This page has been archived and commenting is disabled.

Central Banks Now In "Dangerous Situation": "You've Thrown The Kitchen Sink At It, What's Next?"

Tyler Durden's picture




 

When both Europe and Japan slipped back into deflation despite trillions in central bank stimulus, it served notice that what developed market central planners are doing simply isn’t working. 

That is, the idea that ZIRP, NIRP, and endless asset monetization can stimulate aggregate demand and boost inflation expectations is a myth, and the longer the Janet Yellens, Mario Draghis, and Haruhiko Kurodas of the world attempt to perpetuate it, the more the market loses faith.

In fact (and this is something we’ve detailed exhaustively over the past nine or so months), promoting the misallocation of capital actually serves to create deflation, as it allows otherwise insolvent producers to keep pumping, drilling, and digging, contributing to the global deflationary supply glut that’s wreaked havoc on emerging markets. 

Now, in the wake of the Fed's policy "error" that paradoxically triggered a flight to safety even as the FOMC leaned dovish, the market is signalling that investors are beginning to lose faith. Here's Bloomberg:

More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world’s economic woes.

 

Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market’s outlook for inflation worldwide is approaching lows last seen during the financial crisis. In the U.S., Europe, U.K., and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying.

 

That’s leading investors to write off the Federal Reserve’s chances of raising interest rates this year and increase their bets that it will tighten less than policy makers forecast in the years to come. Speculation has also increased that the European Central Bank and Bank of Japan will need to step up their quantitative easing in the face of deflationary pressures, despite statements to the contrary from their own officials.

 

“There’s a lack of faith in monetary policy -- you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money -- and still inflation is lower,” said Lee Ferridge, the head of macro strategy for North America at State Street Corp. “It leads to a risk-off environment.”

 

Recent economic reports have renewed calls for major central banks to do more. Consumer prices in the euro region unexpectedly fell, deflation re-emerged in Japan, while wages in the U.S. stagnated yet again.

 

International Monetary Fund Managing Director Christine Lagarde also signaled the organization is preparing to lower its outlook for the world economy.

And here's more from The New York Times, who reports that in fact, central bankers may be quietly losing faith in their own abilities as it becomes ever more apparent that the adoption of counter-cyclical policies is simply serving to create larger and larger booms and subsequent busts:

The 2008 financial crisis convinced most people in the world of central banking that it would be a good idea to try to prevent that kind of thing from happening again.


But policy makers have made little progress in figuring out how they might actually do so, a troubling reality highlighted at a conference that ended over the weekend at the Federal Reserve Bank of Boston.


The Fed has publicly committed itself to a strategy of so-called macroprudential regulation, meaning it is now focused on maintaining the stability of the financial system as well as the health of individual firms. But senior Fed officials at the Boston conference described that as more of a goal than an achievement.


Crises remain hard to anticipate and prevent, and the available tools could cause significant economic damage.


“My own view is that while the use of macroprudential tools holds promise, we are a long way from being able to successfully use such tools in the United States,” William C. Dudley, president of the Federal Reserve Bank of New York, told the conference.


Donald Kohn, a former Fed vice chairman, said he was troubled by the gap between perception and reality. “If you ask people who is responsible for financial stability they would say, ‘The Fed,’ ” said Mr. Kohn, a senior fellow in economic studies at the Brookings Institution. “But the Fed doesn’t really have the instruments. It doesn’t really have the tools.


“And I think this is a dangerous situation if people perceive that it has the responsibility and it doesn’t have the tools.”


Eric S. Rosengren, the Boston Fed president, argued in a paper that opened the conference that financial stability should join inflation and employment as explicit objectives of monetary policy. Moreover, Mr. Rosengren and his co-authors presented evidence that the Fed already treats financial stability as a goal. They showed that the movement of the Fed’s benchmark rate tracks discussions of financial stability at Fed policy-making sessions.


Others, however, said it was not clear that raising rates was a more effective means of addressing risks to the financial system than sensible regulation.


 

“I’m a skeptic,” Mr. Kohn, of Brookings, said. “I think that monetary policy, changes in interest rates, are likely to be not very effective in damping a lot of these cycles.

Indeed.

And as we showed last week, excessive central planner micromanagement only serves to widen out the financial cycle which translates directly into ever larger speculative execesses. 

Of course one shouldn't expect that to matter in the minds of the world's monetary authorities. The simple fact here is that the notion that cycles can be smoothed out with Keynesian tinkering is accepted as gospel in developed market economic circles and so the tendency is to simply double- and triple-down on policies that aren't working. 

