BLIND OPTIMISM
Even after 5 years of lax Keynesian monetary policies, including continued ultra-low interest rates, the party may just have gotten started. The bugaboo of deflation is still sticking its ugly head into the exciting world of overleveraged risk-takers. More risk-taking has to be encouraged, because the desired effect of accelerating inflation has so far been missing. The current generation of Central Bankers will do ‘whatever it takes’ to kill off any semblance of this terrible sado-monetarism, as expressed by some, like the Bank of International Settlements (BIS). The simple truth is, that more of the same seems to be needed, because it hasn’t really worked according to the econometric forecasting models. In addition, Central Bankers don’t want to deal with the potential bloody aftermath, if current onorthodox monetary policies would ever reverse. They must be thinking: ‘Not on my watch!’
So Central Bankers can really stay in control of this monetary beast, which they have unleashed? ‘You cannot be serious!’ (John McEnroe - Wimbledon). Of course not! Nature has a way of humbling the most overconfident decision makers. When markets , for whatever reason, have had enough, they may be topping out, whatever Central Bankers say or do, even if the economy looks fine, just like in the past. All trading profits made in the previous bubble run-up, will then subsequently vanish quickly.
It should be abundantly clear (hello, Central Bankers!), that any attempt to determine a certain level of inflation by any one Central Bank, is futile. We live in an open system with extensive globalisation, so prices are being determined by the rest of the world. Accelerating rates of wage inflation are a thing of the past. Global pricing power has effectively been doomed by the expanding internet. Any inflation caused by energy and food prices as well as currency devaluation, is temporary and unsustainable. It is actually detrimental to the disposable income of the middle class, similar to a higher tax rate. This is deflationary. The smartest market in the room, the massive global quality bond market, has figured this out long ago. The 33-year Bull Market in U.S. Treasuries, for instance, is still very much in tact, despite the overwhelming consensus about its demise. Any rise in yields has been temporary and yields in the future can only decline further, as the population grows older and the real deleveraging finally takes hold. Convergence of yields with those in Japan is very much in the cards! Japan was an early example of a highly indebted, greying society, which remains mired in a structural economic stagnation, with low or negative inflation (deflation), whatever the policy of the Central Bank. This process takes many decades, even centuries. You can’t fight these secular forces. They have to play out. All official statements of policymakers should therefore be taken with a huge grain of salt!
The real reason, that Central Banks keep denying a Bubble Boom exists, is perhaps, that they see it as their mission to keep the leveraged Banking System from toppling over. This becomes clearer as the ‘real’ owners of the Central Banks will finally be revealed. If current, outrageously unsound monetary policies ever become unstuck, then the very existence of the 100-year Central Bank system will be hanging in the balance. The world will face the consequences of throwing out of the window 300-year old monetary policies!
RICK SCHMULL
July 4th, 2014
WESTCLIFF-On-SEA, ESSEX, U.K.
