‘Tin Hat Time’ in the financial markets

When one of the brass at an insider institution such as J.P. Morgan is talking like this, you know it’s serious:

 There is a serious credit contraction underway, I think [Yellen] should acknowledge that. I think she has to look at the capital base being wiped off the banks in this downdraft and equities: that’s not supposed to be happening right now. They’re supposed to be bulletproof, and oh, by the way,gold at $1,200 an ounce, what does that tell you? It tells you that in a flight to quality, in a safe haven, people have more confidence in gold than in bank deposits or paper money. I think things have gotten out of control.
A financial-economic system premised on the expertise and omnipotence of central bankers is now faced with the realisation that those central bankers are far from expert and far from omnipotent. This result – the financial equivalent of the aeronautical death-trap that pilots know as coffin corner – was always inevitable. And now it has arrived.

UPDATE:

Choice quotations:

Central banks are getting out of control; They are now more a problem than a solution,” said Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former IMF economist. “Central banks keep trying newer things, but we increasingly see breakages in banks, in the markets.”

Fed officials won’t admit publicly that they’re just making it up as they go. But that’s the reality. As James Rickards explained in an interview with Mike Gleason, “I’ve spoken to Fed governors, I’ve spoken to Regional Reserve presidents, I’ve spoken to a lot of senior officials at the Federal Reserve, and insiders there. They don’t know what they’re doing. They won’t say it publicly but they do say it privately.

If Fed officials admitted that they couldn’t outsmart the market or forecast the economy, that they don’t know anything beyond what’s in latest edition of the Wall Street Journal, then they’d be admitting there is no reason for them to be in charge of setting interest rates or managing the money supply.

The last hurrah of central banks is the negative interest rate policy–NIRP. The basic idea of NIRP is to punish savers so severely that households and businesses will be compelled to go blow whatever money they have on something–what the money is squandered on is of no importance to central banks.
All that matters is that people and enterprises are forced to spend whatever cash they have rather than “hoard” it, i.e. preserve and conserve their capital.
That this is certifiably insane is self-evident. If an economy depends on bringing future spending into the present by destroying savings, that economy is doomed regardless of NIRP, for eventually the cash runs out and spending declines anyway …
What NIRP says about central banks is that they have run out of options and are now in their own end zone, heaving the final desperate Hail Mary pass that has no hope of saving them from complete and total defeat.
NIRP also says the economy that needs NIRP is sick unto death and doomed to an implosion of impaired debt, over-leveraged risk-on bets and asset bubbles generated by stock buybacks and central bank purchases of risky assets.
The central bankers are delusional if they think NIRP will inspire confidence in investors, punters, households and enterprises. Rather, NIRP signals the failure of central bank policies and the end-game of credit expansion as the solution for all economic ills.
What NIRP communicates is: this sucker’s going down, so sell everything and hoard your cash and precious metals. If that’s what the central banks want households and enterprises to do, NIRP will be a rip-roaring success.

 

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About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
This entry was posted in Epistemic Rationality, Flotsam and Jetsam. Bookmark the permalink.

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