Nov 292019

Paul Gauguin Tahitians at rest (unfinished) 1891


To be completely honest, I wrote -most of- the second part of this a while ago, and then I was thinking this first part should be part of the second, if you can still follow me. But it doesn’t really, it’s fine. I wanted to write something to address how little people know and acknowledge about how disastrous central bank policies have been for our societies and economies.

Because they don’t, and they have no clue, largely and simply because of the way central banks are presented both by themselves and by the financial press that covers them. Make that “covers”. Still, going forward, we will have no way to ignore the damage done. All the QE and ZIRP and NIRP will turn out to be so destructive for us all they will rival climate change or actual warfare. That’s what I wanted to talk about.


You see, free markets are a great idea in theory. Or you can call it “capitalism”, or combine the two and say “free market capitalism”. There’s very little wrong with it in theory. You have an enormous multitude of participants in an utterly complex web of transitions, too complex for the human mind to comprehend, and in the end that web figures out what values all sorts of things, and actions etc., have.

I don’t think capitalism in itself is a bad thing; what people don’t like is when it veers into neo-liberalism, when everything is for sale, when communities or their governments no longer own anything, when roads and hospitals and public services and everything that holds people together in a given setting is being sold off to the highest bidder. There are many things that have values other than monetary ones, and neo-liberalism denies that. Capitalism in itself, not so much.

It’s like nature, really, like evolution, but it’s Darwin AND empathy, individuals AND groups. The problem is, and this is where it diverges from nature, you have to make sure the markets remain free, that certain participants -or groups thereof- don’t bend the rules in their own favor. In that sense it’s very similar to what the human race has been doing to nature for a long time, and increasingly so.


Now, if you limit the discussion to finance and economics, there would appear to be one institution that’s in an ideal place to make sure that this “rule-bending” doesn’t take place, that markets are fair and free, or as free as can be. That institution is a central bank. But whaddaya know, central banks do the exact opposite: they are the ones making sure markets are not free.

In the ideal picture, free markets are -or would be- self-correcting, and have an inbuilt self-regulating mechanism. If and when prices go up too much, the system will make sure they go lower, and vice versa. It’s what we know from physics and biology as a negative -self correcting- feedback loop. The self-correcting mechanism only activates if the system has veered too much in one direction, but we fail to see that as good thing when applied to both directions, too high and too low (yes, Goldilocks, exactly).

It’s only when people start tweaking and interfering with the system, that it fails. Negative feedback vs positive feedback are misunderstood terms simply because of their connotation. After all, who wants anything negative? But this is important in the free markets topic, because as soon as a central bank starts interfering in, name an example, housing prices in a country, the system automatically switches from negative feedback to positive -runaway- feedback, there is no middle ground and there is no way out anymore, other than a major crash or even collapse.


Well, we’re well on our way to one of those. Because the Fed refused to let the free market system work. They, and the banks they represent, wanted the way up but then refused the way down. And now we’re stuck in a mindless positive feedback loop (new highs in stocks on a daily basis), and there’s nothing Jay Powell and his minions can do anymore to correct it.

The system has its own correction mechanism, but Greenspan, Bernanke, Yellen and now Powell thought they could do better. Or maybe they didn’t and they just wanted their banker friends to haul in all the loot, it doesn’t even matter anymore. They’ve guaranteed that there are no free markets, because they murdered self-correction.

Same goes, again, for ECB and BOJ; they’re just Fed followers (only often even crazier). In fact since they have no petrodollar, they don’t just follow, they have to do the Fed one better. Which is why they have negative interest rates -and the US does not -yet-: it’s the only way to compete with the reserve currency. Of course today even the Fed, and “even even” the PBOC, are discussing moving to negative rates, and by now we’re truly talking lemmings on top of a cliff.

“Let’s throw $10 trillion at the wall just so home prices or stock prices don’t go down!” Yeah, but if they’ve been rising a lot, maybe that’s the only direction they can and should go. It may not be nice for banks and so-called “investors”, but it’s the only way to keep the system healthy. If you don’t allow for the negative feedback self-correction, you can only create much bigger problems than you already have. And then you will get negative feedback squared and cubed.


