Jul 252017
 
 July 25, 2017  Posted by at 1:31 pm Finance Tagged with: , , , , , , , , , ,  


Walter Langley Never morning wore to evening but some heart did break 1894

 

If there’s one myth -and there are many- that we should invalidate in the cross-over world of politics and economics, it‘s that central banks have saved us from a financial crisis. It’s a carefully construed myth, but it’s as false as can be. Our central banks have caused our financial crises, not saved us from them.

It really should -but doesn’t- make us cringe uncontrollably to see Bank of England governor-for-hire Mark Carney announce -straightfaced- that:

“A decade after the start of the global financial crisis, G20 reforms are building a safer, simpler and fairer financial system. “We have fixed the issues that caused the last crisis. They were fundamental and deep-seated, which is why it was such a major job.”

Or, for that matter, to see Fed chief Janet Yellen declare that there won’t be another financial crisis in her lifetime, while she’s busy-bee busy building that next crisis as we speak. These people are now saying increasingly crazy things, and that should make us pause.

Central banks don’t serve people, or even societies, as that same myth claims. They serve banks. Even if central bankers themselves believe that this is one and the same thing, that doesn’t make it true. And if they don’t understand this, they should never be let anywhere near the positions they hold.

You can pin the moment central banks went awry at any point in time you like. The Bank of England’s foundation in 1694, the Federal Reserve’s in 1913, the ECB much more recently. What’s crucial in the timing is where and when the best interests of the banks split off from those of their societies. Because that is when central banks will stop serving those societies. We are at such a -turning?!- point right now. And it’s been coming for some time, ‘slowly’ working its way towards an inevitable abyss.

Over the past few years the Automatic Earth has argues repeatedly, along several different avenues, that American society was at its richest between the late 1960s and early 1980s. Yet another illustration of this came only yesterday in a Lance Roberts graph:

 

 

Anyone see a recovery in there? Lance uses 1981 as a ‘cut-off’ date, but the GDP growth rate as represented by the dotted line doesn’t really begin to go ‘bad’ until 1986 or so. At the tail end of the late 1960s to early 1980s period, as the American economy was inexorably getting poorer, Alan Greenspan took over as Federal Reserve governor in 1987. A narrative was carefully crafted by and for the media with Greenspan as an ‘oracle’ or even a ‘rock star’, but in reality he has been instrumental in saddling the economy with what will turn out to be insurmountable problems.

Greenspan was a major driving force behind the repeal of Glass-Steagall, which was finally established through the Gramm-Leach-Bliley act of 1999. This was an open political act by the Federal Reserve governor, something that everyone should have then protested, and still should now, but didn’t and doesn’t. Central bankers should be kept far removed from politics, anywhere and everywhere, because they represent a small segment of society, banks, not society as a whole.

Because of the ‘oracle’ narrative, Greenspan was instead praised for saving the world. But all that Greenspan and his accomplices, Robert Rubin and Larry Summers, actually did in getting rid of the 1933 Glass-Steagall act separation between investment- and consumer banking was to open the floodgates of debt, and even more importantly, leveraged debt. All part of the ‘financial innovations’ Greenspan famously lauded for saving and growing economies. It was all just more debt on top of more debt.

 

 

Greenspan et al ‘simply’ did what central bankers do: they represent the best interests of banks. And the world’s central bankers have never looked back. That most people still find it hard to believe that America -and the west- has been getting poorer for the past 30-40 years, goes to show how effective the narratives have been. The world looks richer instead of poorer, after all. That this is exclusively because of rising debt numbers wherever you look is not part of the narratives. Indeed, ruling economic models and theories ignore the role played by both banks and credit in an economy, almost entirely.

Alan Greenspan left as Fed head in 2006, after having wreaked his havoc on America for almost two decades, right before the financial crisis that took off in 2007-2008 became apparent to the world at large. The crisis was largely his doing, but he has escaped just about all the blame for it. Good PR.

With Ben Bernanke, an alleged academic genius on the Great Depression, as Greenspan’s replacement, the Fed just kept going and turned it up a notch. It was no longer possible in the financial world to pretend that banks and people had the same interests, so the former were bailed out at the expense of the latter. The illusionary narrative for the public, however, remained intact. What do people know about finance, anyway? Just make sure the S&P goes up. Easy as pie.

The narrative has switched to Bernanke, and Yellen after him, as well as Mario Draghi at the ECB and Haruhiko Kuroda at the Bank of Japan, saving the world from doom. But once again, they are the ones who are creating the crisis, not the ones saving us from it. They are saving the banks, and saddling the people with the costs.

