Debt Rattle Jun 16 2014: Central Banks Have Become The Markets
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Dorothea Lange Tobacco sharecropper, with baby on front porch. Person County, NC July 1939 The cluster, – or pride, or cabal – of global central banks
[See the full post at: Debt Rattle Jun 16 2014: Central Banks Have Become The Markets]New financial system is in the process of emerging …
“bank PBoC, has become “the world’s largest public sector holder of equities””
heheh … free market … new reality … Adapt or perish
Communism – resource allocation done centrally with “five year plans”
Capitalism – resource allocation done by “investors” using the stock market
Central banks using the stock market. Capitalism morphed to communism? Maybe the communists have “won” after all?
Just when I think I understand things pretty well, somebody comes along and writes about those very same things in such a way that I suddenly start to understand them even better. Clear thinking giving rise to clear communication, I guess. It reminds me of a quote I saw recently attributed to Einstein: “If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.” Ilargi certainly appears to have a good grip of the problem (unlike a lot of people I read).
But as far as possible solutions go, I don’t think there are any. That includes wars, revolutions, regime changes (impeachment?), white collar criminal prosecutions, new laws, a new reserve currency, new monetary systems, hyperinflation, devaluation, confiscation, precious metals, Bitcoin, helicopter drops, space aliens, lizard people, vengeful gods, genocides and jubilees. At least, no plausible solution other than monstrous debt collapse. I’m wondering if it will be an attempt at one of the bogus solutions that provides the trigger – – the Black Swan – – that sends this insane debt absurdity to the shredder.
Out on a limb here, but I’m thinking the trigger could be something as seemingly unrelated as an upcoming attempt to disarm Americans Australia-style. Some precipitating event like another Sandy Hook to garner public support, but without the play-acting and cover-ups. Or another 9/11, but much bigger. They’ll get nabbed in the act this time, and it’ll be curtains. And you’re not going to believe this … wait … uh oh … oh, shucks, the crystal ball just went dark. Sorry.
Given the policy response from and after 2008, this had to happen. With interest rates at zero, all the pension funds will collapse unless we see nominal increases in asset prices, — and the only way to see nominal increases is for the central banks to be the buyer of last resort.
This will go on until the system resets. What will that look like? I don’t think it will be as bad as many fear. I expect a rush into physical bullion at some point, possibly precipitated by the PBoC and/or the Russians openly bidding for all available bullion (which might be triggered by a political event). That will collapse the futures market and lead to a week long banking holiday worldwide. The central banks will save all debt in nominal terms as all currencies will hyperinflate, but in real terms the debt will crash. Much of the world will resort to a barter economy for three months, but that will be short lived. Gold will resume trading at a significantly higher value and will de facto replace the dollar as the reserve currency (along with oil), but without a return to a fixed exchange standard. The dollar will become like the peso. It will continue to exist, but its purchasing power will be only a tiny fraction of what it is today. And after three months the world financial system will become stable again and we will “start over” in a whole new world financial order.
Boogaloo:
As I understand it, hyper-liquidity and hyper-velocity both accompany hyper-inflation. Dollars would be like hot potatoes – – spent as fast as they were acquired because their purchasing power would literally decline as the hours pass. I am unable to envision how anything could make such a situation occur other than making dollars illegal to own for some reason. Are you predicting exponential growth in quantitative easing? That would cause explosive growth in the money supply, but if that’s your prediction, how do you envision that money making its way into general circulation?
(I have some one-hundred-trillion-dollar bills from Zimbabwe in my safe. I can paste a President’s face on them, but as long as they remain in my safe, they cannot inflate the money supply.)
From where I sit, the Fed’s inflationary measures to counteract deflation are nearing an end – – the end being heralded by an absence of non-central-bank buyers of government bonds (as described by today’s TAE article). Your view has been espoused by countless respected pundits over the last six years, but I’ve never read a decent explanation of how hyperinflation is now supposed to occur on top of the decades-long inflation we’ve accrued in the form of un-repayable debts.
All new money comes into existence as debts (except for coinage, if Bill Still is right), so where is this massive pressure to loan hyper-inflationary quantities of money (at zero interest) or to take on hyper-inflationary quantities of new debts? After all, interest rates on loans cannot go lower without causing Wall Street bank bankruptcies because there’s no profit in loaning money at less than the already tiny rates. Please, if you can be specific, what am I missing here? The platitude, “they’ll print to infinity” (not quoting you, by the way) means absolutely squat. Again, I have some one-hundred-trillion-dollar bills from Zimbabwe in my safe.
Diogenes, as I gaze into my crystal ball, here is what I see… two alternatives, but with the same result. In the first alternative, the gold market freezes up first, perhaps in connection with a political event. The result is a collapse in the monetary plane as physical gold becomes the only refuge and the currencies suffer a loss of confidence and hyperinflate. That could be the event that overcomes the present inertia.
The second possibility reverses the sequence. The currencies hyperinflate and trigger the rush into bullion. Only a small handful of people thought it conceivably possible that the dollar could hyperinflate and were predicting that outcome in September 2008. Now the view is more widespread that it is at least possible. Watch what happens if there is another deflationary swoon. If that happens, you are right, there’s all that unrepayable debt. But it will be repaid in nominal terms. The lenders will not lose a cent as all those bad debts become converted to base money. Historically money came into existence in the form of debt, but in a deflationary envirornment it is as you say — nobody wants to take on new debt. So base money becomes a much higher percentage of the money supply. As that process continues the Fed and other central banks lose more and more control. At some point velocity can and will change direction immediately. I am not looking for a gradual change. I am looking for a sudden reversal that will become unstoppable. You speak of pundits making such predictions for the last six years as if six years is a long time. But is it? For someone watching the pot waiting for it to boil, six years seems like an eternity. But the water will boil. It’s the only possible outcome.
There can’t be hyper inflation of goods because there is not very much currency around. Access to cash equivalent accounts is not assured.
There are plenty of petrodollars parked overseas. There is already enough base money out there for a hyperinflation — the dollars have already been printed. The only thing required is a spark, a loss of confidence. Meanwhile, as more and more credit money gets converted to base money, the Fed keeps adding more tinder.
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