But here's the real danger: the degree to which unconventional monetary policy is effective is in no small part dependent on perception. That is, the fiat regime is in large part a giant confidence game. If that confidence starts to evaporate in the minds of very "serious" people, this will all come to an end, and that's not simply the latest rant from a "fringe blog", that's just the way confidence games work. Ironically, the best thing developed market central bankers could do right now is simply stop the madness and allow capital markets to crash and reset. There may still be some hope of preserving the notion of central bank omnipotence here if everyone suddenly comes to their senses, steps back from the money printing, and lets creative destruction purge the system. That would allow the world's foremost monetary authorities to start from scratch and perhaps reclaim some credibility on the way to rebuilding things. 

Of course that won't happen because no one is going to completely admit that they have failed which is why the cycle depicted in the graphic below will simply play out over and over until the entire house of cards collapses on itself:

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 10/05/2015 - 12:58 | 6631558 Groundhog Day
Groundhog Day's picture

The neighbors sink?

Mon, 10/05/2015 - 13:03 | 6631591 RaceToTheBottom
RaceToTheBottom's picture

China has cities of houses with empty sinks....  Use those.

We need integrated, worldwide, sink throwing....

Mon, 10/05/2015 - 14:27 | 6631981 A Nanny Moose
A Nanny Moose's picture

kruggybear would approve of broken sinks.

Mon, 10/05/2015 - 13:00 | 6631561 Captain Debtcrash
Mon, 10/05/2015 - 13:13 | 6631645 KnuckleDragger-X
KnuckleDragger-X's picture

Well thank god we aren't involved in the world economy, otherwise we'd be fucked.....

Mon, 10/05/2015 - 13:44 | 6631801 crazytechnician
crazytechnician's picture

Sssshhhhuuush , Interest Rates are a LAGGING Central Bank indicator ....

...  Of how much DEMAND for DEBT exists......

Riight now , there is NEGATIVE demand for debt , nobody can afford to take more on , therefore NEGATIVE rates ,

BTCHezzzz ....

Mon, 10/05/2015 - 13:00 | 6631574 aliki
aliki's picture

we haven't even seen the real $$$ printing yet IMO. these keynsians are just getting warmed-up. theres not a single f'n thing thats not nailed dow they wont buy with digital dollars that never existed before. next-up (once they are down 20-25% off the highs) they'll buy stocks. if rates were to pop, real estate would dump and they print & purchase houses.

this entire thing has always been about control with these clowns. overload any system whether its healthcare, our southern border, or the financial markets --- flood the zone until it blows leaving the only solution that "the people" seek is help from the government.

real solution = get the fuck out of the "nation building", financial engineering, and any other business they are. let the markets clear, take the pain, cut the debt, and start from scratch. will never happen tho. if that were the case A. individuals would be responsible for themselves and B. that would mean no need for these "government programs" which provide so much "help".

Mon, 10/05/2015 - 13:01 | 6631577 JustObserving
JustObserving's picture

Now it is time to throw the poor.  Do we really need poor people?

Mon, 10/05/2015 - 13:05 | 6631604 Dre4dwolf
Dre4dwolf's picture

Soilent Green is people.

Mon, 10/05/2015 - 13:16 | 6631659 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Mmmmm.  With Fava beans and a nice Chianti.  (teeth clacking sound)

Mon, 10/05/2015 - 13:33 | 6631741 centerline
centerline's picture

Thanks for the post.  I was wondering about the wine selection.  A hardy red like a Chianti makes perfect sense actually.

Mon, 10/05/2015 - 14:36 | 6632012 HardlyZero
HardlyZero's picture

Next ?  Caligula2.

Mon, 10/05/2015 - 15:33 | 6632219 centerline
centerline's picture

lol.  Actually, I failed to clue into the Hannibal line.  Poor memory.  It clicked just a moment ago.  Oh well.  Better late than never!

Mon, 10/05/2015 - 13:25 | 6631703 aliki
aliki's picture

justobserving - no. we need poor people because that keeps inflation low. think about it. if they droned all the poor people, that would reduce the amount of potential labor or labor at the lo end which would drive inflation higher, resulting in the need to raise rates. conversly, the left would rather every & any american fuck whoever, wherever, as much as possible to pump-out maximum babies who can either A. suck off the system and/or B. add to the destruction of the labor force participation rate.

all part of the plan.

Mon, 10/05/2015 - 13:36 | 6631762 centerline
centerline's picture

Nah.  We'll just keep importing more!

Mon, 10/05/2015 - 13:04 | 6631596 Dre4dwolf
Dre4dwolf's picture

Dumping money into bank reserves does nothing but empower banks to steal more money from the population.

