Even Bloomberg Notices that Something is Amiss

As anyone who hasn’t been in a coma knows, assorted central bank interventions have failed to achieve their stated goals over the past several years. A recent article at Bloomberg focuses on their failure to reach their “inflation” targets.

Of course, this particular failure is actually reason to celebrate, as it means that consumers have at least been spared an even sharper decline in their real incomes than has been underway in spite of relatively tepid increases in consumer prices (whereby it should always be kept in mind that whether or not such price increases are considered “tepid” depends on on the composition of the basket of goods and services relevant to each individual).

 

inflation expectationsMarket-based inflation expectations in the major currency areas have crashed again – click to enlarge.

 

Of course central banks have succeeded in blowing up the money supply at truly astonishing rates since 2008, so prices in the economy have certainly been vastly distorted. The devastating effects of such price distortions are currently being visited on the oil patch, where credit-financed malinvestment on a stunning scale has occurred as a result of an erroneous appraisal of future oil prices. A slowdown in money supply growth in the US and China between 2011 and 2014 was all it took to take the wind out of the sails of this particular collective hallucination.

 

US-winds-down-quantitativ-012Inflating the euro alone wasn’t enough to keep oil prices afloat …

Illustration by David Simonds

 

To the delight of the financial industry, asset prices have been the main beneficiaries of money supply inflation, but deep down many market participants are presumably aware that the “wealth” ostensibly created by artificially pushing the prices of titles to capital to the stratosphere is just as ephemeral – it is ultimately nothing but phantom wealth. If everybody tried to cash in, it would disappear in a flash. And of course, that is what it will eventually do, one way or another (it would be possible for even more intervention to keep nominal prices high, as was e.g. recently demonstrated in Venezuela, but certainly not in real terms). As an aside to this, even the accounting profits reported by listed corporations are in many cases largely illusory – they are often little more but capital consumption in disguise.

Anyway, various financial market participants interviewed by Bloomberg are lamenting the “loss of credibility” suffered by the central planners. From our perspective, they never had any credibility. This has nothing to do with the persons running these agencies (although we certainly believe that the economic theories they base their decisions on are extremely misguided), it is simply due to the fact that central planning is literally impossible. Even the best-intentioned planners cannot circumvent economic laws – they might as well try to outlaw gravity.

This development is nevertheless of interest, because the superstitious belief that central bank interventionism actually does work has been widely held in the mainstream (or let us say, the utterly illogical faith that this time, central planning will somehow work in spite of the massive heaps of countervailing evidence that have accumulated over the years). If this faith is lost, it will have implications for financial markets.

One can invest realistically, by being aware of the short and long term effects of money supply expansion and interest rate suppression, but in order for the cynical approach to work as one would expect, the support of a broad foundation of the uncritically faithful is still required. Once this congregation of high-IQ morons becomes antsy, things can change rather dramatically. Or as one observer-participant interviewed by Bloomberg puts it:

 

There’s a lack of faith in monetary policy — you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money — and still inflation is lower,” said Lee Ferridge, the head of macro strategy for North America at State Street Corp. “It leads to a risk-off environment.”

 

Risk off? Uh-oh.

 

TMS-2US money supply TMS-2 since 1988 – sure looks inflated to us – click to enlarge.

 

Credibility Crash

Another reason why we wanted to draw the attention of readers to this article – besides the fact that it documents that faith in central bank omnipotence is dwindling – is a single sentence in it. One thing that always leaves us scratching our head is that the mainstream financial press never asks a question that seems rather obvious to us: is it possible that the economy’s performance is so poor not in spite, but because of the policies implemented by central banks?

Our answer to this question is no secret. One cannot improve prosperity by creating more money from thin air and manipulating the most important price signal in the economy. In fact, it is completely beyond doubt to us that this will end up weakening instead of strengthening the economy. This happens “in spite” of the superficial short to medium term impression of growth conveyed by the increase in aggregate economic activity during the boom phase. As we always stress, activity alone is not enough – its quality is the decisive point. A loss-making company can be quite active while nevertheless still producing losses. No-one would get the erroneous idea that its activity makes any economic sense.