In the past decade, these central bankers have purchased $20-$50 trillion in bonds, securities and stocks. The only intention, and indeed the only result, is to keep banks from falling over, increase their profits, and maintain the illusion that economies are recovering and growing.

They can only achieve this by creating bubbles wherever they can. Apart from the QE programs under which they bought all those ‘assets’, they used -and still do- another tool: lowering interest rates to the point where borrowing money becomes so cheap everyone can do it, and then do it some more. It has worked miracles in blowing stock market valuations out of all realistic proportions, and in doing the same for housing markets in locations all over the globe.

The role of China’s central bank in this is interesting too, but it is such an open and obvious political tool that it really deserves its own discussion and narrative. Basically, Beijing did what it saw Washington do and thought: why hold back?

 

Fast forward to today and we see that we’ve landed in a whole new, and next, phase of the story. The world’s central banks are all stuck in their own – self-created – bubbles and narratives. They all talk about how they solved all the issues, and how they will now return to normal, but the sad truth is they can’t and they know it.

The Fed stopped purchasing assets through its QE program a while back, but it could only do that because Frankfurt and Japan took over. And now they, too, talk about quitting QE. Slowly, yada yada, because of control, yada yada, but they know they must. They also know they can’t. Because the entire recovery narrative is a mirage, a fata morgana, a sleight of hand.

And that means we have arrived at a point that is new and very dangerous for the entire global economy and all of its people.

 

That is, the world’s central bankers now have an incentive to create the next crisis. This is because they know this crisis is inevitable, and they know their masters and protégés, the banks, risk suffering immensely or even going under. ‘Tapering’, or whatever you might call the -slow- end to QE and the -slow- hiking of interest rates, will prick and blow up bubbles one by one, and often in violent fashion.

When housing bubbles burst, economies lose the primary ingredient for maintaining -let alone increasing- their money supply: banks creating money out of thin hot air. Since the money supply is one of the key components of inflation, along with velocity of money, there will be fantastic outbursts of debt deflation. You’ve never seen -let alone imagined- anything like it.

The worst part of it is not government debt, though that, when financed with bond sales, is not not an instrument to infinity and beyond either. But the big hit to economies will be private debt. Where in many bubble areas, and they’re too numerous too mention, eager potential buyers today fret over affordable housing supply, it’ll all turn on a dime and owners won’t be able to sell without being suffocated by crippling losses.

Pension funds, which have already suffered perhaps more than any other parties because of low interest ZIRP and NIRP policies, have switched en masse to riskier assets like stocks. Well, another whammy, and a bigger one, is waiting just outside the door. Pensions will be so last century.

 

That another crisis is waiting to happen, and that politics and media have made sure that just about no-one at all is aware of it, is one thing. We already knew this, a few of us. That the world’s main central bankers have an active incentive to bring about the crisis, if only by sitting on their hands long enough, is new. But they do.

Yellen, Draghi and Kuroda may opt to leave before pulling the trigger, or be fired soon enough. But whoever is in the governor seats will realize that unleashing a crisis sooner rather than later is the only option left not to be blamed for it. Let the house of dominoes crumble now, and they can say “nobody could have seen this coming”, while at the same time saving what they can for the banks and bankers they serve. That option will not be on the table for much longer.

We should have never given them, let alone their member/master banks, the power to conjure up trillions out of nothing, and use that power as a political tool. But it is too late now.

 

 

May 172016
 
 May 17, 2016  Posted by at 9:22 am Finance Tagged with: , , , , , , ,  


Charlotte Brooks Tom Corbett, Space Cadet 1952

This is an article by our friend Steve Keen, which was yanked by Forbes yesterday after just a few hours due to, according to Steve, their ‘parody policy’. I did some research and it turns out the Automatic Earth has no such policy. So I offered Steve to repost it here.

Steve Keen: CERN has just announced the discovery of a new particle, called the “FERIR”.

This is not a fundamental particle of matter like the Higgs Boson, but an invention of economists. CERN in this instance stands not for the famous particle accelerator straddling the French and Swiss borders, but for an economic research lab at MIT—whose initials are coincidentally the same as those of its far more famous cousin.

Despite its relative anonymity, MIT’s CERN is far more important than its physical namesake. The latter merely informs us about the fundamental nature of the universe. MIT’s CERN, on the other hand, shapes our lives today, because the discoveries it makes dramatically affect economic policy.

CERN, which in this case stands for “Crazy Economic Rationalizations for aNomalies”, has discovered many important sub-economic particles in the past, with its most famous discovery to date being the NAIRU, or “Non-Accelerating Inflation Rate of Unemployment”. Today’s newly discovered particle, the FERIR, or “Full Employment Real Interest Rate”, is the anti-particle of the NAIRU.

