Game over. The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought you record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round of peddling blue meth again.
Australia has already cut, so has India. The ECB is talking about it, markets are already pricing in multiple Fed cuts. The new global rate cutting cycle begins anew before the last one ever ended. Brace yourselves as no one, absolutely no one, can know how this will turn out.
Absolutely staggering. We are witnessing a historic unraveling here. Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong. No wonder Jay Powell wants to toss the dot plot. It’s a public record of failure.
Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?
All the distortions of 10 years of cheap money, debt, wealth inequality, zombie companies, negative debt, TINA, you name it, will all be further exacerbated by hapless and scared central bankers whose only solution to failure is to embark on the same cheap money train again. All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences. But since they are not elected by the people and face zero consequences for failure they don’t have to consider the collateral damage they inflict.
I repeat: Structural bears who have predicted that central bankers would never be able to normalize the construct they created and has produced the world’s greatest debt explosion ever were 100% correct. We’re all staring at a colossal policy failure with no accountability.
And so it begins:
Draghi: Several members of the Governing Council raised the possibility of rate cuts, others the possibility of restarting the APP or the extension of forward guidance
— European Central Bank (@ecb) June 6, 2019
Back to the same TINA (there is no alternative) nonsense:
At this moment in time with the ECB’s balance sheet at all time highs amid collapsing inflation expectations:
With rates still negative:
Coming rate cuts in the US following the most pitiful rate hike cycle in history with debt to GDP higher than ever before:
And with economic data, yields and inflation expectations collapsing all around:
And so the TINA effect is back, the blue meth is on the market again and investors are chasing back into stocks in the face of deteriorating fundamentals:
Bringing FOMO back with the expectation that this will usher in a new era of record highs as central bankers are once again stepping in at the right moment trying to prevent another key break in stock prices:
One is virtually enticed to chase assets again for that big grand finale perhaps.
Not because of earnings, not because of revenues or growth. Because they have to as yields are once again collapsing and central bankers are again promising free money.
As I’ve outlined for quite some time: Stock markets can’t sustain gains or record prices without intervention, without a helping hand, without dovish and intervening central banks. This has been true for 10 years and it continues to be true in 2019 cause that’s where all the big gains are:
This is not capitalism, nor does this ongoing farce constitute free market price discovery. It’s politburo based central planning, desperately trying to keep the balls in the air.
“To extend the business cycle” Jay Powell stated this week. Since when is this the primary purpose of the Fed? What happened to inflation and price stability? Already they are tossing their stated inflation goals and are talking about letting inflations run hotter if they can juice it up. There’s no integrity, only moving targets and carrots driven by equity prices.
The pretense is gone, it’s all about keeping the illusion alive that the Fed knows what it’s doing, that it’s always there to save markets from any trouble.
But its track record is obvious: It has failed to meet its inflation targets (ill guided as they may be) for 10 years. It has failed to normalize despite years of promises to do so, and will never be able to normalize. Between 2008-2019 the Fed was non-accommodative for 3 months. It blew up in their faces in December. They’ll never be non accommodative again. They can’t.
This week investors are happy to chase the coming free money train again. They may well be rewarded for the same gig that has worked for 10 years with the consequences already apparent: Ever more record government, corporate and consumer debt and yes, ever more extreme wealth inequality. Bravo.
Alternatively investors may want to exercise caution in chasing policy failure, but rather keep an eye on technicals that may well point to a different result:
While markets will negotiate the ultimate outcome the verdict on the policy front is already in: Game over. The grand central bank experiment has been revealed to be a colossal failure. Brace yourselves.
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I totally agree with you Sven!. This will end in total chaos….worldwide. I never thought they would be able to keep kicking the can for more than 10 years…
Simply brilliant writing. You have summed it up better than anyone I know. We are in for interesting times. That’s considered a curse in Chinese.
Thanks Robert, appreciated
I completely agree… Genius!
Greed is a bottomless pit…the market goes up when it gets bad job’s reports, and it goes up in the promisse of tax cuts. It goes up when the stocks are low ’cause it’s cheap to buy, and when they’re high just ’cause it’s trending and they’re going to go higher! Sugar rush all around, let’s see how many will get diabetes…
Your basic premise seems to be that society can’t bare a negative interest rate. Why do you think that is true? Particularly if society enters a cycle where rather than seeing purchasing power continue to decline as we do now, we start to see it rise due to automation?
When technology drives down prices in key sectors, we experience deflation and our purchasing power increases. Old models are bad at measuring this.
If we get healthcare and education costs under control, I think a negative interest rate would be appropriate as capital will have less and less use as technology marches forward (diminishing returns on goods).
Wage inflation will rise, widening the gap between the cost of labor between developed and undeveloped countries; however, even undeveloped countries will experience wage inflation as more and more of human chores are automated a premium will be in place in trying to have people work on something.
Society can’t bear a negative interest rate simply because in that case savers have an option to negative interest rates – cash. Think of what you’re saying. With, say, negative 10% interest rates savers would merely withdraw all their savings until the rates turned positive. The internet has caused the greatest automation of all time in education, yet education costs are going up, not down.