You need to find a way to put money in the hands of day to day americans or you wont see spending increase.

 

The best way government can do this is through various public works projects (pay average joes to build average things we need anyway).

1) Rebuild and Expand highway system (add more lanes, more decks).

2) Modernize our transit systems (trains) and make them safer, replace aging carts and make sure all materials and equipment are made in the USA.

3) Paint the damn bridges so they stop rusting.

4) Dredge the rivers so ships can keep passing

5) Improve sanitation equipment and water treatment.

6) Rebuild the ports and piers 

7) Refurbish parks and recreational buildings

8) Modernize govt departments with new American made equipment 

9) Subsidize telecom 

10) Harden the power grid

11) Invest in solar plants to offset energy costs (if the govt spent say 2% of its budget on building real solar farms in the desert we could see national electric prices drop a few % points)

12) Invest in Nuclear Waste Storage facilities

13) Modernize the navy and attach american made lazers to everything.

 

etc...

Tons of stuff to do to boost all american industries.

We need these things anyway.

 

But o/c Obama will allow China to come charge us to rebuild our own infrustructure.... great.

Mon, 10/05/2015 - 13:10 | 6631628 Salah
Salah's picture

Fat chance. 70% of all US govt spending now is in transfer payments.  They need 40-50 million to die, and die quickly, and be efficiently disposed of.  Mainly the parasite class (Dem voters) and geezers over 70.

Mon, 10/05/2015 - 13:23 | 6631698 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

ppheeww!!, by parasite class I was afraid you were gonna say financialization architects, or crony capitalists for a second!

Mon, 10/05/2015 - 13:23 | 6631694 sdmjake
sdmjake's picture

Yo Wolfie, I'm not sure 'more government' is the solution. just sayin...

 

Mon, 10/05/2015 - 13:40 | 6631772 crazytechnician
crazytechnician's picture

Wow , your list comes straight of a Soviet Marxist playbook , Utopia ? Anyone ?

What comes after that ? How many hours of daylight ? When it's allowed to rain ?

The problem is Fiat Ponzi Debt from an unsound money supply , fix that and the free markets will fix the rest including everything on your list.

Mon, 10/05/2015 - 14:27 | 6631984 BigWillyStyle87
BigWillyStyle87's picture

Moar government!!!!!!!! If only we could just find the right people for the job surely it will be different this time!

Mon, 10/05/2015 - 13:05 | 6631601 madbraz
madbraz's picture

you lost me at "very serious people"

Mon, 10/05/2015 - 13:05 | 6631603 nnnnnn
nnnnnn's picture

TPP will save you (billionaires only)

Mon, 10/05/2015 - 13:11 | 6631630 abyssinian
abyssinian's picture

Looks like the stock market still have a lot of faith in the Feds,.  up up up in hopes for more QEs

 

Mon, 10/05/2015 - 13:13 | 6631634 Son of Captain Nemo
Son of Captain Nemo's picture

Ben Bernanke singing this to you as he unloads in your face and every orifice that belongs to you!!!!

"Well we all need someone we can cream on"... All OVER!!!!

Let it Bleed!!!!

Mon, 10/05/2015 - 13:15 | 6631637 Haole
Haole's picture

"You'll hear the printing presses from Mars." - Marc Faber

 

The rich get richer

The poor get the picture

The bombs never hit you when you're down so low

 

https://www.youtube.com/watch?v=iv2DTOiYpT0

Mon, 10/05/2015 - 13:18 | 6631667 VWAndy
VWAndy's picture

The banking system aint no friend of mine.

Mon, 10/05/2015 - 13:21 | 6631685 khakuda
khakuda's picture

What's next is a bigger sink.  Japan leads the way here.

CBs will NEVER admit defeat.  Their books tell them they will be right, if they just do enough.

Mon, 10/05/2015 - 13:37 | 6631767 yogibear
yogibear's picture

"Their books tell them they will be right, if they just do enough."

Each time the bank stick-save gets larger and more desperate.

Now the Fed has plenty off-balance sheet as well as on balance sheet. Next time an easy double or $9 trillion, maybe more.

Mon, 10/05/2015 - 13:25 | 6631704 DavidC
DavidC's picture

If these academic fuckwits would just leave well alone things would heal themselves, all they're doing is creating a bigger and bigger clusterfuck.

There, I feel better for having used the word fuck twice (oops, three times).

DavidC

Mon, 10/05/2015 - 13:34 | 6631748 yogibear
yogibear's picture
"You've Thrown The Kitchen Sink At It, What's Next?"

The house. 

