I just listened to Chris' Martenson's recent interview on Financial Sense, and he again predicted with a degree of *certainty* (not the right word, but it's late here), that the US Fed, BofE, BofJ, ESB etc would all eventually announce a vast, concerted round of money-printing. He put a rough figure of $5 Trillion on it and said this is the moment when he will go "all in" and get out of paper money.
I am baffled by his confidence in this prediction. It seems to me, there are many possible pitfalls that could prevent this (competitive devaluations and currency wars, different crisis-levels in diff. countries, extremists taking power, to name but few).
I would like to know more about the reasoning behind it, and what time frame might be put upon it.
Japan, England, Europe, America, and other places all have extremely serious debt problems - both in the private and public sectors. We have already seen coordinated activity between the Fed Res and the ECB in doing very large swaps. If one central bank does a big QE then their currency falls and makes their exports more competitive. Also, money will tend to flee to what are perceived as safe havens. This results in strange distortions in the capital markets. If a number of central banks act together it could serve to mitigate some of the negative effects. So, I agree with CM. I think there will be a coordinated effort. I also believe that it will only work for a short period of time. It will be inflationary. It is a pretty good bet that wages will not rise as fast as commodities in that environment. Asset buying programs will just move more questionable debt from the private sector to the public sector. The central banks already have huge balance sheets. We are not having a liquidity problem - we have an insolvency problem. However, the central banks are not going to just start giving money away. They only loan money. You can't make any money giving money away. There are two other aspects the central banks need to keep in mind:
1) If a person owes the bank 100 dollars and anything goes wrong the person is in trouble. If a person owes a bank 100,000,000 dollars and something goes wrong the bank is in trouble.
2) Until governments all over the world get spending in line with revenue there will be no end to the debt problems. All the QE in the world will not fix it. Raising taxes will not fix it. Only cutting spending can fix it. I have never seen a government cut spending as the result of a tax increase.
There is no way to "fix" the collapse of a credit bubble other than write down the debts, reorganize, and get on with rebuilding the society. If that is done, somebody is going to get the haircut of a lifetime. The rich people and companies are not interested in taking the haircut for loaning money out on high risk ventures and then taking a bath when the risk catches up with them. It is much better to push those losses off to the public sector and stay rich. That is what has been going on for the last 5 years. That is also unsustainable. We are actually coming to a cross roads. There is going to be a very serious financial emergency. The government, who has caused the financial emergency, will make every effort to retain power. They will clamp down something furious on the people. The class of dependency will rebel when their transfer payments are cut or disappear and the military will be deployed to control them. Capital controls will be instituted. The government may will confiscate private property (retirement accounts, bank accounts, land, gold, guns, etc.). Another segment of the population will disagree with the government clamp down because it is against the constitution. They will begin to work behind the scenes to change the government. You can assume the government will not be happy with that. There will be a lot of trouble.
But, the central banks will just have to give it one last try. They will not give up and take the haircut or be nationalized without one more last big printing hur-ahh. When that starts you will know the jig is up and you will need to start focusing on preperations for dealing with the financial emergency that will come afterwards.
The global elites intent is to use the global financial crisis (GFC) to morph the national money systems into a global money system, and this will be sold as the solution to the GFC. There is no smooth and easy path to this goal, but that is what they are pushing for. In some form or other, there will be a global central bank that can "lend" (i.e.) create money to pay for increased growth of government without the need for visible taxation or visible borrowing from real leanders. This new money system will replace the US dollar as the global currency, and the USA will lose the benefit of being the global currency issuer. So in the end, the global elites will control a global fiat currency which will provide the essential funding for global government, and this will result in coordinated global inflation with no place to hide. That, I believe is the Big Idea, stated baldly.
I think we will see a succession, maybe a rapid succession, of half measures all headed in this direction, but they won't quit until they get there. Because as so well stated above, anything less would result in government failure, breakdown, and ultimate shrinkage. So, it is a matter of political power trumping economic concerns. Enless war against "terrorism" is a key part of this strategy.
