The Silver Age Of The Central Banker (Ends Badly)

Tyler Durden's picture

Submitted by Ben Hunt via Salient Partner's Epsilon Theory blog,

For the past six plus years, ever since the Fed launched QE1 in March 2009, we have lived in an era I’ve described as the Golden Age of the Central Banker, where the dominant explanation for why market events occur as they do has been the Narrative of Central Bank Omnipotence. By that I don’t mean that central bankers are actually omnipotent in their ability to control real economic outcomes (far from it), but that most market participants have internalized a faith that central bankers are responsible for all market outcomes.

As a result, an entire generation of investors (we investors live in dog years) has come of age in a market where fundamental down is up and fundamental up is down. What’s the inevitable market reaction to real world bad news – any bad news, regardless of geography? Why, additional accommodation by the monetary Powers That Be, united in their common cause to inflate financial asset prices through large scale asset purchases, must surely be on the way. Buy, Mortimer, buy! During the Golden Age of the Central Banker, monetary policy is truly a movable feast for investors.

But the Golden Age of the Central Banker has now devolved into the Silver Age of the Central Banker, and monetary policy is no longer the surefire tonic for investors it was even a few months ago. In less poetic terms, the Coordination game that dominated the strategic interactions of central banks from March 2009 to June 2014 is now well and fully replaced by a Prisoner’s Dilemma game in the long run and a game of Chicken in the short run. As a result, monetary policy is now firmly a creature of each nation’s domestic politics, and the Narrative of Central Bank Omnipotence is in turn devolving into a Narrative of Central Bank Competition.

Why the structural change in the Great Game of the 21st century? Because this is what ALWAYS happens during periods of massive global debt, as the existential imperatives of domestic politics eventually come to dominate the logic of international economic cooperation. Because this is what ALWAYS happens when global trade volumes roll over and global growth becomes structurally challenged.

Yes, that’s right, global trade volumes – not just values, but volumes, not just in one geography, but everywhere – peaked in Q3 or Q4 2014 and have been in decline since. That’s pretty much the most important fact I could tell you about this or any other period in global economic history, and yet it’s a fact that I’ve never seen in a WSJ or FT article, never heard mentioned on CNBC.

Using WTO data on seasonally-adjusted quarterly merchandise export volume indices, as of Q3 2015 (the last data point from the WTO), the US is off 1% from peak export volumes, the EU is off 2% (this is EU exports to rest of world, not intra-EU), Japan is off 3%, and China + Hong Kong is off 5%. That’s through Q3. Working from global trade value data, converting to local currencies, and making some educated guesses about price elasticity to estimate Q4 2015 volumes, I’m thinking that the US is now off 3% from peak volumes, the EU is off 2.5%, Japan is off 5%, and China + Hong Kong is off 7%.

Now those numbers probably don’t seem very large to you, and certainly in the Great Recession those numbers got a lot larger (about an 18% peak-to-trough decline in worldwide export volumes from Q2 2008 to Q2 2009). But it’s incredibly rare to see any sort of decline in export volumes, particularly a decline that’s shared by every major economy on Earth. In fact, you don’t get numbers like this unless you’re already in a recession.

For example, here’s a chart of quarterly US export data since 1993. Now this chart is showing total value of US exports, not volumes of US exports, but you get the idea. Over the past 20+ years, we’ve never had a peak-to-trough decline in exports like we’re seeing today that wasn’t part of a full-blown recession, and we’re getting close to a decline in values (but not in volumes) that rivals what we saw in the Great Recession. The next time someone tells you that there’s a 10% or 20% chance of a recession in the US in 2016, show them this chart. Export growth is THE swing factor in GDP calculations. I don’t care how consumer-driven your economy might be, it is next to impossible for a real economy to expand when your exports are contracting like this. The truth is that we are already in a recession in the US, and this notion that you can somehow divorce the overall US economy from the obvious recession that’s happening in anything related to global trade (industrials, energy, manufacturing, transportation, etc.) just drives me nuts. Yes, it’s a “mild recession” or an “earnings recession” (choose your own qualifier) because the decline in export values (i.e., profits and margins) has only started to show up as a decline in export volumes (i.e., economic activity and jobs). But it’s here. And it’s getting worse.


