Nomi Prins: Central Bank-Inspired "Major Credit Squeeze" Will Trigger Next Crisis

For all the talk about tapering (in both the US and Europe), the Federal Reserve has actually done remarkably little to reduce its balance sheet. And in an interview with Macrovoices Erik Townsend, former Wall Street executive Nomi Prins expands upon some of the same themes she covered in her latest book, "Collu$ion: How Central Bankers Rigged the World".


As Prins reminds us early on, the Fed and other central banks have expanded their balance sheets by more than $20 trillion, and despite all the chatter about withdrawing stimulus and letting its balance sheet roll off, the Fed's balance sheet has only shrunk from $4.5 trillion to $4.3 trillion.

Central bankers, Prins argues, like to pat themselves on the back for avoiding what many feared would be runaway inflation resulting from low interest rates and quantitative easing. But of course, they did create inflation, just not the kind that could be reflected by CPI:

But the reason the markets went up and didn’t see through that is not because they believed this wasn’t an act of desperation (I think), but because there was just free money being handed out. It’s sort of like if you’re a drug addict, and you know at some point you’ll be clearheaded if you just get off the drugs and get your act together and move forwards, that’s one way to do it.

Or if someone is supplying you with lots of drugs then it just works and everything else, well then you’ll take them. And this is what happened. The Fed was that sort of supplier of last resort and a lender of last resort of capital for the market.

And by, basically, blowing through interest rates, keeping them at 0% in the US and then globally as well, the cost of capital was so low, the ability of any actual government bond to return anything of any substance was also rendered low as a result.

While it's true that all of the money borrowed at rock bottom interest rates still needs to be repaid (unless you borrowed it from a European bank), the massive credit creation during the QE era could expose investors to additional credit risk as the global central bank stimulus is unwound.

And if we start to get problems, like credit risk that has been inflated since all the QE began would start to come to a head – defaults, delinquencies, emerging markets seeing their capital fly back out because there is just a little bit of a worry that this can’t go on forever – all of that starts to culminate into a major potential credit squeeze which, ultimately, can be the other leg of this crisis.

That consumers and corporations never took the opportunity to deleverage during the QE era means the underlying issues that caused the crisis haven't been remedied. This has left the global economy more vulnerable than it was before the crisis, and as central banks truly begin retracting their support (assuming they ever do), the fractures in the system will become apparent.

But I think, ultimately, the sort of coordinated effort of these central banks can keep the markets up for a number of years longer. But with more fractures coming into play, as the ones that we all envisioned would happen, which is that you can’t continue to allow the leverage to increase – forget the height of stock markets – but the leverage in the debt markets to increase indefinitely.

Because, at some point, even cheap debt has to be repaid. And so what we’re seeing right now, I think, is the beginning of that sort of reckoning coming in. With, for example, money flowing out of the emerging markets and emerging market ETFs as quickly as it has in the last few months. Because those are the markets that have, on a government basis, had more risk attached to them to begin with – and yet were able to attract massively oversubscribed bond issuances in the process of having to keep money available to them from a global basis, linking it to dollar-based debt (and so forth) from a corporate basis. And that just expanded the leverage in the world.

One of the most popular defenses of QE is that prices remained stable during the QE era, and the runaway inflation predicted by some detractors never came to pass.

But the notion that we haven't seen inflation is misguided. There has been inflation in asset prices - and of course in tuition and health-care. If we looked at inflation differently, perhaps people wouldn't give the Federal Reserve so much credit. 

Again, it depends how we define inflation. There has been inflation as discussed in asset prices. There has been inflation in university costs, health care costs. There has been inflation in certain basic, let’s say, needs less than things like retail or areas that are actually deflating. And that sort of thing. There’s been inflation recently in oil prices, but not enough to really make the difference.

And there’s been cheap car loans so that people are still buying cars. So everything is kind of keeping itself in check. And inflation in general throughout the developed world where these main economic central banks operate is still really, really low.

And even in the US it’s kind of approaching the 1.9 or so percent on any given month. If you look back at the last 10 years, you know, yeah, it’s been at 2.3, it’s been at 1.5, it’s been at 2.2, it’s been at 1.0. You know, it’s still bobbling around very low levels.

And it’s even lower in Japan and in Europe and now moving that way in the UK and some of the major economies. So, yes, though, if you have that change, or if inflation was computed in such a way that it actually reflected people’s cost of living inflation and the financial markets inflation, then you probably would see stronger inflation.