So all along the way, there will be continued money creation and attempts to synchronize the resulting currency depreciation. But it will be confusing because nobody in authority is going to stand up and admit that this is the intent. Instead they will all just muddle in the general direction of global government just as they have been doing in Europe, while claiming that they are trying to fix the economy and trying to placate voters.
If you haven't read these you might want to
Personally, I'm not as certain as Chris that the major central banks (CB's) will succeed in agreeing on and pulling off a well-timed, synchronized, massive printing operation. But I think there are good reasons to have some confidence that that is indeed the most likely response, given the worldview and logic of central banks and based on their actions and intermittent synchronization since 2008. As I understand it, these are the reasons they will choose it as the best "solution" in a severely deleveraging world that starts a synchronized contraction, as we seem to be seeing now:
1) If deflation continues to build now, after trillions of dollars in individual CB interventions, that's clear evidence that individual CB interventions aren't working
2) These days, the world economy is powerfully integrated. If there's a deflationary collapse in any of the major economies, the banking and commercial consequences will likely concatenate globally into a global depression. There's no national advantage to be had in holding out at the macro CB level. Permitting any of the major economic zones to go down is Mutually Assured Distruction for all economies. That's why the US, currently in somewhat better shape, can't let Japan or Europe go down, for example. And given that, politically, the US can't tolerate actually sending or lending dollars to support either economy, (and actually doesn't have the money), the solution is coordinated printing - an action intentionally set up by the bankers to be outside of political control, and less recognized by citizens as a liability.
3) For similar reasons, there's a need to not permit any of the major currencies to devalue/inflate in a wildly different way than other currencies, and in that way drastically change the exchange rate, powerfully upset the balance of trade, government financing (think bigger and better PIIGS, like Japan), and thereby blow up interbank derivative and interest rate contracts. Global finance is teetering - any of these could trigger another credit crash, banking crisis and concatenation beginning in one or more major economies and spreading globally.
The central banks are generally focused on trying to return to "the old normal" that will likely never exist again. Given that misguided goal, the best way to try and do that is as Chris describes. In simple terms, if you've got a global ponzi operation going, you have to make sure you pour money over the whole operation, cause one sqeaky wheel can definitely lock-up the whole contraption and bring down the entire machine.
I think that coordinated printing likely will be the first massive line of defense in the near future if global deflation builds, and that it's likely that there are some discussions already underway on coordinated "emergency" measures. If the deflationary threat accelerates quickly and is therefore more clearly a threat, that makes coordinated action most certain, and still very likely but a little less certain if it comes more slowly and unevenly. But I think it's likely that coordinated intervention will ultimately fail at some point, and then we'll be left with a world that begins giving up on maintaining the old status quo and becomes more of a chaotic "every country" or "every region" or "every town" for itself kind of economy, as we're already seeing start to happen in Europe. If the banking and trading glue holding the current global economy starts to break down in that way, that's when currency wars, local, regional or national depressions or hyperinflations, bi-lateral military and trading alliances, etc. would start to kick up in earnest and the world could become a much wilder economic patchwork than it already is.
I agree with kelvinator's thinking on this issue.
There are huge numbers of interest rate derivatives in the system. If one of the economic zones has a spike in interest rates it could result in payouts that would break the system and more bailouts would be required. The entire thing is broken as far as I am concerned. However, the root of the evil is debt - private and public sector. As we have seen when you move into very large private sector losses, these losses are transferred to the public sector by politicians. We have seen various forms of this over and over again over the last 5 years. It will continue as the to big to fail private sector entities will not be allowed to fail. Governments are automatically considered to be to big to fail.
The real nasty aspect is government over spending. For some reason this aspect is glossed over in the main stream media. They go on and on about many financial issues but this one enormous issue is rarely covered to any depth. I am not sure why. CNBC is a good example. They should be having one hour specials every week on the impact of out of control government spending to the world economy and to the people's lives if it is not brought under control quickly.
