Bill Blain: There Is A "Last Days Of Rome" Feel To The News These Days...

Tyler Durden's picture

By Bill Blain of Mint Partners

Blain’s Morning Porridge – August 22nd 2017

     “”Forty-two,” said Deep Thought, with infinite majesty and calm.… ”

I’m wondering if I’ve stumbled into a parallel universe after coming back to the office yesterday. Its too damn quiet out-there! Everybody else is apparently still on holiday. It’s scary. Every headline is about thin markets or how markets have shrugged off last week’s sell off.. (what about next week’s?) There doesn’t seem to be anyone actually at their desks… That’ll change…

This week? Since no one is out there.. I can say what I like.. It’s no wonder news flow noise is being magnified out of proportion..

It used to be the summer was the right time for big Jackson Hole style gatherings – safe on the basis holiday markets weren’t paying much attention. Central bankers/economists/investors and other influencers could gab and pontificate without upsetting anyone. But today.. well maybe there are just too many journalists, bloggers and other market parasites just desperately keen to make sure folk are acting upon their supremely important insights into what Stephen Mnuchin’s wife was wearing during his visit to Fort Knox and what it means for global asset prices.

There is a “last days of Rome” feel to the news these days…

But some stuff is still well worth thinking about, so I have to comment on a great Bloomberg Article this morning: “Unintended Consequences of Quantitative Easing” by Jean-Michel Paul.

Regular readers of the morning porridge will know I’ve been deeply suspicious about QE since Day 1. I’ve been writing about the dangers of QE and asset price inflation, for years. Cassandra like, I’m probably right to be concerned, but was anyone listening?

THEY ARE NOW!

The end of QE is now very much “of the moment”; central bankers around the globe are finally waking up to the threats and understanding just why Normalisation is now so critical. That is what the real sub-text at Jackson Hole will be about this week.. although I doubt we’ll hear much about it.. its just too scary..

Can you imagine how global market sentiment would react if a phalanx of Central Bankers were suddenly to admit.. “Er.. we’ve just figured out we’ve profoundly broken the global economy through unforeseen financial asset price inflation, while negative interest rates have killed capitalism and destroyed the underlying processes of market based economies?”

Believe me... that would not go down particularly well… 

I’ve long argued it’s the unintended consequences of QE, aka: massive financial asset price inflation, that are storing up enormous trouble for the future – including breaking the current financial system. Mr Paul points out the value of “investible assets” (broadly parallel, I suppose, to what I call “financial assets”, ie bonds and listed stocks) has grown by 40% from $350 trillion to $500 trillion since 2008. He notes the real assets behind these numbers have barely changed… meaning we don’t have $150 bln of new airports, planes, roads, ports, factories, etc actually visible.

But that cash has to be somewhere…

The reality is simple. In 2008 the global economy just about crashed and burned. It was saved because Governments (the Authorities) poured aid into the broken financial system at enormous expense to tax-payers. Following the crisis, sage politicians announced they would never, ever, never again give tax-payer cash to bankers or financial markets.

Yet, subsequently, while trying to financial engineer recovery and financial stability, what they did was pump massive amounts of cash into the financial system. At what point did they not figure out that would 1) create massive inflation, and 2) build up enormous future tax obligations as central bank balance sheets expanded like balloons (hold that vision).

What has QE created? Massive Financial Asset Price Inflation which is just as pernicious and damaging as any other form of inflation eating away real value. In fact, it’s causing untold additional unintended consequences – including a massive explosion of wealth and income inequality.

Paul notes in his comment that financial asset inflation is killing the processes that drive Capitalism. We see that in the end of “creative destruction” and the number of Zombie Companies held together solely on low rates. A massive Credit Bubble – what? You never spotted it?

Massive Financial Asset Price inflation has not been matched by consumption – in fact low rates have made us all poorer at a time when inflation could be set to jump from the unreal financial asset world into the real world of real assets! Prices are going up and people can afford less – That is what you might call a sell signal!

What’s the solution?

Don’t know.

I suspect we’re into completely uncharted waters here. The central bankers know we need to normalise and rebuild the broken structures of capitalism and market based economies, without it becoming too apparent they are so broken – which would cause financial panic… On the other hand the cure might prove as painful as the self-inflicted injury of QE – analysts who assume a gradual slow steady normalisation of real interest rates will not prove impossibly painful may be kidding themselves…

Arg! It’s all so Bleak.