Each Central Bankster attempted save gets larger. 

It's everything. If that doesn't work then it's complete failure.

Mon, 10/05/2015 - 13:38 | 6631773 Kickaha
Kickaha's picture

It is unsettling to see what I consider to be the improper usage of the word "deflation" in most of these articles.  "Deflation" as I understand the term means an ongoing process where fewer dollars are in the system and available to be used to purchase goods and services.  Under the laws of supply and demand, fewer dollars in the system would mean that the value of each dollar relative to the goods and services it can purchase has gone up, and it would be expected that the number of dollars you would need to purchase, for example, a car, would be reduced because of the increased value of the dollars you are holding.

On the other hand, maybe, for example, there is an extreme glut of new cars available for purchase, causing the manufactures to lower prices in the hopes the price cut will help move their inventory of unsold cars.  Even if there is no change in the money supply, your dollars, at least with regards to a new car purchase, will be worth more.

My problem with the loose usage of the word "deflation" is that the users seem unwilling to concede that these days the latter is happening more than the former.  Price cuts on excess production are being described as "deflation".  

The excess production has been caused by ZIRP. 

The danger in wrongly using "deflation" to describe each and every environment of declining prices presents itself when central banks state that ZIRP or even NIRP, plus more QE, is necessary to either prevent "deflation" or reach a target amount of "inflation".  The continuation of these destructive policies directly encourages capital misallocation, even more excess production, followed by even more price cuts to move inventory, which then causes even more "deflation", and we end up in a descending spiral.

I'm not sure at all whether there is any way to parse statistics into subsets that would supply us with the amount of deflation actually created by a reduced money supply.  There appears to be huge debates as to what exactly constitutes the money supply, and perhaps even if everybody could agree on a definition, there would still be the fact that the amount of money then would have to be combined with the velocity of money to give the observer any sort of real understanding of the interaction of the supply of money and the real world economy.

But despite all that, it still pisses me off to see words misused, especially when doing so benefits the .01% and institutionalizes a downward spiral in the real world economy.

 

Mon, 10/05/2015 - 13:58 | 6631857 nofluer
nofluer's picture

“There’s a lack of faith in monetary policy -- you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money -- and still inflation is lower,” said Lee Ferridge..."

Ummm... inflation hasn't fallen in years. It has in fact accelerated radically. Or don't the oligarchs of finance know the difference between inflation and deflation any more?

What we need now is some RADICAL deflation to reset the dollar and restore a floor to the economy... and to eliminate the FED and restore Glass-Steagal.

Mon, 10/05/2015 - 14:00 | 6631863 nofluer
nofluer's picture

Duplicate post

Mon, 10/05/2015 - 14:33 | 6631994 gcjohns1971
gcjohns1971's picture

Here is an honest question that requires some explanation.

Do Central Bankers actually expect to stimulate Keynesian 'Animal Spirits' in order to boost aggregate demand?

Or is it a red herring to cover for a panic-driven delay of fully monetary system collapse that they actually fully understand is going to happen?  Do they really believe in nominally created digit's power to stimulate real demand without additional production to drive that supply and demand???

EXPLANATION:

The design of the debt-based fiat monetary system uses the facevalue of a unit of debt to back an equal facevalue unit of currency.

But the debt bears interest.

So there is literally not enough money in the world to pay down that particular debt.  Instead it is rolled over.

But to be rolled over, it must be rolled over PLUS ACCUMULATED INTEREST (else the interest already paid would mean continuous monetary deflation, meaning the debt would still be impossible to roll-over).

After many roll-overs the accumulated interest comes to dwarf the original face value, which at the time represented a fraction of the real material economy, which is described by an ever-shrinking portion of the monetary debt while the portion which lies in finance - the accumulated interest - is ever-growing.

Because the accumulated interest is growing at a compound rate, what happens when the service cost of that debt becomes greater than the original face value can service?  

Nominally, I am sure that financiers would like to believe that the monetary system resets with each rollover, with the new face value representing the same percentage fraction of the real economy as the old smaller facevalue.  Were I to accept this, then I would have to accept that there is no upward bound of added value to finance as a percentage of an economy.  For this described feature of debt-based fiat monetary systems absolutely will drive finance to occupy an ever-greater percentage of the economy.   But finance as a service which exists solely as a side-effect of currency design doesn't actually produce any real good or service, but is simply a capital transmission mechanism that otherwise need not exist - hence no value added.

So, what happens when the rest of the economy can't service the accumulated interest necessitated by their very currency?

I would answer that that is what happened in 2008.