The prosperity and freedom of Americans is at serious risk due to out of control government spending. The world does not want or need an infinite number of dollars. There is a limit. Major governments around the world are already quietly cutting back on their dollar reserves. China is a good example. This is a very serious situation - much more serious in my opinion than JPM's credit derivative losses that everyone loves to talk about. If we do not get government spending under control there is going to be a major financial emergency at some point in the not too distant future.
To my surprise, the government is actually preparing for this emergency. Often governments do not recognize and act on impending emergencies. I am not very happy with what they are doing but they are doing. They are preparing to clamp down on the people really hard in an effort to control us and save themselves. The classic government move that has occurred all down through time.
I agree with kelvinator. They will take a shot at a coordinated response if they can. One last massive push to try to get the world economy back to expanding credit and debt. It will not do squat in the long run though as the same fundamental problems will still exist.
The flaw in all these posts is the widespread belief that governments, central banks, masters of the universe or anyone actually directs anything at all. Robert Prechter refers to these so called controllers as potent directors. It is an ironic title because they are niot really potent at all - they just seem to be. In fact they are just as subject to the same endogenous driving forces that utimately steer human endeavour in a wave pattern that is, roughly speaking, three steps forward and two steps back. That is the basis of Elliott Waves. Most people think of Elliott Waves as a means to assess market direction and targets without thinking about the social force behind it. In essence, most people, even if they follow EW, just don't really get it because they are too focused on chasing stockmarket wealth.
Of course, the whole idea of Elliott Waves could be completely wrong but in defense I would point out that Rober t Prechter runs the largest independent financial anaylsis business in the world because his team gets results.
My point is that from an Elliott Wave perspective we are still in a net positive mood. We have very high stock valuations, low dividend payouts, low junk/AAA spreads and financial funds hold very little cash (being fully invested). Despite everything that has happened over the last few years in terms of the debt load and crashing real estate, no one is mounting the barricades and very few of the gangsters from Wall Street or elsewhere have been jailed. The slogan on this site is " Insights for prospering as our world changes" which, given the ideas apparently behind this site, is ironic. Everyone is talking about the collapse of the Eurozone, the death of money, hyperinflation ( with, it seems to me, not a little glee) and yet hardly anyone is actually doing anything about it. Complacency reigns despite the biggest monthly drop in the CPI since 2008, markets have got nowhere in the last decade, gold is stalled, commodities (other than weather related foods) are coming down, and interest rates are at all time lows after trillions of stimulation.
Prosperity seems to have gone missing yet hope reigns supreme judging by the general pundit consensus that central banks will co-ordinate a massive "printing" exercise. Why do we still use that word to describe the process by which they credit the ledger to enable the purchase of bonds of all kinds so that commercial banks can build their reserves with the same central banks. The money does not really go anywhere. It certainly keeps rates down which only encourages governments everywhere to spend up big rather than to cut expenditure. That is the only source of inflation and it is reflected in the rising costs of welfare, health, and education in particular. In most other sectors of the economy prices are falling because credit growth has stalled - that is deflation. Although interest rates are very low, the Fed and the Euopean central bank are only a step behind the afflictions of Greece, Spain and Italy.
When the rush for cash starts the game will be up because bonds will sell off and people will no longer be trusting the institutions or governments. In a sense, the rush for cash has already started because people are paying off loans as fast as they can, others are defaulting, credit card debt is falling and stuff is being sold. The biggest sellers have been the financial institutions - they have sold into every Quantitative Easing and driven up rates each time.
Have a look at the Zero Hedge graph in the Daily Reckoning post of July 14th (you will have to scroll down). When the selling stops, rates fall back again. Eventually, when the mood has swung round to fear again, there will be a waterfall of selling. A 5% drop in the price of these assets (which have not been marked to market) will wipe out the holders of the assets. The nominal values of assets of all kinds have been so distorted by decades of currency inflation that the only real measure of the value of anything is by normalising a stock average to an index of gold and the PPI. In those terms the DJIA has already fallen 87%. It is likely that nominal values will catch up too - that is what a deflation does. Gold will not be a safe refuge because the change in real value has already taken place.