Unless, of course, you have stellar economic growth, and you find unparalleled amounts of oil, and you have a growing population with way more kids born than people dying. But in case you don’t, you’re merely making an initially relatively minor problem much much worse with QE and ZIRP.

What central banks have been doing is they’ve utterly destroyed savings and pensions, i.e. the only thing “ordinary” people had to stave off their own personal collapse and that of their communities. ZIRP and NIRP move all those savings and pensions towards the bankers. And yes, pension funds may have moved into equities from bonds, and they may look good momentarily, but the current parade of new highs in stock markets only exists because of central banks’ QE and ZIRP.

There are tons of zombie enterprises in the world, many of whom have been kept alive by central bank policies, but wait till it becomes evident that the pension funds and systems themselves have turned into zombies. That’ll wake you up. Because who’s going take care of grandma, or her daughter, in a few years’ time? One thing’s for sure, it won’t be Jay Powell.


This has gotten so long already I’ll leave the part 2 I mentioned above to be its own, separate, part 2. Soon.



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Home Forums The Fed Detests Free Markets

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    Paul Gauguin Tahitians at rest (unfinished) 1891   To be completely honest, I wrote -most of- the second part of this a while ago, and then I was
    [See the full post at: The Fed Detests Free Markets]

    John Day

    Nate Hagans had this to say about the divergence of nominal financial capital from physical reality last week. Stoneleigh and Gail Tverberg have often said about the same thing.
    Fig. 8 is a conceptualization of the last few and next few hundred years (not to scale). The green line represents sustainable flow levels available to humanity which reached technological and geographical limits in the 19th century. The red line represents the one-time pulse of non-renewable natural resource inputs to human economies (oil, gas, copper, etc.). The black line represents financial markers (money, credit, etc.) of the underlying primary capital.

    Fig. 8
    Download : Download high-res image (89KB)Download : Download full-size image
    Fig. 8. Humans and Resource Access.

    In the pre-Industrial era up to Point A, humankind migrated around the planet accessing solar flows using relatively simple technology such as agriculture, sails, slaves and animal labor. At the dawn of the industrial revolution, Point B, humanity added the condensed stocks of hydrocarbons to previously flow-based human economies. A valid description of the Solow residual (i.e. the economic growth not explained by labor or capital) was absent during this time because the black line and red line were tracking together.

    Between B and C we hit an energy crisis in the 1970s, which we ‘solved’ by both 1) using debt to pull consumption forward in time and 2) globalization and outsourcing to the cheapest areas of production. These changes allowed economic growth to continue until it hit a wall with conventional finance in 2008 (Point C)– at which point central banks and global governments were forced to essentially redesign the entire financial system. This new (ongoing) paradigm involved measures such as too-big-to-fail guarantees, artificially low interest rates (even negative!) (Salmon, 2019), quantitative easing, central bank balance sheet expansion and various GDP-friendly rule changes (Alderman, 2014). The continued increase in global credit allowed: access to costlier tranches of resources, more social programs, cheap financing for renewable energy, and a sustained – if tepid – return to economic growth since 2009. We are now heading towards Point D, where our global monetary representations of reality continue to decouple from the underlying biophysical reality (red curve).


    Although this post likely will not inspire many comments, I think it may be the most important of last year or two. This touched on many things I have been thinking lately, but have been struggling to articulate.


    free market system

    Its pretty hard to discuss what is and how it operates without first agreeing on a definition.
    However, we can agree that it only exist in la-la-land.
    What “ism” that exist, in the real world, is subject to many interpretation by all.
    What we can agree, is that where ever we look we see that the 10% have found many various ways of taking “the rake” to keep themselves on top of the pile no matter if the economy is in a positive feedback loop or a negative feed back loop.
    Those same people make the rules and regulations so that they can be winners.
    The majority of those same people have gone to the same schools, and got trained as lawyers, accountants, bankers and enablers for the elites.

    There is no proof of any wrong doing – Biden

    ( Rake is the commission fee taken by a poker room for operating the game. The commission is scaled to the buy-in and generally equals 5-10% of the pot in each hand.)
    (yesterday, they were called “Rentier ” – a person who lives on income from property or securities)

    ” …. but wait till it becomes evident that the pension funds and systems themselves have turned into zombies. That’ll wake you up.”

