The Third and Final Phase for Central Banking Has Begun

ALL of the so called, “economic recovery” that began in 2009 has been based on the Central Banks’ abilities to rein in the collapse.

The first round of interventions (2007-early 2009) was performed in the name of saving the system. The second round (2010-2012) was done because it was generally believed that the first round hadn’t completed the task of getting the world back to recovery.

However, from 2012 onward, everything changed. At that point the Central Banks went “all in” on the Keynesian lunacy that they’d been employing since 2008. We no longer had QE plans with definitive deadlines. Instead phrases like “open-ended” and doing “whatever it takes” began to emanate from Central Bankers’ mouths.

However, the insanity was in fact greater than this. It is one thing to bluff your way through the weakest recovery in 80+ years with empty promises; but it’s another thing entirely to roll the dice on your entire country’s solvency just to see what happens.

In 2013, the Bank of Japan launched a single QE program equal to 25% of Japan’s GDP. This was unheard of in the history of the world. Never before had a country spent so much money relative to its size so rapidly… and with so little results: a few quarters of increased economic growth while household spending collapsed and misery rose alongside inflation.

This was the beginning of the end. Japan nearly broke its bond market launching this program (the circuit breakers tripped multiple times in that first week). However it wasn’t until this month that things truly became completely and utterly broken.

The Friday before last, the Bank of Japan cut interest rates to NIRP for the first time in its history. And for the first time since 2008, a major Central Bank’s policy didn’t have a single positive outcome.

Every Central Bank action since 2008 has had a negative consequence whether it be a higher cost of living, publishing savers and those relying on interest income, moral hazard, and the like.

However, up until the week before last, every time a Central Bank launched a new policy, there was always the a positive consequence, namely stocks moving higher.

Not this time.

The Bank of japan launched NIRP and stocks immediately nose-dived.

Please let this sink in: a Central bank, indeed, one of the largest, most important Central Banks, has officially "lost control."

This will not be a one-off event. With the Fed and other Central banks now leveraged well above 50-to-1, even those entities that were backstopping an insolvent financial system are themselves insolvent.

The Big Crisis, the one in which entire countries go bust, has begun. It will not unfold in a matter of weeks; these sorts of things take months to complete. But it has begun.

Smart investors are preparing now.

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Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research