Faith in Central Banks Dwindles

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Even Bloomberg Notices that Something is Amiss

As anyone who hasn’t been in a coma knows, assorted central bank interventions have failed to achieve their stated goals over the past several years. A recent article at Bloomberg focuses on their failure to reach their “inflation” targets.

Of course, this particular failure is actually reason to celebrate, as it means that consumers have at least been spared an even sharper decline in their real incomes than has been underway in spite of relatively tepid increases in consumer prices (whereby it should always be kept in mind that whether or not such price increases are considered “tepid” depends on on the composition of the basket of goods and services relevant to each individual).

inflation expectationsMarket-based inflation expectations in the major currency areas have crashed again – click to enlarge.

Of course central banks have succeeded in blowing up the money supply at truly astonishing rates since 2008, so prices in the economy have certainly been vastly distorted. The devastating effects of such price distortions are currently being visited on the oil patch, where credit-financed malinvestment on a stunning scale has occurred as a result of an erroneous appraisal of future oil prices. A slowdown in money supply growth in the US and China between 2011 and 2014 was all it took to take the wind out of the sails of this particular collective hallucination.

US-winds-down-quantitativ-012Inflating the euro alone wasn’t enough to keep oil prices afloat …

Illustration by David Simonds

To the delight of the financial industry, asset prices have been the main beneficiaries of money supply inflation, but deep down many market participants are presumably aware that the “wealth” ostensibly created by artificially pushing the prices of titles to capital to the stratosphere is just as ephemeral – it is ultimately nothing but phantom wealth. If everybody tried to cash in, it would disappear in a flash. And of course, that is what it will eventually do, one way or another (it would be possible for even more intervention to keep nominal prices high, as was e.g. recently demonstrated in Venezuela, but certainly not in real terms). As an aside to this, even the accounting profits reported by listed corporations are in many cases largely illusory – they are often little more but capital consumption in disguise.

Anyway, various financial market participants interviewed by Bloomberg are lamenting the “loss of credibility” suffered by the central planners. From our perspective, they never had any credibility. This has nothing to do with the persons running these agencies (although we certainly believe that the economic theories they base their decisions on are extremely misguided), it is simply due to the fact that central planning is literally impossible. Even the best-intentioned planners cannot circumvent economic laws – they might as well try to outlaw gravity.

This development is nevertheless of interest, because the superstitious belief that central bank interventionism actually does work has been widely held in the mainstream (or let us say, the utterly illogical faith that thistime, central planning will somehow work in spite of the massive heaps of countervailing evidence that have accumulated over the years). If this faith is lost, it will have implications for financial markets.

One can invest realistically, by being aware of the short and long term effects of money supply expansion and interest rate suppression, but in order for the cynical approach to work as one would expect, the support of a broad foundation of the uncritically faithful is still required. Once this congregation of high-IQ morons becomes antsy, things can change rather dramatically. Or as one observer-participant interviewed by Bloomberg puts it:

There’s a lack of faith in monetary policy — you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money — and still inflation is lower,” said Lee Ferridge, the head of macro strategy for North America at State Street Corp. “It leads to a risk-off environment.”

Risk off? Uh-oh.

TMS-2US money supply TMS-2 since 1988 – sure looks inflated to us – click to enlarge.

Credibility Crash

Another reason why we wanted to draw the attention of readers to this article – besides the fact that it documents that faith in central bank omnipotence is dwindling – is a single sentence in it. One thing that always leaves us scratching our head is that the mainstream financial press never asks a question that seems rather obvious to us: is it possible that the economy’s performance is so poor not in spite, but because of the policies implemented by central banks?

Our answer to this question is no secret. One cannot improve prosperity by creating more money from thin air and manipulating the most important price signal in the economy. In fact, it is completely beyond doubt to us that this will end up weakening instead of strengthening the economy. This happens “in spite” of the superficial short to medium term impression of growth conveyed by the increase in aggregate economic activity during the boom phase. As we always stress, activity alone is not enough – its quality is the decisive point. A loss-making company can be quite active while nevertheless still producing losses. No-one would get the erroneous idea that its activity makes any economic sense.

The above mentioned question neither seems to occur to the authors of such articles, nor to the vast majority of mainstream economists. Instead, a truly bizarre routine conclusion tends to be drawn from the evidence of failure: we must try to fail on an even grander scale. In other words, let’s fail in style! With a bang instead of a whimper! Here is the lone sentence from the Bloomberg article exemplifying this mind set:

“Recent economic reports have renewed calls for major central banks to do more.”

We regard this as evidence that the unnamed authors of these “recent economic reports” are certifiably insane. Instead of demanding that central banks should stop what has so obviously failed to work, they want them to do even more of it! If there is any consolation, it is that this is certain to make the eventual “credibility crash” all the more profound. A small consolation to be sure, but better than nothing.

Lastly, we should perhaps mention that the main focus of the Bloomberg article, namely the “concern” allegedly created by the seeming inability of central banks to create “inflation” is extra absurd. One thing we will never worry about is the ability of a sufficiently committed central bank in a fiat money system to debase the money it issues.

campfire_cartoon_10.31.2014_largeThe one thing they can actually do …

Cartoon by B. Rich

All that has happened so far is that price increases have not yet shown up where they would have liked them to show up, but even that can be easily remedied. Keeping the process under control is an altogether different kettle of fish though.


Back in 2008/2009, we pointed out that during the “great financial crisis”, central banks proved to be the last bulwark market participants trusted to be able to keep the implosion of the credit bubble at bay. In effect, a bureaucratic arm of the government was seen as more likely to succeed in this than governments themselves.

It follows from this that there is little that is of greater importance to systemic confidence than faith in the abilities of central banks. Thus, when even the mainstream financial press begins to publish articles about a potential “loss of credibility” faced by these august institutions, one must begin to pay close attention.