Don't Think It Won't Happen Just Because It Hasn't Happened Yet: Loss Of Faith In The Fed

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Much of the supposedly godlike power of central banks is participants' faith in their powers to control not just finance but the real world that can be leveraged by finance.

The Grand Narrative of the global economy since the 2008 financial meltdown has been: whatever the problem, zero interest rates and more credit will fix it. Too much debt? Zero-interest rates and more credit will fix that. Government spending far exceeds tax revenues? Zero-interest rates and more credit will fix that. Economy sluggish? Zero-interest rates and more credit will fix that. Few jobs being created? Zero-interest rates and more credit will fix that.
Had a bad hair day? Zero-interest rates and more credit will fix it.
Implicit in this narrative is the notion that there are no hard limits on credit or central bank money creation. If creating $1 trillion in new credit-money and pushing it into the hands of financiers doesn't do the trick, then push $2 trillion more.
Equally implicit is the assumption that the central banks repressing interest rates and creating trillions of dollars out of thin air can control any blowback or unintended consequences triggered by the free money for financiers tsunami. The central banks implicitly claim to be Masters of Universe: not only are there no hard limits on zero interest rates or nearly unlimited monetary heroin, there are also no limits on the power of the Federal Reserve and other central banks to bend markets and behaviors to their will.
These implicit assumptions have fostered a quasi-religious belief in the unlimited powers of the central banks and the freshly created credit they issue.
In other words: there are no hard limits on central banks or credit creation. If central banks want to keep interest rates at near-zero, they can do so with no limit. If they want to push the stock market higher they can do so with no limit.
I have discussed what I see as intrinsic limits on manipulating markets in Are There No Hard Limits on Financial Finagling? and Have We Forgotten What an Authentic Market Is?
My point is that manipulating markets strips markets of price discovery of assets and risk and the feedback that enables markets to recover equilibrium; decisions made when risk and price have both been suppressed or hidden by manipulation are necessarily catastrophically mis-informed.
But that is only one hard limit on central banks' supposedly unlimited power to mold the world to their liking with unlimited monetary heroin: there are others. One is energy: central banks can create more credit with which to buy energy, but they cannot create more energy. Stripped of artifice, all central bank credit can do is bid the price of energy up to the point that only those with access to central bank free money can afford it.
When energy markets tighten up, free money for financiers will only exacerbate the inequalities of energy access and consumption; zero-interest rates and monetary heroin can't and won't stabilize access to energy or the extraction of more energy.
Another hard limit is leverage. Zero-interest rates and free money for financiers can push leverage higher, so every $1 in cash supports $25 in credit and $100 in derivatives, but it doesn't stop the reverse leverage when the collateral declines in value: if the collateral underlying a bank that is leveraged 25-to-1 declines by 5%, the bank is insolvent.
As longtime correspondent Harun I. explained in Resolution #1: Let's Call Things What They Really Are in 2014 (January 15, 2014), the Federal Reserve is itself leveraged 72-to-1.
Issuing more credit at zero interest does not increase the value of collateral. The only way to keep the value of phantom collateral rising is to inflate asset bubbles, one after another.
But inflating asset bubbles by injecting unlimited credit into markets is not a game without limits; indeed, recent history has shown that bubbles are intrinsically unstable and they deflate violently due to internal dynamics that cannot be controlled by central banks issuing more credit at zero interest. Reduce complex systems' feedbacks to a monoculture or single input and you doom the system to collapse.
A third hard limit is the political loss of faith in the godlike powers of central banks.In the moment, it seems as if central banks have had their way for six years, and there is no reason not to believe they will have their way for another six years, or sixty years.
Serial bubbles that deflate violently, rising wealth inequality driven by free money for financiers, the crippling of market dynamics, including the markets for energy, risk and capital, the extraordinary increase in systemic leverage based on phantom collateral--any one of these has the potential to push the number of people opting out of "the central bank and state have godlike, unlimited powers" faith above the Pareto Distribution tipping point, where the vital few 4% influence the 64%.
In other words, much of the supposedly godlike power of central banks is participants' faith in their powers to control not just finance but the real world that can be leveraged by finance.
Once this belief fades, so will the powers of central banks.

