on bullshit. That is indeed what sociopaths do, wanking the mental illness out on the global population while you can get away with it.


Treason Season's picture

Speaking of India, Stewart Thomson has reported India´s possible new PM is pm friendly. 

¨ Narendra Modi is the front runner in national election polls. This man has been weighed in silver, a ceremony reserved for Hindu priests. He’s publicly stated that he doesn’t want to stifle the goldsmith industry. He wants to develop it.

disabledvet's picture

I think this is absolutely spot on. I just don't see what difference "blowing out the balance sheet another trillion" actually does here.

Everyone says "taper failed in Japan"...but in fact QE failed in Japan.
I think a good argument can be made that in the USA...because of the timing of QE...that it "bought time" so speak for "the crazy people" (Wall Street speculators) to clean up the balance sheets of the banks they blew up.

Has Wall Street changed as a consequence?

The question therefore is..."who's responsibility is this bubble?"
The BTFD people?
I have a "few" doubts.

What's a hundred billion dollar reverse repo again?

booboo's picture

Right you are, since 2007 the entire scheme has been to move private debt onto the public. No telling how much trash has been stuffed into pension funds but by the time the scheme is discovered public and private pensioneers will be sitting on their dead electric scooter in a three week old shitty Depends at the curb waiting for the check that will never come. 

Raging Debate's picture

Booboo your wrong, the check will come. It will be for $1,500 and rent will cost $1,300 by then. like the Russians getting $300 and rent costing $250.  

Raging Debate's picture

Booboo your wrong, the check will come. It will be for $1,500 and rent will cost $1,300 by then. like the Russians getting $300 and rent costing $250.  

LMAOLORI's picture



Almost unbelieveable how much of that private debt was shoved off to Taxpayers if you recall the Fed made that accounting change...


Accounting tweak could save Fed from losses



If I understood that correctly it means any decrease in the value of those mortgage ASSets bernanke left will be added to the public debt.

"As of Feb. 1, 2006, when Bernanke took over as chairman, the Fed’s balance sheet indicated it owned $748,840,000,000 in U.S. Treasury securities. At that time, the balance sheet listed no mortgage-backed securities. As of Jan. 29, 2013, the balance sheet indicated the Fed owned $2,243,176,000,000 in U.S. Treasury securities and $1,532,224,000,000 in mortgage-backed securities.


 Please someone tell me I just don't understand the accounting tweak and explain it to me if I'm wrong.

i_call_you_my_base's picture

"I think a good argument can be made that in the USA...because of the timing of QE...that it "bought time" so speak for "the crazy people" (Wall Street speculators) to clean up the balance sheets of the banks they blew up."

A good argument? Disabledvet, this is the only thing they've been doing. Singular focus. Buying time to repair the gaping hole. Holding RE inventory, buying MBS, goosing prices all around, etc. Too bad it didn't work...

AccreditedEYE's picture

Just buy the f-ing dip. Really.

Stoploss's picture

I'll take uncoordinated global default for 500-

What did I win Alex??

booboo's picture


What was the National Athem of America changed to after 2016?

Renfield's picture

Does anyone notice that the only outcome (in the graphic above) that does not result in "further selling" is "upcoming elections"?

I find it interesting that elections are still considered a (or the?) game-changer.

i_fly_me's picture

The elections are just another lie. 

FredFlintstone's picture

Why is the gorilla always 800# for christ's sake? I doubt they ever gey much bigger than say 300 or 400 pounds.

akak's picture

That is very true.

Hell, I doubt Maxine Waters or The First Wookie are much above 250 pounds.

Winston Churchill's picture

Maxine is definitely a lightweight, but the Wookie ?

Randoom Thought's picture

I guess I do not understand why QE expansion to a certain global destruction is a better path than killing the central banks and starting over with a REAL and representative government controlling things. God never handed down a law stating: "Thou shalt be a slave to the bankers".

ElvisDog's picture

I completely disagree with the conclusion. The Fed will continue to taper because they want asset prices to fall so their fellow banker buddies can buy up the distressed assets on the cheap with their enormous excess reserves. They think they can engineer a controlled collapse of asset prices. We will see.

NoDebt's picture

Not when they're levered 50:1 on those assets.

The slightest ripple on the pond....

timehill's picture

Sorry folks, but The Age Of Innocense fell when President JFK was assinated in 1963!

eddiebe's picture

The age of innocence ended when we all started to lie.

marathonman's picture

It goes back a lot further.  1913, 1871, 1862, 1787.  There's a lot of ruin in a nation.

timehill's picture

Sorry folks, but The Age Of Innocense fell when President JFK was assinated in 1963!

SmittyinLA's picture

Elections in todays' media NSA funding world are totally fungible, look at our Kenyan Communist illegal alien holding the US Presidency.

Elections are an illusion. 

dexter_morgan's picture

exactly, and the 2 parties are an illusion.

My opinion is the last election TPTB left to chance was 1960. They wanted Nixon, who would eventually win and take us fully off the gold standard.

Take the Kennedys. Ardent anti-communists and not believers in central banking. I believe JFK was taken out for voicing his sentiments about the Fed and being in a position to do something about it. Robert, ardent ant-communist (if my memory serves me, he was pretty sympathetic to McCarthy's quest), enemy of the mafia, and probably one of the last relatively honest pols out there. Teddy got the message and the party got the message.

Interestingly, we had a pretty vibrant CPUSA back in the 50's and early 60's. After the '68 demoncrat convention they just...........disappeared - or were absorbed.

\tinfoil hat off