This is the root of pretty much all macroeconomic evils. If global trade volumes in Asia, the US, and Europe are contracting simultaneously, then global growth is contracting on a structural basis. Global contraction in trade volumes everywhere is exactly as rare as a nationwide decline in US home prices, and it’s exactly as mispriced from a risk perspective. The 2007-2009 nationwide decline in US home prices blew up trillions of dollars in AAA-rated residential mortgage-backed securities. A continued contraction in Asian, US, and European trade volumes will blow up whatever vestiges of monetary policy cooperation remain, and that’s a far bigger deal than US RMBS.
When global trade volumes contract, the domestic political pressure to raise protectionist barriers and seize a larger slice of a smaller trade pie becomes unbearable. That was true in the 1930s when protectionist policies took the form of tariffs and quotas, and it’s true today as protectionist policies take the form of currency devaluation and negative interest rates.
Here’s why. In Q4 of 2015, the value of German exports as measured in euros was actually up 0.5% over Q4 of 2014. But over the same time span the euro depreciated versus the dollar by more than 10%. As a result, the value of German exports as measured in dollars from Q4 2014 to Q4 2015 was also down more than 10%. But domestic German economic activity doesn’t take place in dollars, of course, it takes place in euros. In other words, the export-oriented sectors of the German economy felt okay in 2015, at least from a domestic political perspective. But if you had not enjoyed that euro depreciation against the dollar, German exports would have felt terrible, and there would have been significant domestic political consequences. We would all be reading today about “the industrial slowdown in Germany”, with scads of articles in the FT about how Merkel’s regime was losing popular support.
To be sure, the depreciation of the euro versus the dollar made everything that Germany imported that much more expensive. So this isn’t necessarily some profits windfall for German exporters, and if you’re the German equivalent of Walmart it’s a big problem. I’ve read a number of economists and analysts (not so much in regards to Germany but definitely in regards to China) say that this economic downside serves as an effective deterrent against rampant and competitive devaluations. Unfortunately, that’s pure nonsense.
Thinking of national governments as just another big company (or, in slightly more academic terms, conflating national competitiveness with private sector profit margins) is a classic mistake that investors and economists make when they analyze politics. Neither the German government nor the Bundesbank care about corporate profit margins! They care about economic activity. They care about keeping the factories running, with real people making real things that can be sold in the real world. A depreciating currency is, by an order of magnitude, the most effective weapon in any modern government’s arsenal for keeping the factories running, and when global trade starts to contract this weapon will be employed by any means necessary, regardless of the P&L consequences for the private sector. That includes the P&L consequences for the banks, by the way.
Now everything I just wrote about the domestic political dynamics of Germany, multiply it by 10 for Japan. Multiply it by 100 for China. Both China’s export volumes and export values are declining, and no matter how much domestic credit and currency they pump in (and god knows they’ve tried), there is no possible way to stimulate the domestic economy enough to pick up the slack from a declining export sector. This is a domestic political disaster, and getting those factories humming again is a domestic political imperative. At least if there’s a regime change in Germany, Merkel and Schäuble and Weidmann can all retire to their respective comfy chalets and pick up however many millions they like by hitting the speaker circuit. Somehow I doubt that those retirement options are available for senior Politburo members rousted in the middle of the night by a new Chinese regime. To get the factories hiring you need to sell more stuff. To sell more stuff you need to cut your prices. To cut your prices you need to devalue your currency. This is why China is going to float the yuan. Not because George Soros or Kyle Bass said they have to. Not even because their foreign reserves are by no means the fortress balance sheet they’re made out to be. No, China is going to float the yuan because they want to, because it’s clearly the winning move from a domestic political perspective.
Just like the Smoot-Hawley Tariff Act was clearly the winning move from a domestic political perspective in 1930. Just like the anti-free trade diatribes by both the Republican and Democratic presidential frontrunners are clearly the winning moves from a domestic political perspective in 2016. This is … ummm … not good.
It’s not good because these winning moves from a domestic political perspective do not occur in an international vacuum. To the degree that these monetary policy decisions impact other countries – and when global trade volumes are shrinking these decisions impact other countries a lot – other countries are going to respond with their own “winning” moves from a domestic political perspective, and before long you have a competitive death spiral of monetary policy decisions that sound good when you’re making the decisions, but end up putting everyone in a worse position and shrinking the global trade pie even further. 
