Not as smart as other people told them they were (updated)

From the incomparable David Stockman:

That’s also why the euro bond trader quoted above hit the nail on the head. By destroying the bond market and touching off a front-runners gambling spree the central bankers of the world have truly taken themselves hostage. If they keep printing money at the current rate of $2.5 trillion per year collectively, they will destroy the monetary system of the world—-and apparently even they recognize that dead end.

But in their foolish resort to running their printing presses at rates never before imagined, they have generated a volcanic tower of capital gains on the trading books of speculators all over the planet. At the first sign that the Big Fat Bid of the central banks is going to be removed, the fast money will sell with malice aforethought in order to capture their gains, and get out of harms’ way before the great bond bubble violently implodes.

In that event, there will be no containing the selling pressure short of monetizing the world’s entire $40 trillion stock of sovereign debt.

As always, worth reading in full.

Now add to this, China’s purposive and explicit snub of President Obama on the tarmac of Hangzhou airport earlier this week, and draw your Bayesian-probabilistic conclusions for the future of the value of the US dollar, and the values of its bum-chums, the euro, sterling, and the yen.

* * * * *

Many years ago, in 2001, when I worked as a junior intelligence analyst, I was called up to Parliament House to brief an advisor to the Minister for Trade on the outlook for the Argentinian economy. Argentina had been in the news every day, with its economic and financial difficulties, so I had done some research and completed a current assessment of what I expected to happen there, for distribution to my agency’s customers. I’d concluded that there was a good chance that the government would have to default on its debt, and break the peg of the Argentinian peso to the US dollar.

At some point in the briefing, which I attended with another two analysts, the advisor turned to me and asked me about Argentina. I gave him the history, talked about the options facing the government, and what I thought was likely to happen.

At the end of my spiel, the advisor surprised me by asking ‘So they can’t get out of this situation?’

I was being asked to give a ‘yes/no’ answer. Having thought of the situation in terms of probabilities of outcomes, I was being asked for an opinion, delivered with certainty, on what would happen.

My response then surprised me again. I responded: ‘No, they can’t get out of it. They will have to default and break the peg.’

All of a sudden, having been asked that question, I saw the situation clearly. The Argentinians were stuck, and couldn’t escape.

The situation of the central banks, as relayed by David Stockman above, reminded me today of the Argentinian situation. David is speaking with certainty, and for the first time, rather than simply agreeing with him in the broad, I agree with him in this specific.

The central banks are trapped. They cannot get out of this situation without defaulting and devaluing their currencies.

I don’t know when it will happen – for Argentina, it took another half year before the government gave up in December.

But, right now, for the first time, I am sure that it will happen.

Learn from Argentina’s experience in December 2001. And prepare accordingly.

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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.
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