As I noted in The Coming Crash Is Simply the Normalization of a Mispriced Market, this line from songwriter Jackson Browne captures the false assumption of those who believe central banks can stave off crashes, not just of assets but of faith, forever: Don't think it won't happen just because it hasn't happened yet.


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MeMongo's picture

Just wish it into the cornfield Anthony!

Manthong's picture

About one turning ago there was another country that suffered huge losses in a war, was saddled with crushing debt and had no gold.

Its stock market went to the moon, but you couldn’t buy a cup of coffee for a bucket of cash in Weimar.

t0mmyBerg's picture

Seriously, why this almost never gets mentioned on the talking head news networks I have no idea.  Same thing with nominal GDP targeting, which will be Yellens contribution to the puke that is the Fed.  Great we got nominal price levels up but they do not reflect anything real.  Stock market can go to the moon, but you cannot buy a cup of coffee with a bucket of cash in Weimer.  Well said.  No inflation because asset inflation doesnt count in our case apparently.  Hows that wealth effect working out for us Ben?  Ben....???

Anusocracy's picture

Perpetual credit creation and its attending perpetual government debt obligations occur for the benefit of one small clique.

It's their method of survival.

eclectic syncretist's picture

The fed ultimately provides us nothing but a one way ticket to zero, which is closer than most would like to believe.

HardAssets's picture

@tommyBerg - it isn't mentioned in the msm, because 'they' own the msm.

One place where is effect is obvious is in asset sales.  Sell some long held real estate and you get to pay taxes on the 'gain' even though the real returns were flat or negative.  Long term inflation is a real *&%$ and we live in a rigged game.

Xploregon's picture

@Hard Assets- if you held income producing real estate (commercial) for about seven years, what would you do under the current and assumed crash scenario?

Da Yooper's picture

Seriously, why this almost never gets mentioned on the talking head news networks I have no idea.




the same folks who run & OWN the Fed


also own the media


Quinvarius's picture

If Japan has taught anything, it is that Central bankers can push the prices of paper garbage up, but they cannot keep them up.  They have to buy the entire asset class to complete the job.

thewhitelion's picture

Maybe that's the point.  If you can buy assets with free or nearly free money, maybe buying it all makes sense.

nope-1004's picture

In theory buying up everything seems rational.  But take it to its limit, much like asset prices.  At some point, asset prices can no longer rise regardless of who owns them, and assets themselves have no value if only a select few own them.  For example, if the USG owned every house, what would they be worth?  If the Chinese govvy owned ALL the global gold, what would it be worth?  Value and trade require a certain amount of asset disbursement.

No doubt an asset transfer is taking place, but TPTB can't buy up everything - it will do them no good. 

Keltner Channel Surf's picture

"You say you lost your faith, but that's not where it's at

You have no faith to lose and you know it ... "

Unknown Poster's picture

Another hard limit is when more printing is met by uncontrollable laughter. Hey, how's Zimbabwe going?

GetZeeGold's picture



Everything is priced in gold there these one takes paper.

realWhiteNight123129's picture

Well it already happened:

The ones who have lost the faith in the Fed are the people working there themselves:

Ponder this:


By telling on one hand “wealth effect transmission virtuous cycle“ at FOMC and replacing it by “The temptation to postpone adjustment can prove irresistible, especially when times are good and financial booms sprinkle the fairy dust of illusory richesat the BIS, central bankers have just destroyed their own cult. If the people were different you  could argue of a difference in view point, but the people are absolutely the same. The list is available. The difference is that there is a lot less political pressure possible at the BIS in Basel, versus at the FOMC meeting.  


By telling on one hand “stimulating the economy through easier access to credit for Auto and Mortgage” at FOMC, and replacing it by  .” The consequence is a growth model that relies too much on debt, both private and public, and which over time sows the seeds of its own demise.” at the BIS, central bankers have just rendered their speech void. 




Seasmoke's picture

Just remember back, to what you thought could happen on September 10, 2001. 

yogibear's picture

The Federal Reserve is a useful tool for Wall Street. Once enough people pile on and buy the hype the power participants calling the shots will take it down quickly and do a very large transfer of wealth.

PR Guy's picture

Another very large transfer of wealth.

lunaticfringe's picture

Another article about distorted markets and sheep with a normalcy bias. Check.

RaceToTheBottom's picture

Pretty soon the sheep will rise up and , and, and, and, well they will stop being sheep......

OK, maybe they will always be sheep.  