Still, QE has taken us to a very strange place, Prins says. And that's not just in terms of the amount of quantitative easing, but in the nature and quality - the buying of riskier assets like ETFs in Japan and corporate bonds in Europe. And while central bankers like Mario Draghi, Janet Yellen and Ben Bernanke have more or less declared the post-crisis stimulus a victory, investors would do well to wait until balance sheets have been meaningfully reduced to judge.

Listen to the full interview below:


ebworthen TheMexican Fri, 06/08/2018 - 20:17 Permalink

Raise those fucking rates FED, normalize to 6%, the economy is strong, right?

Quit buying MBS crap, quit propping the house-flipper bubble.

Quit bailing out Wall Street and bail out Main Street.

Those FED fuckers owe me $4 million from 2008.

Money-changing bastard Satan worshipers!

Hang 'em high from the nearest tree!

In reply to by TheMexican

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In reply to by wadalt

techpriest Uchtdorf Fri, 06/08/2018 - 23:58 Permalink

I met her in person recently. On this topic, she does have a long neck, which is more pronounced depending on the angle of the photo. Still, based on her book, snide remarks from the ZH comment section are not the worst she had to deal with, compared with working at Lehman Brothers, Goldman Sachs, etc.

But putting the appearance aside, she has a lot of insider knowledge, gave a great talk, and overall I get the impression that the central banks try to present themselves as near-omnipotent, but in reality, they are more like Mickey Mouse in the Soreceror's Apprentice, except there is no sorcerer to stop what they have started, and they really don't have a plan aside from retiring and passing the problem to the next central banker.

In reply to by Uchtdorf

whatisthat Fri, 06/08/2018 - 20:12 Permalink

I would observe the purpose of QE was corruption and manipulated markets in favor of politicians and bankers and wall street firms - at the expense of American taxpayers......

techpriest curbjob Sat, 06/09/2018 - 00:05 Permalink

This is part of the purpose of her book, and the talks she is giving. The big banks + the central banks have loaned each other money in a rather complex, interconnected way, such that any one going bankrupt will endanger another. When the Treasury yield went above 3%, she explained that shortly after we got the financial crises in Argentina and Turkey. If they actually attempt to shrink the balance sheet, who knows what country or major bank will feel the squeeze next?

In reply to by curbjob

Chief Joesph Fri, 06/08/2018 - 20:30 Permalink

Of course the Feds have done nothing!  They are totally incompetent!   They are on auto-pilot and the Central banks control them.  There is no oversight of the Feds either.  Congress can't even audit them.  Essentially, your underwear is flapping in the wind.

new game Fri, 06/08/2018 - 20:33 Permalink

first off the fed will never ever be able to unload 2-3 trillion, unless japan and euroland start buying it in a round robin scheme like hot potatoes. But they will be printing very soon when this fissure laden debt ponzi  econ realizes the underlying collateral is impaired. they must print or this fuker goes zonk de donk bonkers...

tic toc on that.

Son of Captain Nemo Fri, 06/08/2018 - 20:41 Permalink

Hey Nomi.  Put that $4.5 trillion "shrinkage" to  $4.3 trillion into context with the U.S. DoD spending an estimated $6.5 trillion in 2015 ALONE!....

I think it's far... far... worse then your estimate(s) have gone!!!

Grandad Grumps Fri, 06/08/2018 - 20:42 Permalink

I don't know what Nomi looks like ... but she probably looked different than the face pasted over someone's head. Are they pasting human faces on lizards or zombies?

Ban KKiller Fri, 06/08/2018 - 20:43 Permalink

I lend at .25 and you can't repay. So I'll give you new loan at 1. Yeah, that will work out. ..  ....until people see through your vaporware. 

Send your pay to play money, of course. 

Zappalives Fri, 06/08/2018 - 20:45 Permalink

She is a prop/distaction/pyschop/ pretending to be a dem/prog women.

Granted............5 attractive.

Please show her titties and pussy

After the parade of fat/ugly dem/prog women.

A welcome relief.

FU all zh fag worshippers.

You need to suck harder on hillary butthole.

Any questions?

rejected Fri, 06/08/2018 - 20:48 Permalink

"the Federal Reserve has actually done remarkably little to reduce its balance sheet"

Now that's funny.... :))

Who the hell is stupid enough to buy the bonds?

They're going to have to do some creative banking (fraud) to get rid of them.

But hey,,, fraud is now Americas middle name.

Atam Gits Fri, 06/08/2018 - 21:13 Permalink

" But of course, they did create inflation, just not the kind that could be reflected by CPI "


That's because the printed money never made it to us commoners.  It stayed in the financial and corporate systems.  It funded stock buy backs.  The inflation is right in front of our faces- it's in the stock markets.