Education cost are virtually nil. The cost of a college degree? Most colleges can not educate any longer.
“Your basic premise seems to be that society can’t bare a negative interest rate. Why do you think that is true?” Because, like e.e. Cummings, when the bank tells them they are going to charge them for the privilege of lending the bank their money, they will say “there is some sh*t I will not eat” and stuff it in their mattress.
Today’s WSJ had a different take on debt, essentially saying it’s not too bad. Of course they were looking at different data sets.
What do you think of their analysis, Sven?
Thanks for keeping it simple!
the link appear dead, perhaps they retracted it 😉
Fed Dot has lost the Plot, time to show them what’s in our toolbox and that we will do whatever it takes.
I been suspecting for some time now that all the world’s currencies will have a “hyperinflation decade”, in which they basically all reset to zero (Venezuela style). Many thanks to Mike Maloney who always posts fresh content about this subject.
I am trying to understand if we are heading in for this scenario with the worldwide Central bank easing, or if we are instead in for a deflationary crisis first.
I only see this game ending in one way…. Hyperinflation. Why? because the answer to everything is to paper it over, first with promised paper (debt) and then when that inevitably fails… printed paper. All that printing will ultimately result in hyperinflation or global financial system collapse. Then there will probably be a reset of sorts. I won’t claim to know what that looks like, but it might end the US reserve currency status be replaced by more debt via the IMF bailout with SDRs… Maybe precious metals are the long term answer for us little folk? IDK.
Sven’s right of course. The world’s central banks have taken it upon themselves to fight against the growing deflationary forces of technology, demographics and debt and any pretence of normalisation is false. We live in a debt-based global monetary system. The crux of the matter is that 97% of “money” is bank credit. Every time a bank loan is taken out by a creditor, money is created out of nothing (there have been a number of journal articles on this by Richard Werner, not to mention the Bank of England confirming as such on the public record). That new loan carries an interest obligation. To pay the interest obligation, more money must be conjured and circulated through the system until the debtor earns some of it. But that new money also carries an interest obligation, which requires yet more debt to be created and so it goes on. As total debt grows, so does the burden of interest servicing costs, that is, unless interest rates move generally in a downward direction or productivity increases faster than debt. Because of the rise of the welfare state and underemployment, productivity growth simply is not occurring to the extent that it needs to. Therefore the only option that keeps an illusion of prosperity and the game going is to lower interest rates. The system cannot survive without exponential debt growth. It’s that simple. The only way for them to prevent debt from constraining prosperity is to eventually get the average interest rate on all issued debt down to zero. Knowing this is the ultimate outcome means we can, in the short to medium term at least, invest accordingly. What happens once we’ve been stuck there for another decade is anyone’s guess. Debt jubilees are unlikely because pension funds would be forced into bankruptcy earlier and the public outrage would be too great. Deflation is a real possibility as the long-term debt cycle overwhelms the inflationary policies of central banks. Regardless of what occurs, the populace is set to lose. Future prosperity will be lower for majority of people around the world. The grand experiment will be written into the history books as a grand failure.
This is “Game Over” for everyone especially our middle class which has been taking the brunt of asset theft for 40 years in one way or another. People get some physical gold and silver, some crypto (Litecoin, Steller) and hunker down with as little debt as possible. We are going to need to band together or total chaos will turn this country into a “Hooverville” 2019 style. Get those “folk songs” ready there is a change acommin’.
It doesn’t have to be GAME OVER. This can mark the beginning of the BEST TIMES EVER. If we only learn to accept that NEGATIVE INTEREST RATES can be PERMANENT.
What many people don’t understand about Capitalism is that it works like a game of Monopoly. First everything is great. Capital is built in the form of houses and hotels. Everyone is winning, with a little help of the bank, which finances the expansion. But then everyone starts to lose, except the winner. The winner can extend the game by lending money to the losers so that they can pay their bills. But at some point it becomes clear that the debt is never going to be repaid. The only thing that can keep the game going is to make interest rates on those debts negative. The alternative is to end the game and start over.
For a game of Monopoly that’s not a problem but in the real world it is. Just imagine all the businesses being closed so that all capital is destroyed so that we start from square one. In the past this happened a few times. There have been depressions, wars and inflations that destroyed a lot of capital. And after the destruction, capital could be rebuilt, and interest rates could be positive again. After World War II there has been a long period of uninterrupted global economic expansion facilitated by central banks extending ‘the game’.
The problem is not excessive investment but the idea that interest rates can’t go below zero. If no-one is willing to borrow and the top 1% sits on excess money, the equilibrium interest rate is negative, unless there is an artificial price control like the zero lower bound. Until now debts had to expand and we needed inflation because interest rates needed to be positive. With negative interest rates, the economy can flourish without the need for more debt. We now have fiat currency and cash is becoming obsolete so it is possible. A tax on cash and currency allows for negative interest rates.
And interest is a reward for risk. Once interest rates are negative, interest can be banned altogether, so tat bad debt would gradually disappear. The tax on currency and cash will ensure liquidity in financial markets at all time. There will be deflation, so negative rates can compete with zero rates on bitcoin or gold. If you understand the issue, and realise that this is the best option, you may need to promote it, so that more people learn about it.
