Central banks: a sausage based conundrum
1. The conundrum:
Despite the Federal Reserve expanding their balance sheet from $800bn to $4.4tn; despite holding interest rates at zero for 8 years; despite all the new ‘jobs’ that have reduced unemployment to 4.4%: the Fed’s measure of inflation is 1.8% and falling, wages are going nowhere, and the Keynesian holy grail of surging ‘aggregate demand’ is as elusive as a glass of lemonade in a Dublin pub.
It seems that no matter what they do, they can’t get companies to pay higher wages, or get people to spend more money. The ‘recovery’ that High Priest Bernanke promised before he took his talents (AKA his address book) to Citadel…has gone bye-byes. And Sister Yellen, alone and forlorn, left holding the can…has run out of places to look.
This is not the way it was supposed to work.
2. The Sausage:
The way our banking and monetary affairs are conducted resembles the making of sausages – seeing a sausage being made dulls the appetite, so even people who know, prefer not to dwell on it when they’re eating one. Even so-called ‘experts’ apparently. Here’s Adair Turner, former Chairman of the Financial Services Authority, talking to Martin Wolf over ‘Lunch with the FT’ in June 2016:
In the mistaken belief that our money and our banking are in some way inevitable, the average person learns to avert their eyes, and after a while, they forget they are eating a sausage. However, our money and our banking are not inevitable; they are merely ubiquitous.
The Federal Reserve (along with the ECB, BOE, BOJ) has spent the past 8 years desperately trying to create inflation. This is because the thing that scares the bejeebers out of them is deflation…
Deflation is the ‘monster’ because in a debt based monetary system (AKA a Ponzi scheme), new debt has to be constantly created to keep asset values expanding. When asset values shrink, the debt acquired to ‘buy’ them doesn’t – revealing what was hidden all along – insolvency – which leads to contagion – which leads to government bailouts – and the process starts all over again. Except that this time the CBs are afraid the monster will be too big to bail out. For once they are right.
This Ponzi scheme was originally designed to serve the interests of two groups of people:
As an aside, the New York mafia have traditionally enjoyed similar privileges, but mainly at the city and state level; though of course the comparison ends when it comes to the printing of money – only the banks are allowed to do that. The government still frowns on money printing when the mafia does it – so they’ve largely given up on counterfeiting, and instead concentrate on things like drugs and prostitution – two activities which politicians and bankers find much easier to overlook, and indeed often partake of.
But I digress…
3. A sausage-based conundrum:
Here’s what Central Bankers and mainstream economists don’t want you to know:
They don’t know why they have been unable to create inflation. They’ve rehashed spurious explanations like ‘secular stagnation’, and ‘savings glut’ in an attempt to sound like they do…but they don’t.
However, whilst they may not have a clue how the real world works…they do have an uncanny ability to get everything backwards…they are the most ‘arse about face’ group of people imaginable. Well…apart from journalists, but let’s not go there today…
Bernanke, Yellen, Draghi, Carney and Kuroda were convinced Quantitative Easing (QE), Zero Interest Rates Policy (ZIRP) and /or Negative Interest Rates Policy (NIRP) would be inflationary because their theories told them that if you loosen monetary conditions – make credit very cheap – consumers will rush out to borrow and spend; businesses will invest to meet the increase in demand; banks will increase lending…and hey presto unemployment will fall, companies will pay more to attract a shrinking pool of workers, and inflation will rise…the Phillips curve will indicate where the sweet spot is…and everything will be fine. Except that it doesn’t work that way – the real world has very different ideas.
Beyond a certain level of indebtedness, which we reached earlier this decade, the psychology of the markets shifted…not as in ‘gear change’…but as in ‘tectonic plate’. This is how the shift has affected behaviour:
In short…QE, ZIRP and NIRP have been deflationary, not inflationary…Arse about face.
4. So what is going on?
Firstly let’s debunk the Central Banking claim, via the Bureau of Labour Statistics (BLS) that unemployment is 4.4%. I.E.: that the employment market is ‘tight’:
There are 255 million Americans of working age. Of these, 102 million are not employed. This represents 40% of the working age population, up from 35% at the millennium. Of those, the percentage of unemployed males in the core group of 25 to 54 is at record highs. Meanwhile the percentage of Americans over 55 who are still in work is soaring…again arse about face…
Of the 153 million Americans who are employed, 26 million are in low wage, part time jobs. Of those, 8 million hold multiple jobs. 10 million people classify themselves as ‘self-employed’, which includes a large number who are barely scraping by. A further 21 million people work for the government, jobs that generate no revenue, which are therefore funded by private sector taxes. Jim Quinn of ‘The Burning Platform’ summarises it thus:
So: there are a lot more people available in the labour market than is suggested by the BLS. So then the question is this: Why aren’t businesses hiring them? Why do employment surveys consistently quote employers ticking the box that says ‘hard to find workers’?
In summary: the phrase ‘labour shortage’ is yet more blanket macroeconomic garbage from people who have never had a real job let alone run a business that employs people. The reality in the markets is this: executives are reluctant to pay wages at a market-clearing rate. This is the same reluctance that leads them to buy back shares rather than invest in the future, the same reluctance that leads consumers to pull back and savers to double down:
Economic conditions are poor. We are not in a recovery; we are in a depression. Central Banks don’t understand the problem because central banks are the problem.
5. The future – More arse about face?
I have stated my view of the end game on a number of occasions. I can summarise it thus:
Debt is a claim on the future – on wealth that doesn’t yet exist. When governments mortgage their children’s future to the point where a critical mass and/or a critical group wake up to the fact that it will never be paid back, then the jig is up.
I believe that this awakening will occur in the bond markets. There will be a sovereign debt crisis, which will start in Europe or the emerging markets, and spread across the globe causing major dislocations of capital. I don’t know when this will happen, but personally, I am not waiting until it looks imminent – by then it will be too late to get out of the way.
In the shorter term, I think Ben Hunt of ‘Epsilon Theory’ has a compelling view of how things will pan out:
I recommend you read the article. In general, his notes and his podcasts are very good – erudite, entertaining and educational. A bit like the FT thinks it is.
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