I believe nominal values for most things will fall but relativities will more or less remain. Provided you have no debt you will most likely get through these difficult times especially if you have a job that is secure. The problem for people with a lot of debt i.e. having less than 50% home equity is that they get caught in the deflationary spiral where the purchasing power of their monthly obligation, their interest rate and principal payment, just gets bigger and bigger as values of everything around them drop. If interest rates rise as well then they are really fried. The safety route is to sell out now before the route but many mortgage holders are already underwater and will still owe money. In the US, because of non-recourse lending, many more will simply walk away from their debts. That is why there is a downward spiral when people realise what is happening - anything that can be sold for cash is sold to try to keep the sinking ship afloat or too simply get out of the grip of debt.
The only way to prosper in these circumstances is to be cashed up but, of course, most people are not cashed up because most people have a mortgage. Deflation hurts those most who think that they are well off. They are those who form the majority of the population in the countries of the west - the enormous consuming middle class. In my own country, Australia, perhaps the majority of that "imaginary" wealth is in real estate which is close to being the most expensive in the world right now. If the spread between the real and the imaginary are too far apart, we too will be up the creek without a paddle.
The post is here but I have put the key bit below:
"Billions of dollars were lent to people who shouldn't have been allowed to borrow lunch money. And now, there are losses — trillions worth.
The real question — the only question of great significance since the blow-up — is: who will take the losses? Or, to put it another way: How will the financial system be cleaned up? Who will decide who wins and who loses?
Mr. Market or Mr. Politician?
Let investors and speculators take the losses...or put them on savers and taxpayers?
Who will lose? The rich? Or the rest?
We've given you our answer many times: let Mr. Market sort it out. He's completely impartial. He's honest. He's fast. And he works cheap.
In a flash, back in September-December of '08, he probably would have wiped up the floor with the bankers. In a real crash, few of the big banks would have remained standing. Investors and lenders who had put their money in them...and who had invested in the things their phony credits supported...would have lost trillions.
The rich wouldn't be so rich anymore. And we'd now be in some phase of real recovery with many new financial institutions.
But we're not in a position to impose our will on the world. And the politicians are. So, they've decided to do it another way. Instead of allowing Mr. Market to do his work they make their own choices...generally trying to direct the losses towards groups of people who don't make campaign contributions...and don't know what is going on. That is, towards the masses...and the unborn..."
timeandtide - A couple of comments on your comments. Personally, I don't think that Central Banks absolutely control the world in a predictable way, and I'd guess that Chris and the others posting don't figure that they necessarily do either. (As for Prector, I stopped paying attention to him long ago when I saw how many times his predictions were wrong, and how many times he and many other wavites had to reinterpret that, actually, we had just been in the midst of a wave B of a Wave 1 instead of a Wave A of a Wave 3, etc.and that's why things hadn't happened as predicted) Ultimately, CB's do control money - it's their creation. Counter to your view that they control nothing, if they are petal-to-the-metal bold enough in how much they print and how they distribute it, I believe they absolutely have the ability to create inflation - it's what they do. They can cause prices to rise if they are totally determined to do that. I've heard Fed is now talking about ways to get printed cash directly into consumers hands - after all, Wild Ben's helicopter drops on corners he talked about a decade ago are very different than wimpy T-bond buy backs from bankers, and we haven't seen the chopper drops just yet - we haven't seen a completely desperate Fed. In some cases, like in Argentina and Zimbabwe, CB's devalue the currency and drive up the stock market on an ongoing basis. Because it's a wild world, I'm not certain whether we're going straight into a deflationary mode, as Mish (and you) seem to believe, because CB's are ultimately outflanked, politically hamstrung or too slow, or whether a massive, coordinated print fest by central banks that will create a buying opportunity in commodities and some stocks as a means of trying to hedge the resulting inflationary wave, as Chris seems to favor. I lean toward Chris' view for the reasons I gave in my comments, and because I think they will be desperate to avoid the deflationary outcome which you feel they are powerless to avert. I think it's appropriate to not be certain what will happen - the future isn't known. We'll have to prepare as best we can and wait and see how things come apart and hopefully paste themselves back together.
