When The Freaks Run Wild

Authored by EconomicPrism's MN Gordon, annotated by Acting-Man's Pater Tenebrarum,

Conditioned to Absurdity

The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.

Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of his disfigurement and worked for circus sideshows until his death at age 78. [PT]

After repeated exposure, however, the shock of an absurdity is reduced to that of vanilla ice cream.  Somehow, even the extremely preposterous becomes commonplace after a while.  For example, a panhandling Batman doesn’t get a second look in Hollywood.  That persona comes a dime a dozen.

Batman needs help for the rent (which it should be noted is too damn high these days). [PT]

Yet just because an absurdity’s been watered down to the seemingly ordinary, doesn’t mean it has become any less ridiculous.  Rather, the viewer has become conditioned to the absurdity.  The abnormal has been calibrated to a feigning normal.

Extreme market intervention by central planners has been going on for so long that the distorted conditions it produces are considered normal.  The Cyclically Adjusted Price Earnings Ratio (CAPE Ratio) of the S&P 500 is currently more than double its historic average.  But no one, save a few grumpy old farts, is alarmed by this.  Like a freak at a freak show, it all seems perfectly normal.

Shiller P/E ratio – as of 02 August 2018 it stands at 32.67 – roughly twice its long-term average and well above the 1929 peak. Only at the year 2000 tech mania peak was it even higher. [PT]

Diapers, soda pop, beer, chocolate, and chicken, are all rising in price.  At the same time, the federal government is aiming for a $1 trillion deficit.  Still, U.S. consumers haven’t been this fired up about the economy since February 2001.  You see, in the year 2018, spending more and getting less is perfectly normal.

Cancer and Crackpots

The destructive absurdity of modern fiscal and monetary policy is only matched in nature by the insidious replication of cancer cells.  As these cancerous cells are replicated and divided, and then replicated and divided again and again, their uncontrollable growth flows into lumps and tumors.  Sometimes these cancerous growths go undetected for years, as if the body is perfectly normal.

The cancer cells also sometimes move throughout the lymphatic system and start growing elsewhere in the body.  The cells of the body defect in a way that brings about a wretched cycle of self-destruction.  The cancer, in other words, is an absurdity.  Yet once set in motion, it is difficult for the body to stop.

Today’s money is also an absurdity.  Yet only a small fraction of the population bothers to understand this.  Moreover, there is hardly a soul among us with living memory of a day and age when money was a genuine store of value. In contrast, today’s money is derived from debt.  It is not real money.  It is fake – pretend – money.

Like replicating cancer cells, unbacked, irredeemable legal tender, grows without limits.  So, too, its over issuance has destructive consequences.  Yet most don’t seem to notice with any clear understanding.

US money supply TMS-2; current level: ~USD 13.2 trillion. TMS-2 has grown almost 10-fold in the past 30 years, it is no wonder there was a big party in the stock market. [PT]

This perpetual money debasement has been going on for so long it is considered perfectly normal.  No one, save a few grumpy old farts, gives a lick.  Instead, crackpot economic theories, espousing the virtues of 2 percent inflation, are parroted without thought.

The mantra, as absurd as it may be, is that 2 percent inflation is needed to avoid falling into something called a “liquidity trap.”  How 2 percent inflation protects the economy from becoming ensnared is unclear.  But it may have something to do with a continual process of easing the debt burden via currency debasement.

Where this all leads is a thought provoking topic.  In case you missed it, this week offered an ever so slight gander at an absolute freak show… if only for a brief moment.

When the Freaks Run Wild

The preeminent pioneer of modern day fiscal and monetary absurdity is the Bank of Japan (BOJ).  In fact, the BOJ has been executing policies of mass money debasement for several decades.  Their primary objective has been to suspend the deflationary effects that followed the bursting of a cheap credit induced asset bubble that popped nearly 30 years ago.

Total assets of the Bank of Japan – inflating at warp speed. [PT]

The BOJ blazed the trail of a variety of absurdities, including quantitative easing and negative interest rates.  They also perfected the art and science of direct purchases of Japanese stocks via exchange traded funds.  But while the BOJ’s efforts have not succeeded at stimulating Japan’s economy, they have succeeded in attaining several remarkable feats.

Japan’s government debt exceeds 250 percent of the country’s gross domestic product (GDP).  What’s more, the BOJ owns  47.5 percent of the Japanese government bond market.  Of course, the BOJ purchased this massive pile of government bonds with money they, in effect, create from thin air.  These figures, no doubt, are absurdities.

Japan’s public debt-to-GDP ratio is at a new high of 253% [PT]

Without question, the central planners at the BOJ run a highly managed and controlled monetary system.  Hardly a hint of a free market remains within the BOJ’s new ‘yield curve control program.’  But that doesn’t mean things aren’t completely aghast under its tight cover.

Earlier this week the BOJ’s central planners ever so slightly opened the peek hole to their monetary policy freak show tent.  The central bank doubled the cap that it will allow the yield on 10-year Japanese Government Bonds (JGBs) to rise from 0.1 percent to 0.2 percent.

Costly uncapping: The privilege of lending money to the Japanese government for essentially nothing can become quite expensive rather quickly. Anyone who bought JGBs two days ago must now wait several  years until interest payments make up for the losses incurred since then. [PT]

Following the move, JGBs promptly sold off.  Yields spiked up 6 basis points to 0.12 percent – eclipsing the old 0.1 percent cap on the first trading day after it was raised.

As context, given the BOJ’s extreme monetary intervention over the years, we venture a guess that yields of 0.1 percent and even 0.2 percent on 10-year JGBs are absolute absurdities.  But what do we know?

Should yields violently test the new 0.2 percent cap will the BOJ be able to slam the lid shut?  Or will they lose control as the freaks run wild?

Certainly, the answer will be revealed in due time.

Getting ready to run wild [PT]