    The readers of TAE are already awake. Its too late to change the system. We have been rejected by our friends and circle of life as tin foil. If we are not taking a “rake” we will suffer.
    So, now, how can we minimize our pain.



    What we can agree, is that where ever we look we see that the 10% have found many various ways of taking “the rake” to keep themselves on top of the pile no matter if the economy is in a positive feedback loop or a negative feed back loop.

    I covered that already.


    Although this post likely will not inspire many comments, I think it may be the most important of last year or two. This touched on many things I have been thinking lately, but have been struggling to articulate.

    Boogaloo, you may be right but that would be a shame. I know I’ve been talking far more about politics than “real” issues like this, but that’s because of how the media coverage changed, that the press figured out that reporting skewed “news”, that presents opinion as news, pays so much better. And I still think this is our main issue today.

    But yes, it buries our focus on larger issues such as central banking, and its consequences.

    I would like this post to get a lot of comments; that would mean people understand the gravity of what’s going on.


    “I would like this post to get a lot of comments; that would mean people understand the gravity of what’s going on.
    I covered that already.”

    I know. Different words same thing.


    And I hope many people can connect to this as well:

    This touched on many things I have been thinking lately, but have been struggling to articulate.

    John Day

    With compound interest on loans of conjured money from fractional reserve lending, it is inevitable that those creating the money will “own” everything pretty quickly.
    Why don’t they own everything already?
    what happens when there are multiple, “valid” claims that gratly exceed the actual physical wealth?

    In the coming reset, there will have to be something other than the usual sorting out of recent years, which is to give the bankers every asset, whenever there is a question (Wells Fargo Mortgages) and also give them enough conjured money to keep their extractive system intact.
    It seems to me that by their own books, bankers already “own” more than what exists, but others also have valid claims on some of it.
    Bankers and financial elites need to take the biggest haircut of all time, and fractional reserve lending has to be removed from bankers and central bankers, going forward, if there is a forward…


    @ John Day
    ” …. if there is a forward…”
    All of the inventories that we see pilled up at every dealers, does not belong to the business owners. Its on contingency, or loan collateral..
    yep, the lenders, the money printers, think that they will be okay because they have a claim on real assets.
    Its no different than holding gold. You can’t eat it. And you got to find a buyer at the price that you want and say no to those who want it but don’t have the money that you want in exchange for that asset.
    It will take a very special salesman that can sell a freezer, to an esquimaux, in the middle of winter.


    Yes, the folks who have been reading you, some since The Oil Drum, understand and appreciate your take on the issues, Illargi.

    President Trump seems to have recognized the existence of the forgotten members of our society, who were not only left out but actively hurt by such policies.

    To listen to people talk, the radio, the television, we seem to think Trump is this “out there” candidate. Will the next populist presidential candidate figure out a way to communicate this fairly complex idea (the crux of your above writing) to the masses, and out-Trump even Mr. Trump?

    Maybe we’ll be seeing “Miss me yet?” bumper-stickers of The Donald in 2025…


    @ John Day – in the event of another 2008,
    How many millions would be foreclosed on (by a system we bailed out)?
    Has the mindset changed and a peaceful “moving on” is a thing of the past?
    The folks I know and work for who have been piling out of the market, buying real assets and then trying to raise the debt don’t even seem capable of entertaining such thoughts (I probe gently).

    V. Arnold

    Damnit!!! Lost an entire post and I don’t have the energy to try again.
    A well written and relevant thread Ilargi…
    Looking forward to part II.

    V. Arnold

    Until I read this essay, I am one who considered capitalism inherently evil/bad.
    Even given I mostly understood the whole economic system was/is heavily manipulated. My reasonning was simply that capitalism made it possible. I failed to recognize the whole economic system was captured by a few vile men whose greed knows no bounds.
    Also along with this was the total breakdown of our system of laws; we went from a nation of laws to a nation of men.
    This made it ripe for the central banks to go rogue…
    I hope going forward, you’ll show a way out of this quagmire of a captured economic system.
    It seems to me that with the internationalization of finances this won’t be possible without a global collapse leading to a massive depression…
    This often creates opportunities for a despot to rear their ugly head.
    What also occurs to me at this time is an informed citizenry; here we’re in deep shit; economic ignorance abounds across the spectrum; reinforced by ignorant media economic gurus given wide exposure on the MSM.

