"Marginal Utility" Of Central Bank Intervention Is Rapidly Diminishing
Much has been written of the dramatic drop in the Debt/GDP multiplier, or Keynesian accelerator, over the last few years that shows the marginal utility of adding more debt produces less and less growth (and in fact can become a drag). More debt to solve too much debt seems put to bed as a solution except in the surreal world of central bankers and politicians. Well, with all the hoop-la today for the 'peek' over Dow 13000 and our discussion of the nominal versus real 'value' of the Dow as central banks of the world have printed $7tn into existence in the last few years, we thought an examination of the marginal utility of central bank printing would be useful. The depressing truth is that, using Gold as a proxy for central bank ebullience, the impact of implicit devaluation (or explicit printing) by central banks is having a smaller and smaller impact on stock market (asset) prices. Since the lows in March 2009, the impact of central bank intervention on the Dow has rapidly diminished from over 20 Dow points per $1 Gold move to only 2 Dow points per $1 Gold move in the last few months. What is dramatically clear is that investors are losing 'value' even as they see their brokerage statements rise and while Gas prices will inevitably slap reality into their faces, perhaps just as the Debt/GDP multiplier signaled the Keynesian Endgame, then the Gold/Dow multiplier signals the Currency-Wars Endgame - or alternatively, Central Banks will have to go exponential in their extreme experimentation to fulfill equity-holder's hopes and dreams as they approach their event horizon.
This chart plots the rolling rate of change of the Dow (in points) for each $1 shift in Gold. If we assume that Gold is a useful proxy for central bank exuberance and extreme experimentation (which seems defensible given this discussion and chart), then the rapidly diminishing scale of the oscillations clearly indicates that the impact of central bank money printing is decelerating dramatically.
This seems to suggest that in order to maintain the desired devaluation-inspired rise in asset prices, Central Banks will have to go exponential to escape the linear and reflexive impacts of their peers and competitors in the central bank world - or perhaps we really are once again hitting the asymptote of Keynesian ridicule. We are sure the CBs of the world will invent a new mutually-assured-destruction Depression-inspired reason for the step-shift in balance sheet expansion required to fuel asset prices and in the meantime, we'll hold our gold.
Perhaps a clearer analogy (inspired by Andy Y) is that central banks are approaching their event horizon and while one cannot see the Black Hole (inferring its position from the Hawking radiation spewing from it), perhaps a growing cacophony from Bernanke/Draghi spewing forth is the 'sign' that we are about to go over the edge.