But, Ben, our monetary policy leaders aren’t stupid. They know what happened in the 1930s just as well as you do. Don’t they see that there is a strategic interaction at work here – a game, in the formal sense of the word – that requires them to take into account other leaders’ decision-making within their own decision-making process, understanding (and this is the crucial bit for game theory) that the other leaders are making exactly the same sort of contingent policy evaluations?
Yes, of course the Fed can see that there’s a strategic interaction here, and of course they’re playing the game as best as they can. But they’re playing the wrong game. They’re still playing a Coordination Game, which is ALWAYS the game that’s played in the immediate aftermath of a global crisis like a Great War or a Great Recession. They have yet to adopt the strategies necessary for a Competition Game, which is ALWAYS the game that’s played after you survive the post-apocalyptic period.
Here’s what a Coordination Game looks like in the typical game theoretic 2x2 matrix framework. If you want to read more about this look up the “Stag Hunt” game on Wikipedia or the like. It’s an old concept, first written about by Rousseau and Hume, and more recently explored (brilliantly, I think) by Brian Skyrms. 
Fig. 1 Coordination Game (Stag Hunt)
The basic idea here is that each player can choose to either cooperate (hunt together for a stag, in Rousseau’s example) or defect (hunt independently for a rabbit, in Rousseau’s example), but neither player knows what the other player is going to choose. If you defect, you’re guaranteed to bag a rabbit (so, for example, if the Row Player chooses Defect, he gets 1 point regardless of Column Player’s choice), but if you cooperate, you get a big deer if the other player also cooperates (worth 2 points to both players) and nothing if the other player defects. There are two Nash equilibria for the Coordination Game, marked by the blue ovals in the figure above. A Nash equilibrium is a stable equilibrium because once both players get to that outcome, neither player has any incentive to change his strategy. If both players are defecting, both will get rabbits (bottom right quadrant), and neither player will change to a Cooperate strategy. But if both players are cooperating, both will share a stag (top left quadrant), and neither player will change to a Defect strategy, as you’d be worse off by only getting a rabbit instead of sharing a stag (the other player would be even more worse off if you switched to Defect, but you don’t care about that).
The point of the Coordination Game is that mutual cooperation is a stable outcome, so long as the payoffs from defecting are always less than the payoff of mutual cooperation. This is exactly the payoff structure we got in the aftermath of a Great Recession, as global trade volumes increased across the board, and every country could enjoy greater benefits from monetary policy coordination than by going it alone. As a result we got every politician and every central banker in the world – Missionaries, in game theory parlance – wagging their fingers at us and telling us how to think about the truly extraordinary monetary policies all countries adopted in unison.
But when global trade volumes begin to shrink, the payoffs from monetary policy defection are no longer always less than the payoff of monetary policy cooperation, and we get a game like this. 
Fig. 2 Competition Game (Prisoner’s Dilemma)
Here, the payoff from defecting while everyone else continues to cooperate is no longer a mere 1 point rabbit, but is a truly extraordinary payoff where you get the “free rider” benefits of everyone else’s cooperation AND you go out to get a rabbit on your own. It’s essentially the payoff that Europe and Japan got in 2015 by seeing the euro and the yen depreciate against the dollar, and it’s the payoff that China hopes it can get through yuan devaluation in 2016. Ultimately, every country sees where this is going, and so every country stops cooperating and starts defecting, even though every country is worse off in the end, as no one gets the +3 payoff once everyone starts defecting. To make matters worse, the “everyone defect” outcome of the bottom right quadrant is a Nash equilibrium – the only Nash equilibrium in a Competition Game like the Prisoner’s Dilemma – meaning that once you get to this point you are well and truly stuck until you have another crisis that forces you back into the survival mode of a Coordination Game. Sigh.
Look, I understand why the Fed (and for that matter, important constituencies in the PBOC and ECB) want to keep playing the Coordination Game even when the writing is on the wall for a change in the game payoffs. It’s a much “nicer” game, where you’re baking a larger economic pie and everyone can be better off than they were before. Also (not to get too tinfoil hat-ish about all this), it’s the sort of game that academics and the Davos crowd love to play, as it allows them to gather in tony enclaves, congratulate each other on their intellectual prowess and service to mankind, and tut-tut about those pesky elections and benighted masses. Put in a less snarky way, the IMF and similar entities have an existential stake in promoting the Coordination Game. Not that there’s anything wrong with that.
But it’s no accident that everything, from exchange rates to commodity prices to global trade volumes, started to go off the rails in Q3 of 2014. That was the start of monetary policy divergence – a $10 word that means competition – as Yellen’s Fed announced an outright tightening bias and Draghi’s ECB went in the polar opposite direction with balance sheet expansion and negative rates. And I’m sorry to say it, but once you leave the cozy confines of the mutual coordination Nash equilibrium, you can never go back. Instead, it’s an inexorable one-way street to the other Nash equilibrium, mutual defection. It’s just math. And human nature. I wouldn’t want to bet against that combination.

