Aside from a few skeptical strategists, SocGen's economists such as Michala Marcussen, have been ever so happy to drink the Kool-Aid of a US, and global, recovery that never comes and of a rate hike which until a few weeks ago was "imminent"... and suddenly isn't even though nothing in the US economy has supposedly deteriorated. Which is why we were very surprised to read a note from none other than Marcussen, in which the formerly hopiumy economist , confirms what we have always known: that sooner or later, everyone will admit the truth.
Less confidence in central bank puts
As noted above, the most notable feature of recent market price action is that there has been no visible comfort taken on risky assets from the idea that central banks may step in with further liquidity injections to alleviate the situation. To our minds, this reflects two main points. First, the fact that the tremendous amounts of liquidity injected to date have produced less than spectacular economic results. Clearly, markets have lost faith in the ability of unorthodox monetary policies to kick start the economy over time. This also fits the findings of academic literature suggestion diminishing returns from subsequent rounds of QE. Second, central banks have clearly become more concerned about the potential risks to financial stability from indefinitely inflating asset prices, suggesting that they may be slower to step in.
Should the current situation - contrary to our expectations - spill over to a full blown crisis, we have little doubt that central banks would act. The lesson from the last crisis was that as the crisis deepened, central banks became more unorthodox in their approach. While part of the debt service costs of the public sector have been monetised (as central banks hand back profits from the carry of government bonds to the government coffers), actual debt has not been monetised. Moreover, political constraints have kept fiscal policy considerations in check in the bulk of the major economies. This raises an interesting question on whether fiscal policy expansion, backed by central banks, becomes the tool to fight the next crisis.
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So... central bank intervention does little (or nothing, as the St. Louis Fed admitted as well), and yet SocGen has "little doubt that central banks would act."
Come to think of it, so do we, because while the world knows Einstein's definition of insanity, here is what his definition of idiot would be: a central banker.
As such, perhaps it is worth reminding readers that from the very beginning of this website, we predicted that the unleashing of QE, first in the US, and then everywhere else - the biggest policy mistake ever conducted by central bankers everywhere - has just one very logical ending: helicopter paradrops.