I have to start reading happier stuff in the morning…

Which is why I come back to Stephen Mnuchin and his wife.. I, for one, will giggle when the  whole Trump thing implodes, but I don’t reckon its as important as some folk think.. Washington will carry on indifferent to whatever fool sits in the office. Cynical and dangerous view.. but checks and balances and all that..

But folk hate shocks and uncertainty… Which is why what what Mnuchin’s wife was wearing matters.. The rationale goes something like: We’re all doomed because it turns out one of the saner members of the Trump cabinet has married a “let-em-eat-cake” Marie-Antoinette without enough common sense to STFU. (Unfortunately… although I’ve never heard of her before, apparently his wife, Louise Linton, is a famous Scottish Actress… Really?

Enough.. back to the day job!

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Batman11's picture

How do we take this dead duck off monetary life support?

The question facing Central Bankers globally.

The ECB has been quietly praying that the EU’s technocrats would come up with a permanent solution to the problems they have been masking by buying bonds at the periphery.

No such luck, keep praying.

The Central Bankers strategy relied on trickle down, but it didn’t exist and inflation never picked up.

Central Banks flooded the markets with liquidity to create a “wealth effect”.

Central Banks waited nine years and found nothing had really trickled down; inflation was going nowhere.

All the stimulus has gone into asset price inflation and artificially inflated asset prices will just crash when the liquidity supply dries up.

How do we take this dead duck off monetary life support?

Batman11's picture

They have inadvertently proved Keynes was right all along.

This is exactly what Keynes saw in the 1930, he called it a “liquidity trap”.

The wealthy and businesses will hoard their money and not invest until demand picks up.

In the US they engage in share buybacks to bide their time until demand re-appears.

As there is no trickledown this is not going to happen.

We are stuck in a supply side infinite loop.

Keynes said fiscal policy is the only way to get out of these situations and monetary policy won’t work due to the “liquidity trap” that we can see if we care to look.

Richard Koo has recently looked into 1929, Japan 1989 and 2008 and come to the same conclusion.

These are all the same, a debt saturated economy with a debt fuelled asset price bubble.

Richard Koo compares them and gives us some lessons we might lean.

He explained why austerity didn’t work in Greece to the IMF.
Ben Bernanke read his book and altered US policy.

He leads those we follow.

https://www.youtube.com/watch?v=8YTyJzmiHGk

The West turned Japanese in 2008.

He also sees the supply side infinite loop, where they just keep doubling down on the same failed QE policies. He shows the ridiculous levels of bank reserves that have built up with QE, this money is never going to get into the real economy as so few are borrowing.

They are full up on that debt stuff already.

Batman11's picture

In the 1970s, we had high inflation and stagnation.

There was excessive demand and insufficient supply causing high inflation.

A supply solution fixed the problem.

In the 2010s, we had very low inflation and stagnation.

There was excessive supply and insufficient demand causing low inflation.

Supply side solutions didn’t fix the problem.

Now students can you help the global elite by pointing out the error in their approach?

It's not hard; anyone with an IQ over 70 should manage it.


JohnGaltUk's picture

The baby boomers are done spending

JRobby's picture

Yes. The timing is not good. In fact, horrendous.

Boomers "savings" have been through too many bubble bursts.

Financialization will damage 3 generations.

Paul Kersey's picture

Mnuchin and his wife are the perfect symbols of the ruling class that presides over what will become a Roman empire-like collapse. We 300 million or so people are the American plebeians, who are firmly under the thumbs of corporate oligarchs and their bloated military. Can anyone guess who personifies America's Emperor Caligula?

Iskiab's picture

@batman. I agree, but if Keynes was right that means:
1. Monetarists were wrong
2. Trickle down economics are wrong (misleading)
3. You can throw away 30 years of economic theories from 70s-2010s.

I agree with you, but I have no doubt people will continue to push monetarist crap for polical reasons.

JRobby's picture

Monitorists>>>>U Chicago>>>>Communist

BennyBoy's picture

 

Build a new financial system that isnt based on exponential growth of debt for survival.

Boom bust boom bust, gee, who cudda seen this coming...again and again.

Its the result of a debt based system.

There are other financial systems, but bankers would make a lot less money, like a utility, and governments would naturally be constrained, less wars, less bribes, less crony crapola etc.

Not nirvana, but a lot less crap, and fewer bullshit Nobel prizes for stupid economic theories.

Lucretius's picture

Dear Sir, or B B if you prefer,

 yours is quite possibly the most sane and rational comment I think I have ever encountered, anywhere. Most deserving of one of those BS Nobel Awards!

Peace brother.

L.

