The Trap

The complexity of global economics has gone beyond comprehension. It can no longer be explained by any of the mostly western based and now obscure mainstream economic theories. Central bankers are in denial, still egoistically believing that their PhD diplomas have given them something akin to divine knowledge. Until they realize that they do not have the answer, they will continue down the path of destruction, never pausing to look for better alternatives.

Of all the articles I read recently, these few sentences in Annaly Capital Management's Market Commentary (pdf) just about summed it all up:

“The first quarter of 2012, like the fourth quarter of 2011, was characterized primarily by heavy central bank activity. The Federal Reserve (Fed) continued with Operation Twist, which is currently scheduled to end in June 2012. The ECB completed its second tranche of Long-Term Refinancing Operations (LTRO) in February, and has provided €1 trillion ($1.3 trillion) of liquidity across both tranches. The Bank of England added an additional £50 billion ($80 billion) in February to its existing quantitative easing program, bringing it to a total of £325 ($520 billion). The Bank of Japan recently expanded its asset purchase program to ¥65 trillion ($784 billion) to be completed by the end of 2012, as well as upsizing its “Growth-Supporting Funding Facility” to ¥5.5 trillion ($66 billion) from ¥3.5 trillion.


All together, the four major central banks added over $300 billion of new assets in the first quarter of 2012, and $1.6 trillion over the last year.”


These numbers are mind boggling. In less than five years, five central banks (ECB, BoE, BoJ, PBoC and the Federal Reserve) increased their balance sheets by about $8 trillion in the aggregate. I "borrowed" the chart below from my cyber-friend Bart [of, ed.], who has a chart for everything under the sun.



The balance sheets of five major central banks, the Fed, the ECB, the BoE, the BoJ and the PBoC since 2003, via ''



This is advanced Ponzi economics. Instead of having to find new suckers to invest new funds, central bankers simply print whatever is needed. The prescriptions of Keynesian theory are allegedly intended to stimulate future economic activity. However,  all the money created is really used to prop up the failed debt and investments of the past, with little future benefit.

I started this post with the intention of trying to determine where we are in the real estate cycle, but ultimately arrived at the following conclusion:

It does not matter whether you are bullish or bearish, nor does it matter what part of the economy you are focusing on. All you have to do is answer two questions:

1. Would (…. state your opinion here…..) these conditions exist without the massive amounts of central bank intervention shown above?

2. Would these conditions be sustainable if the central banks were to stop printing money?

Pertaining to real estate, my answer to the two questions is:

There is no doubt that current conditions would not be possible without the Fed's intervention. Furthermore, these conditions are clearly unsustainable if the Fed  terminates Operation Twist in June and does not replace it with 'QE3'.

Therefore, the leading indicator for real estate is not pending home sales, new home orders, or mortgage applications but rather what Ben Bernanke's next move is.

Anyone who looked at a few micro markets and from that somehow determined that the housing market has bottomed needs to ponder and answer the two questions above.

The fact is that in spite of all the non-stop printing by the major central banks of the world, there is very little to show for it.

The fact is that the US, the largest economy in the world, is heading towards the "fiscal cliff" – even Tim Geithner recognizes that.

The fact is that Euro-land has already gone over the cliff.

China, now the world's second largest economy….well, I have no clue what is going to happen there, except to say that the Bo Xilai story reads like a spy novel.

Japan has been living off fiscal deficits. With the public debt at well over 200%  to GDP, how long will it be before their past savings run out?

In conclusion, the global GDP now has as a new line item – "Income from Central Banks".

Maybe John Williams of can come up with the real GDP by backing out the central bank numbers.




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3 Responses to “The Trap”

  • SavvyGuy:

    Excellent post on the machinations of major worldwide CBs. To me, it seems as if the CBs are all trying to continue the global financial Ponzi scheme, keeping up appearances, all the while hoping that the “animal spirits” in the global economy will take up the baton. In other words, they are all looking for the next sucker, the next fall guy, the next person to pass on the burning match to.

    There is no doubt that enormous financial losses are looking for a final resting place. So far, these losses are being papered over, tossed around, levitated, and swept under the rug. The big question is, who will be the final bag guys, the final victims? I think it will be current savers and future taxpayers. Who else to loot from?

  • georgew:

    I enjoy virtually all of your posts Pater. Here is something you could start a new comic relief blog section on in your spare time:

    I have to say that in spite of Eric Holder arguing the case for assassinations of US citizens and the various Orwellian Acts & Bills supported by his administration, Obama’s Nobel Peace prize is far more justified than Krugman’s Economics counterpart.

  • jimmyjames:

    Maybe John Williams of can come up with the real GDP by backing out the central bank numbers.


    This chart is from last year-Debt adjusted GDP–but it does show the boost in GDP and subsequent failures of Fed money goosing-

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