But articles like this are good because they hold the role of providing a reminder that this fake game cannot continue forever.  

The longer it progresses, the harsher will be the snap-back to reality.

LawsofPhysics's picture

Actually, the loss of faith in fiat currencies and corrupt governments has happened several times in the last 30+ years.  It really depends on whether or not the major players lose power and control (which is what this is always really about).   The last time the major players changed was WWII.


hedge accordingly.

sessinpo's picture

LawsofPhysics    It really depends on whether or not the major players lose power and control (which is what this is always really about).   The last time the major players changed was WWII.


Um. most of the major powers never lose power and control. They control the laws and have the information. Thus they adjust their positions ahead of the rest of us. It is them, that have hedge accordingly.

That is why after every reset, we still have oligarchs and a new government that eventually becomes corrupt.

Rinse, repeat.


LawsofPhysics's picture

Bullshit.  look at the history of "resevere currencies".  yes, some famlies can remain powerful, but we are talking about countries and currencies here.  FYI, the chinese only allow other chinese to have that kind of power, good luck to the Rothchilds in that "market".


That which cannot be sustained, won't be, period.

Yes, same as it ever was.

Evolution requires the sacrifice of those who make bad choices, always has, I don't have anything against people and famlies that work together and make good choices. Don't get mad dipshit, make better choices yourself. 

Looking at the votes it would appear that the divide and conquer tactics of TPTB are still working.  Idiots.

Mark_BC's picture

This time when it crashes TPTB won't really know what's happening (although they believe they do) and why they can't rebuild a new empire afterwards, which is ultimately due to a decline in resources and their failed attempts to violate the laws of physics. Social misery will erupt and they will be violetly overthrown.

LawsofPhysics's picture

Intereting hypothesis.  I know a VC guy with his own private island and private security team.  He can grow more than enough food on his property to feed himself, his family, and that of his team.  Good luck, but the optimism is indeed appreciated.

Bahamas's picture

Wait until the banknotes will have so many zeros that they'll continue also on the back side for lack of space on the front

sessinpo's picture

Bahamas    Wait until the banknotes will have so many zeros that they'll continue also on the back side for lack of space on the front


I don't believe in this situation.

Nationally, there is so much debt and obligations ( 60 trillion plus) that dollars become scare).

Internationally, if other nations give up on dollars, they simply won't want them no matter how much is printed. If I don't want 1 banana from you, I certainly am not going to take 1 trillion bananas.

LawsofPhysics's picture

Actually, in a currency crisis, the physical note can become very valuable for local trade.

CHX's picture

Only place you'll see the zeros is behind the gold and silver price ;-) The money is already created in many 100s of Trillions of debt or liabilities, and derivative contracts around the globe, but it will never circulate as such IMO.

Temerity Trader's picture

The nail on the head! That is the ONLY thing that will bring about an end to the party. People are completely certain the Fed now is 100% in control of the markets and will NOT allow them to fall. The Fed bankers will print a trillion dollars a day if that’s what it takes to support stocks, etc. Too big to fail. Millions are betting big, the Fed cannot and will not fail them. It is all they have. If the Fed ever losses its Godlike image, it is all over. Bears may have to wait a long time for that to happen, as there may be “limits”, but they are not on the near horizon.

nakki's picture

From my perspective every "crash" has benefited fewer and fewer people so let's not pretend it won't happen again.  Most people want to be led by and have faith in their government.  Unfortunately 90% of intelligent people have no idea what the FED is, or whom the FED was set up to benefit.  I have a feeling that in the not so distant future they will.

nakki's picture

I truly believe that 95% of the population think the FED is part of the government and only a small fraction of the populous knows that Janet doesn't "run" it and it was set up to benefit the top .001 %. 

Armed Resistance's picture

You're on the right track, but I think the number is closer to 97-98%.

KnuckleDragger-X's picture

You only find the facts if your looking for them.....

Dingleberry's picture

Thank your public schools and their socialists teachings and group think.