Herodotus's picture

There will be no real growth until the debt is repudiated.

 

HenryKissingerBilderberg's picture

There will be no real growth until the debt is repudiated.

that is so anti semite!

Iskiab's picture

I agree with this and and the article. The premise of democracy and capitalism is constant revolution; governments change every four years to bring in new ideas and a new direction, capitalism self corrects itself and reassigns capital from poor business models to good business models.

The US problem with it's democracy is there's not enough real change because there are only 2 parties, there are no fresh ideas and instead you see the same direction with power changing hands between republican and democrat, but I can't tell the difference in their policies. Republicans go on about tax cuts, democrats about new spending, they both mean more debt and higher taxes later when it needs be be paid back. What doesn't change are the big issues in the country and the direction of the country.

In the economy you see tax breaks, crony capitalism, and government intervention supporting large business. How many companies would be around right now without intervention? Then they hobble along barely alive until the next recession where they will ask for another hand out to stay afloat. If you look at pictures of advertising from the turn of the 20th century, you'll notice almost all of those companies aren't around anymore, and that's the way it should be. For some reason politicians and perceptions have changed things so people see change as bad, when it's inevitable.

The article is about business but I bring up policy because that's the underlying problem: polical intervention. The government has sided with stability and against change, and created a form of contagion within the government. In the war of stability vs change, change will always win, the question is how much treasure will the government spend in a losing fight and how much damage will it cause when it self corrects.

dark pools of soros's picture

its cute that you think we are still playing capitalism games.... the system gave that up entirely in 2009

unless bad debt is allowed to die, there is no capitalism

lucitanian's picture

Not a truer word!

Not only capitalism but democracy and even logic has been sent to the grave. All that's left is self interest and the preservation of the power structure:

Yanis Varoufakis blows the lid on Europe's hidden agenda
Mustafa Kemal's picture

"The US problem with it's democracy is there's not enough real change because there are only 2 parties"

1 party, please

LawsofPhysics's picture

LMFAO!!!

Are you really going to argue that there is "no demand" with almost 8+ BILLION people competing for the remaining resources REQUIRED to maintain a higher standard of lving?!?!?!

Don't be such a stupid fuck.  The FACT is that economics itself is BULLSHIT.  NO economy can grow forever in a biosphere with finite resources.

In the meantime...

"Full Faith and Credit"

marathonman's picture

Every central banker that engaged in QE should be convicted of theft.  Even if they didn't they should be convicted of theft on a global scale.

malek's picture

Great, no matter what happens, some idiot like you will take one single piece of the whole picture and turn it into "evidence" that Keynes/Marx/Nero/? was right all along...

IProtectYou's picture

Makes no sense, from top to bottom :)

This is not a "liquidity trap", Asia is pushing down Western wages.

Low interest rates means low inflation in goods and services (the cost of money is an important component of allmost everything we consume)

THEY engage in share buybacks to bid up THEIR stock options.

Making rich people richer and poor people poorer is not a particularly smart concept to increase demand.

Demographics in the Western world are not supporting the demand side.

Cheer up, next move will probably be sending interest free CB money into your bank account... :)

yogibear's picture

They  are stuck on life support.  Next move is helicopter money.

Richard Duncan (former IMF economist) gave a talk on this to the central banksters to keep printing because the alternative is a depression well beyond the 30's.

Bottom line, their trapped into printing/QEing.

Richard Duncan's discussion with Alan  Greenspan.

https://www.theinvestorspodcast.com/richard-duncan-alan-greenspan/

Zimbabwe American style.

 

LawsofPhysics's picture

Unfortunately this is happening on a global scale...

Solio's picture

Since this duck is dead life support will have no effect.

 

But, have you tried praying (since preying didn't help much?)

AG17's picture

All i read every day is about soon to be inevitable finance doom, expected war between nations, natural disaster waiting to happen, a muzzie killing someone in Europe.

 

Where is the asteroid which killed earth million years ago? 

Memedada's picture

The financial doom is already a reality for the majority of people. The West is comprised of two classes – the owners/0,01% and the owned/99,99%. The latter is indebted into slavery for centuries to come. They have no savings, no wealth, no or little personal property and for sure owns nothing productive/profit generating – they have growing debt in a faltering (to be polite) economy. In other words: they’re already financially doomed. 

AG17's picture

Already doom has happened agreed now waiting for explosion. 

dark pools of soros's picture

no explosion... the porn and opiods will continue

blargg's picture

Don't forget a massive volcanic eruption, an unexpected asteroid, a solar flare, North Korea, global warming... be alarmed at all times, the end is near!!!