The Golden Age, per the original Greek myth, was an era of unblemished cooperation and great deeds. The Silver Age, on the other hand, was a pretty miserable time to be alive. Not as warlike as the Bronze Age, and not the war of all against all as in the Iron Age, but the spirit of the age was one of strife and competition. It ends badly. But it’s not a hopeless time. It’s a time to protect oneself and one’s family for the harder times to come, and it’s also a time to plant the seeds that will flourish when this cycle ends. What’s required is seeing the world for what it is, not what we might wish it to be. That’s not easy, whether you’re a central banker or a small investor, but it’s never been more important.

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Soul Glow's picture

I hate when an author uses a quote and doesn't reference it.  What the hell is the point of the quote?  Just some cool thought before you get to reading.  Tie it together Ben!

LordBuckFast's picture

This is how it ends......

Tall Tom's picture

All of those quotes refer to competing and not cooperating.


The Silver Age is about non cooperation and a destructive competition to where everyone gains a little rather than a lot...


It is the transitonal stage to the Bronze Age which is soon to be followed by the Iron Age. The Iron Age is outright War where everyone loses everything.

Soul Glow's picture

Each quote should be put into context during the article otherwise they just sit there looking like eye candy.  It's the difference between going on a date with a hot but dumb individual and going out with an attractive and intellectual person.

Money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural.

- Aristotle


  When considering the policy of the Federal Reserve we see how foolish such a policy is given the above quote.  Interest is unnatural as imbreeding, and what is left is a retarded economy.


^^See how I explained the quote and brought it into the text?  Now I can move on, discuss the ECB and BoJ's NIRP policy that relegates the dollar to an infantile policy, one in retardation, and this because who will ever want to use a bank account again.  I could go on to describe gold as money, maybe use the quote, "Gold is money and nothing else is" by JP Morgan and then extrapalate on the quote once more.

See that is how to write.  Bring in the quote and context it, otherwise it floats around like a dumb blonde walking the room looking for a drink.

PeeramidIdeologies's picture

Fiesty today! Points were scored!

open-range's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

cossack55's picture

Pretty heavy for a Saturday, but still better than watching a freakin' funeral.

agent default's picture

Central bankers better back off and cut the crap at all levels.  Or they will enter the jacketed lead age and fast.

PoasterToaster's picture

If you print currency, and measure GNP in currency, what will happen to the GNP?

If, despite all your printing and derivation and monetary shenanigans, GNP inevitably shrinks anyway, what do you think has finally happened?

dumb_funded's picture

Silver, speaking of it, sales on EBAY are crazy the last two days.  Gold not so much.  Silver much!

CarpetShag's picture

Deeply intellectual and truly jaw-dropping

falak pema's picture

THe libertarian creed as published here is :

throw the baby out with the bath water. Get rid of the US' existing four estates : Legislature, executive, judiciary as well the MSM and the Banks who run the economy.

So whats left?

"Get rid" in the current mindset infers "violence as violent as the current status quo makes us suffer".

So where does this LOGIC lead us?

A man like TRump, a billionaire and Oligarch, an outright reactionary, a home grown mix of Casino-Thyssen and Hitler is now the champion of right wing USA.