Its existence was first mooted some 30 months ago by Professor Larry Summers at the 2013 IMF Research Conference. The existence of the FERIR was confirmed just this week by CERN’s particle equilibrator, the DSGEin.

Asked why the discovery had occurred now, Professor Krugman explained that ever since the GFC (“Global Financial Crisis”), economists had been attempting to understand not only how the GFC happened, but also why its aftermath has been what Professor Summers characterized as “Secular Stagnation”.

Their attempts to understand the GFC continued to fail, until Professor Summers suggested that perhaps the GFC had destroyed the NAIRU, leaving the ZLB (“Zero Lower Bound”) in its place.

This could have happened only if there was a mysterious second particle, which was generated when a NAIRU equilibrated with a GFC. Rather than remaining in equilibrium, as sub-economic particles do in DSGEin, NAIRU apparently vanished instantly when the GFC appeared. Something else must have taken its place. DSGEin was unable to help here, since it rapidly returned to equilibrium—while the real world that it was supposed to simulate clearly had not.

CERN’s attempts to model this phenomenon in DSGEin were frustrated by the fact that a GFC does not exist inside a DSGEin—in fact, the construction of the DSGEin was predicated on non-existence of GFCs.

The ever-practical Professor Krugman recently suggested a way to overcome this problem. Why not turn to the real world, where GFCs exist in abundance, and feed one of those into the DSGEin?

Unfortunately, the experiment destroyed the DSGEin, since the very existence of a GFC within it put it through an existential crisis. However, before it broke down (while mysteriously singing the first verse of “Daisy, Daisy, give me your answer do”), the value for the NAIRU in DSGEin suddenly turned negative.

This led Professor Summers to the conjecture that perhaps there was a negative anti-particle to the NAIRU, which he dubbed the FERIR.

Lacking a functional DSGEin at the time, Summers fed a GFC into the older SLIM equilibrator lovingly maintained by Professor Krugman—and he discovered that the NAIRU took on a negative value there. Since the NAIRU cannot be negative, Professor Summers realised that he had discovered a new particle—the FERIR. When the FERIR interacted with a ZLB, the outcome was Secular Stagnation.

Professor Summers—who expects to receive the Nobel Prize for his discovery—had some harsh words for critics who had rubbished the very attempt to explain the GFC using a sub-economic particle equilibrator.

“They accuse us of adding ‘epicycles’ to our models to make them fit the data. That’s nonsense: that’s so 15th century. We’re way beyond that now,” sneered Professor Summers at length. “These days, we add new fundamental particles to our sub-economic menagerie: that’s way more sophisticated.”

The FERIR may now help economists understand the persistence of the ZLB, which has confounded all predictions to date. Having expected the ZLB to evaporate and be replaced fairly rapidly by an NRI (“Natural Rate of Interest”), economists have been flummoxed by its persistence—eight years now and counting.

“We have shown that the FERIR equilibrates with and maintains the ZLB,” Professor Krugman explained. “So Larry’s discovery is really, really important”.

Now that economists have explained the persistence of the ZLB, they can now turn their attention to understanding its perverse effects. The real problem of the ZLB for economists has been that it inverts the status and behaviour of all other sub-economic particles. In particular:

Growth, which was high, is now low;

Inflation, which was bad & everywhere, is now good & nowhere;

CBs (“Central Banks”) which prevent inflation, now try to cause it; and

HMDs (“Helicopter Money Drops”) which were mad, are now sane

These inversions are causing real problems for economists, who find themselves arguing for policies they used to oppose. Professor Summers hopes that knowledge of the existence of the FERIR will make it easier for economists to argue that night is day and rainbows are grey, as they provide policy advice in these troubled times.

POSTSCRIPT: Written with the inspiration of Axel Leijonhufvud’s brilliant parody “Life Among the Econ” firmly in mind.

POST-POSTSCRIPT: The NAIRU—the “Non-Accelerating Inflation Rate of Unemployment”—was a fiction of Milton Friedman’s imagination, and countless hours were wasted by economists trying to calculate it. I fully expect a new generation of economists to waste their time trying to calculate the FERIR as well.

POST-POST-POSTSCRIPT: The serious intent to this parody is the observation that the approach to economics that failed to anticipate the GFC—and that even believed such events were impossible—is unlikely to be able to advise what to do in the aftermath to the GFC. We need a new theory, not merely a new fictional acronym in the fantasy universe of mainstream economics.