    Doc Robinson

    Of course, “The Fed Detests Free Markets.”
    Freedom cannot be controlled.

    Government intervention to prop up prices in certain markets is now so commonplace that it can seem normal for our ‘capitalist’ system. For example, instead of allowing foreclosures to be a matter between banks and borrowers to work out (with the banks potentially granting a principle reduction and restructuring the debt, keeping the borrower in the house), there is a push for the government to intervene by buying up foreclosed houses and slowly putting them back on the market, to prevent the normal downward movement in home prices caused by the increase in supply following foreclosures.

    6.4 Government Purchase of Distressed Houses
    The final policy intervention we consider is a government facility to purchase distressed homes and then slowly re-introduce them to the market… we use our quantitative model to compare several policies. The most cost effective policy we consider is a government intervention that holds foreclosures off the market until demand rebounds, thereby rectifying the dynamic imbalance of supply and demand caused by foreclosures.

    How Do Foreclosures Exacerbate Housing Downturns?
    Adam M. Guren and Timothy J. McQuade
    Boston University and NBER; Stanford University
    August 12, 2019

    Dr. D

    This is highlighting the difference I often bring up about Capitalism. Free markets are when I can carve a fishhook from bone and if my cousin wants it, he has to trade me something. That is, it’s organic. It’s innate to man, and as world-wide black markets show, is inextinguishable. That you should enjoy the fruits of your hard work is natural and opposed to the inorganic, rigged system we see today.

    However, the tilt toward corruption is *also* natural and organic, which makes it difficult to discuss clearly. Like other systems — the price system we’re talking about here — the level of corruption is always >+1, but should cycle around a centerpoint, the way market cycles around a trendline. What these guys do — or rather I should say, what WE do, when we abdicate all our duty and give up our morality for authority — is to allow that corruption to get far, far wider. And since it hovers near zero-bound, the only direction it can expand is up. Is that, too, natural? Well probably, as they’ve been struggling with it as far back as we have records, King Canute, Nebuchadnezzar, whatever. But that’s us, our cycles of indifference, selfishness, and immorality where we THINK we’re going to get that extra $1,000 by playing loose, but really when we accept policies and Presidents that play loose, we lose ten-fold that, and worse still.

    This will be the manner of the king that shall reign over you: He will take your sons and appoint them for himself, for his chariots, and to be his horsemen; …And he will take your daughters to be confectionaries, and to be cooks, and to be bakers. And he will take your fields, and your vineyards, and your oliveyards, even the best of them, and give them to his servants. And he will take the tenth of your seed, and of your vineyards, …And he will take your menservants, and your maidservants, and your goodliest young men, and your asses, and put them to his work. He will take the tenth of your sheep: and ye shall be his servants. And ye shall cry out in that day because of your king which ye shall have chosen you; and the Lord will not hear you

    This is what they — we — did to sign up to the system and “I’ll get mine!” and jump in line to receive the first fruits of the inflation, of the money flow, and screw the other guy, my co-worker, someone in Milwaukee. That is to be slaves and lose so, so much more. That part appears to be natural too, and it’s only our new system — and unprecedented lack of morality — that has allowed it to reach so far. And that makes the snap-back that much worse. For as the other quote says, the people will be punished with their whole country. When it comes, justice is broad, not fine. But nearly everyone nationwide, worldwide approves of this corruption, of all sorts, not just market interventions. No one has the least desire to be judged on their own merits, without inside help. You wanted dishonesty. Well God is a gentleman and gave you what you asked. Are you happy now or have you learned something?

    No one’s learned anything yet. Instead of their own work and merits, they plan on “sharing” themselves some of that other guy’s money, his hard work. …And the sad part is, when that guy stole it, then the fruits of that theft favor others for 100 years, how on earth do you settle matters and not fall into all-stealing-all?

    Maybe we can’t escape ourselves. If we’re corrupt how can we possibly hope to escape the results of our own corruption? That’s like dousing ourselves with water and expecting not to get wet.

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