Since the fundamental problem is one of debt service costs, they implement ZIRP and/or NIRP, print an outrageous amount of money immediately to keep the financial system solvent for the moment, and then implement regular QE to address continuing solvency issues as they transmit through the economy...

...except for all that currency creation actually EXPANDED the debts and debt service cost even further!

So.

You tell me.  Do the Central Bankers ACTUALLY believe in 'aggregate demand'???

Or,

Are they just trying to delay the problem until some other solution presents itself or until they've departed the world in luxurious style?

 

 

Mon, 10/05/2015 - 15:06 | 6632112 Clowns on Acid
Clowns on Acid's picture

gcj - well presented. My point is that wth Glass Steagal there were competing entities with dissimilar objectives bidding for money. This prevented not only the centralization of risk that we have seen since the repeal of Glass Steagal, but also the reported and factual fraud, price rigging (LIBOR, PMs, Fed buying equities, etc), and non competition of dissimilar economic entities.

Under Glass Steagl Commercial banks competed with Brokers and Insurance companies for your dollars / investments. Given the yiled curve at any point in time, Insurance (annuties, etc) products may have been seen as more attractive than stocks or commercial bank products because of te present risk / reward profiles.  Fraud and price rigging was rare because of the competion between industries any one industry would be screaming loudly if there was a sniff of fraud or wrong doing by a competing industry.

It was a true competion for available dollars and thus steadied the system and provided a relatively low volatility environment, bubble free... except for when the Fed would keep interest rates artificially low (Greenspan late 80s and 90s) and skew the game for Stawks. 

Without the competion for investment dollars amongst copmpeting dissimilar industries, fraud and centralization of reward is a natural progression. Dodd Frank was a joke and a distraction from the real issues...of course.  

Mon, 10/05/2015 - 15:49 | 6632275 nofluer
nofluer's picture

"The design of the debt-based fiat monetary system uses the facevalue of a unit of debt to back an equal facevalue unit of currency."

Ummmm... no. You forgot to figure in fractional reserve banking So given that little bug, the "face value of currency" would far exceed the facevalue of the unit of debt.

Mon, 10/05/2015 - 14:53 | 6632071 Clowns on Acid
Clowns on Acid's picture

The Depression of 1929 to effectively 1946 heralded in Glass Steagal. Rubin, Weill, and Summers influenced (paid off) Bill Clinton and conned vinced others nitiwts like Phil Gramm to agree to repeal Glass Steagal.

It only took the Bolshevik thieves 8/9 years to blow up the system again (1999 - 2008) and have the Fed bail them out...unlike in 1929 when the general populace would never had allowed such blatant thievery.

Mon, 10/05/2015 - 15:12 | 6632138 Not if_ But When
Not if_ But When's picture

I am having a great deal of trouble buying this most basic premise about the lack of inflation.

Is it or is it not true that if inflation was measured in the manner it was in 1980 - that inflation would now be in the area of 7%?

Because if this is true and we are also at about "full employment" (supposedly - maybe, who knows - but the Fed itself says so) , then WTF are they scared shitless to raise rates?


Mon, 10/05/2015 - 15:37 | 6632240 SofaPapa
SofaPapa's picture

“There’s a lack of faith in monetary policy -- you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money -- and still inflation is lower,” said Lee Ferridge, the head of macro strategy for North America at State Street Corp. “It leads to a risk-off environment.”

 

Recent economic reports have renewed calls for major central banks to do more. Consumer prices in the euro region unexpectedly fell, deflation re-emerged in Japan, while wages in the U.S. stagnated yet again.

These two paragraphs are the definition of cognitive dissonance.  Paraphrased:

Paragraph 1: What you're doing makes things worse.

Paragraph 2: Things are getting worse.  Do more.

What a feedback loop.  Who are these people?

Mon, 10/05/2015 - 16:06 | 6632350 RMolineaux
RMolineaux's picture

This item quotes NY Times opinion as follows: "OTHERS, however, said it was not clear that raising rates was a more effective means of addressing risks to the financial system than sensible regulation."  Lets find out who these "others" are and start paying more attention to them.  The 2008 crash was due largely to regulative failure promoted by Greenspan and his fellow de-regulators in their naive belief that a "free market" could regulate itself.   The 2008 experience should convince anyone with his head on straight that it was a result of regulative failure.  But, all too few people are saying so.  Instead, they promote a generalized criticism of the Fed while subtly continuing to promote the failed doctrines of de-regulation.  

At the same time, we must acknowledge that zero interest rates and QE's by themselves will never promote sustainable economic growth so long as inequality of income distribution widens and massive amounts of taxpayer funds are wasted on war making.  

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