AG17's picture

We missed out on killer robots too.. Anyways the doomsday is inevitable. 

NobodyNowhere's picture

Of course, "near" means on the order of a thousand years in that context.

Secret Weapon's picture

You forgot the Grand solar Minimun and associated ice age and crop failures.

mpyre's picture

75 million years ago, extinguishing the dinosaurs...I know of some DC dinosaurs that it would be nice to extinguish.

Memedada's picture

“…including a massive explosion of wealth and income inequality”. I don’t see this as an unintended consequence of QE. It is all by design. The ownership class created the crisis and is behind the subsequent robbery (of the public, commons and future generations).

The consequences of QE are not unintentional but unofficial – there’s a huge difference.

The next crisis will be used as another excuse to enrich and empower the 0,01% even more. Only a full blown revolution will be a real game changer. 

Gordon_Gekko's picture

Louise Linton...WOW!

Secret Weapon's picture

She married him for his personality and because he is so hot looking.

Debugas's picture

capitalism ( defined as companies exist for bottom line ) has run its course

it is the end of this type of capitalism

because if companies exist to have profit then workers get paid less than they have to pay to buy all the goods they produce. All kinds of life support ( expansion of markets, borrowing money from the future ) have run their way already. It is the end, the limits of finite demand have been reached

So we need a new type of -ism

For example china suggest that companies should exist to satisfy the needs of the society

blargg's picture

if companies exist to have profit then workers get paid less than they have to pay to buy all the goods they produce.

So you're saying that if a company produces say garbage bags, and makes a profit, that their employees won't be able to purchase enough garbage bags for their home because they can't purcase all of the garbage bags the company produces?

Also, isn't the very act of working for money taking a profit for the labor? A person works for money, spends some of it for costs (food, rent), and ends up with extra that's the profit they use to buy things like TVs and precious metals.

lo2hi's picture

You don't get out much, do you?

LawsofPhysics's picture

You are one stupid fuck.  "Capitalism" requires a respect for capital!!!   In other words, NO CORPORATE BAILOUTS!!!!!!

 

Capitalism has NOT existed for a long time you dumb motherfucker.

bogbeagle's picture

Ha,  the irony of it.

 

WTF has a "central bank" got to do with Capitalism? 

 

  A Central Bank is an organ of central planning.

NobodyNowhere's picture

Circa 2050

"The Decline and Fall of the American Empire" by A. Historian.

The thesis is that it was all caused by greedy and conniving bankster dynasties in London and NYC.

shankster's picture

Newsflash! The last days of this modern-day Roman empire AKA former USA fell many decades ago. This is the aftermath and it gets worse..much worse from here. The economy and financials are only one small part of the reason.

lo2hi's picture

Really? What are the larger parts?

Ballin D's picture

Social Marxism. The world doesn't work when you put weak people in high places for the sake of "diversity"

NobodyNowhere's picture

You havn't identified the problem until you have identified the men behind the alleged problems.

wholy1's picture

"without it becoming too apparent they are so broken" - UH, what about "soooo CRIMINAL"?!

Last of the Middle Class's picture

One of the most spectacular lies of the millennium is that the massive income equality effect of QE was not by design. That somehow the asset bubbles blown and complete lack of money velocity are a surprise to the Fed. Not so, these are all known entities and were at the beginning of QE. Overlooked, pushed aside, or however you want to characterize it up to and including collusion to destroy a free market economy is exactly what happened. The dead wood of a free market economy must be allowed to die off so that new industries can get enough sunlight in the economic forest to thrive and grow. Crony capitalism sending billions of dollars to the manufacture of electric vehicles that is mathematically more economically destructive than IC engines is the problem and the income and wealth divide of QE is at the heart of it all. Look at your news media and the absolute crap they sell on a daily basis. It's not even propaganda anymore, if no one believes it. The wealth divide has created an alternate universe, not "asset bubbles" and the coming realization that it is not reality is going to bring panic to many a crony capitalist as the "one trick pony" printing presses of the Fed have run their course. Destroying a fiat's value by printing train loads of it for the few destroys the economy and the political effects will be felt for years. Who'd a thunk it? To call this an unintended consequence is just crony reporting.

sinbad2's picture

Caligula made the wives and daughters of Senators work in brothels for the troops.

That should be introduced into the US, with a slight change, as there are so many faggots in the US military, the Senators and Congressmen should also work in the brothels for the troops. 

NobodyNowhere's picture

You left out Congresswomen.  Are they too ugly?