How can such a mix provide a secular revolution or a change that is for the people and for the republic ?

I use 'secular revolution' as vision that is a reaction to lefist anti-religious secularism of the 60s  and a return of religion as per the right-wing mantra of our age.

Trump the moralist about people living off the state teet and the man who cleans out the Augean stables like Hercules unchained.

Wow.... And ZH says this is the future of the USA ?

Land of the Pharoahs becomes land of THE HERO ?

Next stop, land of Caesar is guaranteed!

We reap what we sow. Libertarians then all wear purple !

And the golden age unfurls...I've heard that song from Dick Cheney.

trader1's picture
What almost always gets forgotten about the fascist movements of Europe between the wars is just how much promise they seemed to hold, and how many people of good will saw them as the best hope of the future.  Their leaders were young—Hitler was 43 when he became chancellor of Germany, the same age as John F. Kennedy at his inauguration, and Mussolini was only 39 when he became prime minister of Italy—and most of the rank and file of both men’s followers were younger still. Hitler’s party, for example, had a huge success among German college students long before it had a mass following anywhere else. Both parties also drew to a very great extent on the avant-garde culture and popular ideas of their time. How many people even remember nowadays that before the Second World War, the swastika was seen as a pagan symbol of life, redolent of ancient roots and primal vitality...? The fascist movements of the 1920s and 1930s were thus closely attuned to the hopes and fears of the masses, far more so than either the mainstream parties or the established radical groups of their respective countries. Unlike the imagined “fascism” of modern radical rhetoric, they were an alternative to business as usual, an alternative that positioned itself squarely in the abandoned center of the political discourse of their eras.  In terms of that discourse, in the context of their own times and places, the talking points of the fascist parties weren’t anything like so extreme as they appear to most people nowadays—and we forget that at our deadly peril.
medium giraffe's picture



CarpetShag's picture

She whimpers when you bang her?

medium giraffe's picture

No, only when I sit on her face.

spqrusa's picture

Interesting but Wrong.

The goal of the last 100 years of "monetary intervention" was to dilute the value of your dollar holdings against real assets. Now that the Banksters have access to unlimited monetary intervention, their acquisition of assets has reached a peak which explains why the 0.1% now own 99% of assets.

One must also remember that there is a class of "investor" (the crypto-crown) which owns its assets as a State Secret, i.e. they can shoot you for revealing their theft. Either way, in the end, the money was always "theirs", your ass(et)s where always "theirs", your governments are "theirs", and finally with the marking of every man, woman and child with SS numbers, you are "theirs". 

It's good to be the King (err. Queen). It's all T(heirs).

Insurrexion's picture




Please stop with the distraction, of the Fed this, the ECB that, the fucking Boj and the BoE's young boy trading. I detest central banking as much as the next 6ft. Teutonic Dominatrix Bitch.

BTW, I have a special pink bolt cutter for every fucking person pointing in the pictures.


No one except this pointing out the obvious.

It's not the Central banks we need to focus on.

They have failed.

It's our government leaders, their debt and the TBTF banks that we need to break up, and burn down!

Then come the firing squads to send them all back to Hell.

Then of course, much sex, and drinking.


Soul Glow's picture

It's all of the above in cordination.  Central banks, TBTF banks, government leaders, all of them, which is why it must all be torn down.

PeeramidIdeologies's picture

I think that has been established. Now on to the how...

clue4sum's picture

Nice horseshit article.Unlike your stupid game theory life is REAL,not a stupid game. The economy will get better when and only when we put those at the top of the pyramid scheme in jail and confiscate their illegal profits.period....We at the bottom can no longer produce enough to support an ever increasing group of criminal scumbags at the top. After all how many oligarch can the average peasant carry on each shoulder?

PeeramidIdeologies's picture

I like to boil it down to a more universal context.

THEY are using our prosperity to protect THEIR interests.

WE need to regain control of OUR prosperity to ensure OUR best interests come first.

Who's in?!

Oh just me.

Looks like THEY are going to have their hands full.

Big Stapler's picture

Central economic planning has never worked, and this time won't be different

Monk's picture

Given the fact that the Fed is a private consortium of commercial banks that operates independently of the government, then one may argue that it was never a "silver age" of central banking.