I like many things that Bill Bonner has to say (I think, like me, but unlike yourself, he's a believer in holding gold these days), and I agree we should have taken over the banks on behalf of the public (as needed in every country around the world), zeroed the shareholders, restructured their debts and assets, fired and jailed their executives as appropriate, and put the remaining bank assets back out into the private market. I don't agree with his view that the banks just should been left to die in an uncontrolled bankrupcy concatenation in 2008, and like the old teeshirt said "Let God (the market) Sort 'em Out". But the idea the free markets alone are going to lead us to anything like the promised land at this point makes no sense to me. I think capitalism itself is failing now, along with government. They don't call greed "blind" for nothing. The idolization of blind greed and unregulated free market capitalism has been leading us straight toward the ecological and resource cliffs we're in the process of spilling over like lemmings. Free market capitalism has a lot of characteristics that recommend it, but many people seem to take it as a blinding, suffocating religion - in its name, they deny environmental damage, peak oil, peak credit, peak everything to feel free to keep following the path of golden chits provided by the absurd mythology of infinite exponential economic growth.
I would agree with you that Elliott Wave analysis is no easy ticket to trading nirvana. I have not come across any system that is but I have not found anything that rivals EW for giving me a sense of where we are in the market in the sense of cutting down the possible options to find the most likely probabilities. It is just one of the very few tools that I use. My favourite is still the pencil and ruler (or the charting software version) which will allow me to draw trendlines. The real benefit of Prechter is his monthly analysis - he gives the best rationale for why successful traders tend to be contrarians. His genius and great insight has been to more or less reverse the usual cause and effect realtionship to better explain the workings of financial markets as opposed to economic markets. His work elegantly shows why sharemarket participants most often fail because they are, in a sense, too rational. They pay too much attention to the frontal cortex and ignore the limbic nervous system which governs so many of our actions. Most people criticize Prechter for being wrong about markets when the truth is he is usually just too early. As far as I know, his predictions in 2003 with the publication of "Conquer the Crash" regarding the likely outcome of the run up debt came long before anyone else was even thinking about the risks to the real estate market. True his timing was out (he did not expect it to take 5 years for the market to top again after the 2002 bottom) but the scenario he outlined has been extraordinarily accurate. His vision comes from looking through the lens of Socionomics - a term he coined to cover the study of social mood in aggregate and how it drives the progression and regression of human society.
I do not deny that people in positions of power do control things for periods of time. Central Bank bosses are one example of potent directors. My point is that their control and power is also subject to the same mass mood that governs society. For a while their actions in opening the floodgates of credit creation worked wonderfully well. Greenspan celebrated the "new economic paradigm". It should be remembered too that it is just not a matter of bankers easing borrowing requirements, it also requires an active desire on the part of the borrower to go into debt. The two parties to credit/debt transactions, both the lender and the borrower, are two sides of the same coin. It requires a strong belief on the part of the lender that the debt will be paid back and a confidence on the part of the borrower to be able to service the loan. The motivation is the same "animal spirits" that makes a bull market, that expands an economy by giving employers the confidence to hire more workers and so on. It should be remembered that every upturn has, by definition, arisen out of the ashes of the previous downturn. Why does that happen? What changes the mindset? The standard reading of events is that an improving economy restores confidence but that does not answer why an economy improves in the first place. Nor does it answer why an economy tips over when things are seemingly on a beautiful trajectory. Greenspan's comments about a new paradigm came just months before the collapse of the Nasdaq.
The Prechter way of seeing things is that the mood precedes the economy. In other words, before the start of a major upturn the mood has already changed - people start investing again, taking on risk, hiring new workers, spending on themselves and so on. This happens despite the economic conditions. Think of the start of the last upturn in the early eighties - interest rates were above 15% but that did not deter people. The animal spirits were loose.
Prechter has demonstrated through Socionomics and Elliott Waves how we are subject, in aggregate, to long cycles of, in broad terms, confidence and pessimism or lack of fear followed by bouts of almost inexplicable unwillingness to take on any sort of risk. Within these larger cycles are smaller cycles of the same positive/negative mood.