THis is why you get called all manner of insults when you even mention the Fed.

eddiebe's picture

Easy enough to talk about loss of faith. Where the rubber meets the road is where people work for a buck to survive. That looks to be still happening. The central bankers know it and they are hell-bent on keeping it that way. Everything else is noise.

photonsoflight's picture

It is getting to the point that one working all day will not be able to support oneself. That is why the military has been giving so much equipment to local law enforcement. How many bullets have they bought , I lost count? Remember this, when he who is without sin cast the first stone, be ready with your stones.

brunoaa's picture

We, from South America know very well how this things develops and ends. Rising inflation, capital control, imports control, price freeze, indexation of the economy, countless heterodox economic plans all failing. Hyperinflation is a bitch from a macroeconomic standpoint, but individually it can bring some opportunities. Companies like Unilever, Volkswagen, etc... used to make most of their international worldwide profit in hyperinflationary Brasil of the late 80's (kept very quiet about it) and were able to remit dividends without major problems

LawsofPhysics's picture

^^^this.  I do business in Russia and Brazil.  I can't emphasize this enough.  People in 'merica have no clue what "poverty" really means and they need to be damn careful what they wish for.

TrustWho's picture

Exactly right and why I am so angry with Federal Reserve policy. For one, American women will be sold for the sex trade. The lucky ones will marry into another culture and will likely be abused. This is only one shock that the current middle class will experience. 

gtb's picture

How much for the little girl?  How much for the women?

SofaPapa's picture

That sounds like some other culture is going to take the leadership role.  Who?  China?  The EU?  Russia?  Brazil?  India?

I fully agree that the central banks of the world are running the system on fumes and it's a matter of time, but I don't see how anyone comes out of this "on top".  Knowing which countries / blocs will be relatively stronger or weaker is even a challenge.

Globalization has been a process of leverage.  The chaos on the other side is going to be the social twin to the economic collapse it accompanies.  On a country / regional scale, I don't see any "safe" places to hide from this one.  Best someone can do is to be pretty independent on an individual / self-sufficiency spectrum.  Keep your heads down, this is going to be rough.

Scarlett's picture

>> For one, American women will be sold for the sex trade. The lucky ones will marry into another culture and will likely be abused. This is only one shock that the current middle class will experience.   


That boat has sailed.  

It is already happening.

Tens of thousands of 18y old darlings are engaging in "dating" sugar daddies, in exchange for tuition and a nice restaurant/travel.  

Loads of websites/blogs on how to find a suggar daddy.  

Comfortable prostitution, American style.

Calculus99's picture

I hear there are some problems in a place called Ferguson?

Why not dose the place with zero interest rates and more credit then?

smcapmachine's picture

We could use the same headline for zerohedge

nakki's picture

It seems to me that few understand that the people that truly run the show could give to a shit about "the people". Why should they? Can 7 billion people experience what the majority of Americans have and still enjoy? Can 200 million Chinese or Indians or Africans have a middle class life? Can everyone drive two cars, live in a 2500 square foot home? Can everyone have a comfortable retirement?  People act as if the FED was set up to benefit the majority.  It's wasn't!  We all know that the true power can do whatever they want and never in life has the majority made out as well financially as the few, so this talk of everyone winning and stocks and housing always going up is stupid.  The bubble will bust and fewer and fewer will have anything. Soon after that you can "rent" your house and car and whatever else you "own". Silly people's just look at the $ it's theirs, not yours!! Don't believe me just read what it says on it. 

NoTTD's picture

And everybody's gonna get wet.

NoTTD's picture

Prediction: This whole bubble becomes glaringly apparent to all and subsequently explodes  at the moment a GOP  president sits down in the oval office.   The only thing keeping it afloat is the complete blackout in the MSM - which will be lifted when it no longer has one of its own to protect.


Make a note you heard it here first.

LooseLee's picture

Sorry I need to point this out, but whom has a 'need' to have faith in the Fed? IMO it is only other Pinko Commie Fascists that have a need to have 'faith' in such a corrupt and incorrigible unelected herd of 'officials'. The Federal Reserve, and all banks who exist to centrally plan are, by definition, Communist in nature. So, by deduction, anyone who elects to follow such misguided miscreants are themselves Pinko Commie Fascists. If you do not understand this then that is why you are a follower, apologist, trend-rider, et. al., while quite possibly not even being aware of it, of The Fed. You follow out of fear. Awakened people have no use or need for such an evil establishment and therefore will 'Fight The Fed' to the very ends of the earth. And hopefully, those Pinko Commie followers will one day have a 'great awakening' and then proceed with right action...In the interim, though, those who will inherit the earth have more pain to come.