The above mentioned question neither seems to occur to the authors of such articles, nor to the vast majority of mainstream economists. Instead, a truly bizarre routine conclusion tends to be drawn from the evidence of failure: we must try to fail on an even grander scale. In other words, let’s fail in style! With a bang instead of a whimper! Here is the lone sentence from the Bloomberg article exemplifying this mind set:

 

“Recent economic reports have renewed calls for major central banks to do more.”

 

We regard this as evidence that the unnamed authors of these “recent economic reports” are certifiably insane. Instead of demanding that central banks should stop what has so obviously failed to work, they want them to do even more of it! If there is any consolation, it is that this is certain to make the eventual “credibility crash” all the more profound. A small consolation to be sure, but better than nothing.

Lastly, we should perhaps mention that the main focus of the Bloomberg article, namely the “concern” allegedly created by the seeming inability of central banks to create “inflation” is extra absurd. One thing we will never worry about is the ability of a sufficiently committed central bank in a fiat money system to debase the money it issues.

 

campfire_cartoon_10.31.2014_largeThe one thing they can actually do …

Cartoon by B. Rich

 

All that has happened so far is that price increases have not yet shown up where they would have liked them to show up, but even that can be easily remedied. Keeping the process under control is an altogether different kettle of fish though.

 

Conclusion

Back in 2008/2009, we pointed out that during the “great financial crisis”, central banks proved to be the last bulwark market participants trusted to be able to keep the implosion of the credit bubble at bay. In effect, a bureaucratic arm of the government was seen as more likely to succeed in this than governments themselves.

It follows from this that there is little that is of greater importance to systemic confidence than faith in the abilities of central banks. Thus, when even the mainstream financial press begins to publish articles about a potential “loss of credibility” faced by these august institutions, one must begin to pay close attention.

 

Charts by: Bloomberg, St. Louis Federal Reserve Research

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

3 Responses to “Faith in Central Banks Dwindles”

  • therooster:

    The banks are pushing on a string now. Debt saturation is far too high. Time for the market to make its closing chapter appearance. We need market contributions to debt-free liquidity. It’s good to add some yin to the existing yang in order to complete the full working model of a liquidity yin-yang. Is it not light that comes out of darkness in the process of creation ? Nothing new here, is there …. really ?

    Gold is now a debt-free real-time digital currency (fully backed) with completely scalable liquidity thanks to floating trade values.

    Just add assets to the mix and stir ….. gently.

    You cannot pour new wine into old wineskins.
    http://BitGold.com/r/0UZxqF

    • rodney:

      Kindly stop posting the link to your website … this is shameless spamming.

      Nothing personal, I don’t read your “debt-free liquidity” comments … but if you comment here you owe some respect to the blog author.

      • VB:

        Asking him is completely pointless. He has the typical mentality of scammer/spammer. He will persist with pushing his scam outfit no matter what. People like that can be stopped only with force – but banning spammers is a very non-trivial exercise, as I know from personal experience.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • When the Freaks Run Wild
      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...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK "https://app.seasonax.com/"web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...
  • Wall Street - Island of the Blessed
    Which Disturbance in the Farce can be Profitably Ignored Today? There has been some talk about submerging market turmoil recently and the term "contagion” has seen an unexpected revival in popularity – on Friday that is, which is an eternity ago. As we have pointed out previously, the action is no longer in line with the “synchronized global expansion” narrative, which means with respect to Wall Street that it is best ignored.   Misbehaving EM currencies – the Turkish lira...
  • Fundamental Price of Gold Decouples Slightly - Precious Metals Supply and Demand
    The Fundamental Price has Deteriorated, but... Let us look at the only true picture of supply and demand in the gold and silver markets, i.e., the basis. After peaking at the end of April, our model of the fundamental price of gold came down to the level it reached last November. $1,300. Which is below the level it inhabited since Q2 2017. We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.   Gold and...
  • The Fake Promise of Adult Day Care
      Cold Dark Clouds The sun always shines brightest in the northern hemisphere during summer’s dog days.  Here in America, from sea to shining sea, the nation burns hot.  But, all the while, cold dark clouds have descended over the land of the free.   In case you ever wondered - yes, they really did say it... [PT]   For example, Senator Mark Warner – an absolute goober – is currently running interference for the Democrats on a proposal to silence political...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com