He and his researchers in the Socionomics Institute have amassed a considerable body of evidence to back up their claims. Many people simply hate the idea that we humans do not quite have the free will that we like to think we have - that we are subject to forces that we seem to have little control over. For me, the sheer simplicity of the premise that we are subject to endogenous mood cycles rings true. Prechter descibes them as endogenous, meaning coming from within as opposed to being the result of any feedback loop from the outside. This is the vaguest part of the theory because it does not explain what causes mood to swing from one extreme to the other. I can accept, though, that we simply do not yet know without throwing out the conceopt just because it is not easily explainable. As an example, I would cite the use of Fibonacci ratios which are used extensively by market traders. These same ratios crop up everywhere in nature, most particularly in growth cycles (which, in essence, is what stock indexes are tracking). We can marvel at the mathematical magic of Fibonacci numbers and their ubiquity in the natural world but we cannot exactly explain why this occurs.
So, while we might like to think that things happen because a central banker loosens the straps on credit, I see it as a result of aggregate mood change across the whole of society. Elliott Wavers and those who study Socionomics see progress and regression as a series of ever larger waves progressing across the centuries. In this case, the Grand Supercycle has been in progress since 1789 with a series of five Supercycle waves within that. It is surmised that the sequence came to an end in real value terms in 2000 but topped in nominal terms in 2007. The last biggest downturn was the crash of 1929 which is marked as a wave 4 supercycle. It is therefore expected that the present downturn, because it is a Grand Supercycle wave, will be larger and a more damaging setback to human progression.
On the subject of free markets, I simply do not think we have had a free market since the nineteenth century. Since the advent of the Fedreal Reserve in 1913 every market has been regulated and in most cases the regulation has tended to have the effect of creating a barrier to entry and restricting competition. Every attempt to regulate often means that some interests are favoured over others. No sector has benefited more than the banking sector.
That is not to say that there should not be a number of relatively simple rules. For one thing, the Glass SteagalL Act worked quite well for the 50 years when it probably was not needed. However, it was dismantled bit by bit over the eighties just in time for when it was needed! Why was it dismantled? Socionomics would explain it as an expression of the social mood - the animal spirits were loose and the authorities had become complacent enough to think it no longer necessary because they too were in thrall to the new era of optimism. The Clinton administration thought everyone, regardless of their means, should have the right to own their own homes and there was an army of credit providors just itching to flog barrow loads of mortgages. The same thought was there right up to the housing market peak in 2005-06 and the credit spigot remained open more or less until the collapse of Bear Stearns in August 2007.
I quite agree with you that free markets are not going to lead us to the promised land - whatever that is. What the market mechanism can do and which it does best when mostly unfettered is to create real price signals. Price signals have become incredibly distorted, not only because of the torrent of money into the major commercial banks courtesy of the Fed as it has purchased bonds and "assets" of all kinds off them, but also because markets have more or less become casinos for speculation rather than places where transactions take place to raise capital (stockmarkets and bondmarkets)) , sell raw materials (commodities) or enable producers to hedge their production (futures markets). Within those markets you now also have the new phenomenon of high frequency trading which I can only describe as officially sanctioned insider trading which allows these traders to front-run the market. There are also the so called "dark pools" where trading takes place on the quiet between large institutions. This seems to be an officially sanctioned means of avoiding the messy market business of price discovery. How any of this can be good for the integrity of the market is beyond me.
I think Chris and others are right in that the politicians will do whatever they are told to do by the wealthy corporations who have so much sway in the corridors of Washington and other portals of power. There may be another round or two of QE. Each successive round (2 QEs and Twist so far) has had a lesser effect. I don't think another will make much difference. Bernanke's most recent testimony was pathetic - a first year student could have torn it apart but then he was not facing students, he was facing a miserable bunch of morons grown fat on the largesse of major corporations. The mood is swinging round and events will simply overwhelm the Fed and the politicians. Wealth destruction by way of liquidation and the scramble for cash will happen far faster than bankers can inflate, even if they had the balls to do so.
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