A short introduction:
How do I save for my retirement in your negative rate world ?
It is important to realise that negative rates might be the market equilibrium given the fact that money and capital are concentrated and many people are in debt and aren’t willing to borrow more. There may be no acceptable alternative for negative rates.
People may need to save more for retirement. On the other hand, interest costs are hidden in every product and service, so these things can be cheaper and you may have more to save. On the macro level, negative rates tranfer money from people who have more to people who have less.
There might be deflation (quite possibly so) and deflation may become permanent because there is no need for debt expansion to keep the economy going, so zero interest may still be a positive return.
You may also prefer to invest in equity as the interest rate is capped and the returns on equity can be positive. Hence, investors might prefer equity rather than debt. Balance sheets of corporations can be deleveraged (as there is no reward for high risk) so that the financial system will be more stable and the stock market will be more stable too.
Bad debt could disappear for high risk is not allowed and the economy will be stable. And as a side benefit, if cash and currency are taxed at a high enough rate, central banks can undo all the quantitative easing as investors would like to get rid of cash and will gladly gobble up all the debt on the balance sheets of central banks. Central banks may make a huge profit on that.
Sven, what is your opinion on NIRP and the war on cash?
I do not believe there is a war on cash. The ECB even promotes the use of cash. Cash is simply becoming obsolete. I always liked cash because you can see it but even I use cash less and less.
How does your proposal of NIRP work when inflation eventually returns, either through cost push inflation or through too much printing of money? Inflation will be the silver bullet that kills your system
The argument for printing money is that it was needed to keep the debt expansion going. With negative interest rates, there is no such need. Money printing would promote inflation, which would push interest rates upwards. As a consequence there would be fewer funds available for lending at a maximum interest rate of zero, money supply would contract, and inflation would be contained.
With ‘Natural Money’ no-one can borrow at interest rates above zero. This also applies to governments. This can be attractive for governments for they can borrow at negative rates if their finances are in good shape. For instance, Germany and Switzerland can borrow at negative rates because of that. So there is an incentive for governments to have stable finances. Trust is the basis of low interest rates.
The government of Argentina has to pay high interest rates because of the default and inflation risk. In the end paying lower rates is beneficial for governments as they will have more money to spend.
“the economy can flourish without the need for more debt”
Wishful thinking – the REAL economy provides via surplus energy, not debt tokens (we call them money) – Debt is now being used as an energy/resource proxy – If you take away the debt as you suggest you expose the fact we are in a phase of declining surplus.
The historic resets you allude to were all PRIOR to us burning through the easy Oil and PRIOR to massive increase in world population. (ie it was possible to easily ramp up energy burn)
A reset will expose the obvious overshoot and with it wreck our current supply chains.
We are in the overshoot. To manage it without a collapse of the economy and civilisation might require some kind of dictatorship forcing people to accept the consequences. One might need Chinese type one-child policies world-wide and banning frivolous uses of scarce resources. That would require an unexpected turn in history. On the economic side you need negative interest rates to handle negative growth without a collapse of the economy. The alternative could be Great Depression II followed by World War III.
Thanks for this great article. I agree totally with what you wrote. I’ve been waiting for this rotten system to come down for a long time. It looks like we are close now….
Frankly, I think there should be a total reset. Who has benefitted from this endless money printing (and debt accumulation)? Well the 1% (or should I say the 0.1%)…it has gone directly into their pockets. And the majority of those uber rich think they are geniuses…. Having such wealth concentrated among such a few people is simply totally unhealthy.
And here comes the starvation and evaporation of all saving that support the retired part of our population. We are talking about the lose of the wisdom of our most experienced. I guess that is o.k. because our government sponsored “hospice” programs are aimed at their extinction anyway. Then the dumbed down youth can find out slavery is preferred to freedom where the political thieves flourish and everyone else is forced to hide or die.
GDP will be decreasing in coming year partly due to depletion of natural resources (fossil fuels and base metals). In order to reduce the money overhead so purchasing power of money can be maintained, negative interest are a welcome tool. Better that hyperinflation.
Thanks for the great piece. I agree wholeheartedly. Central Bankers are naked and I fully expect the same old tricks. Threatening cuts, interventions, zirp and nirp, all the usual BS. But it’s gonna be awful hard to get away with all that again. But I surely expect them to try and keep us shorts on the sidelines while they jawbone markets up and away. I hope Bernie is the DNC’s nominee. The thought of that makes my mouth water.
No mistakes have been made… to the contrary, the FED has extended the grand 2008
catastrophe past the traditional 7 or 8 year cycle date. The strategy to weaken the world
and subjugate them without the luxury of the petro dollar, has worked beyond the
wildest expectations… the brain dead American people have followed the path of least
resistance like a herd of blind wildebeest stampeding into the crocodile crossing…
what comes next is an overlap of the dollar into a crypto carbon currency.
This writer , like so many before him, has been either been recruited by the subjugators for perception management, or lacks two cents of sense.