Beware of Experts

The hubris of today's central bankers really is quite something. They all believe they have things under control and that they will simply pull this lever or that when the time comes, and the economy will obey. They think of the economy as a machine, and of 'economic variables' such as production, consumption, interest or inflation (i.e., rising prices for consumer goods – they only care about asset prices when they fall), as cogs in the machine, a machine they have command over.

This delusion is furthered by the vast pseudo-scientific output of today's 'monetary theorists', of which there are a dime a dozen. Given that central banks are major source of bread for 'macro-economists', you will find that a great many of them list monetary policy as one of their specialties. They are the developed world's equivalent of voodoo priests or sangomas.


The delusion is also furthered by the media, which have long ceased to peek behind the curtain to get an unvarnished glimpse of the wizard.

This is the kind of environment in which what will later be euphemistically referred to as a 'major policy mistake' is bound to happen. One of these days, one or more of the variables which central bankers think they have under control will terribly misbehave. They have conveniently forgotten that it wouldn't be the first time.

Some of these people are at times regarded as 'experts' on certain slices of economic history. Ben Bernanke is widely hailed as someone who understands the Great Depression better than any other monetary bureaucrat. However, if one really looks closer at what he let occasionally drop regarding his expertise, one realizes he has probably read exactly one book (the one about US monetary history by Friedman and Schwartz).

We may be mistaken on this point (we cannot say with certainty what he has read, but we do know some of what he hasn't read), but we wonder, what does the man truly know about history? Not much, we think. If he did, he would be aware that highly intelligent men have done the craziest things with state-directed money. They were all very deliberate and took a lot of time discussing the problems they were facing with other intelligent and well-educated people, most of whom were the experts of their day. And then they buggered everything up, usually quite methodically and thoroughly.



voodoo-4Monetary policy expert in his natural habitat.

(Photo source unknown)



Endless Streams of Money?

We had to think about all this when coming across the latest news items about central bankers. First up to bat was an ECB board member, ironically one who was widely hailed as a 'hawk' at the time of his appointment. Belgian board member Peter Praet, who replaced a true hawk, namely Germany's Jürgen Stark, as the central bank's chief economist.

Marketwatch reports:


“The European Central Bank could adopt negative interest rates or purchase assets from banks if needed to lift inflation closer to its target, a top ECB official said, rebutting concerns that the central bank is running out of tools or is unwilling to use them.

“If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That’s a very clear signal,” ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal. Annual inflation in the euro zone slowed to 0.7% in October, far below the central bank’s target of just below 2% over the medium term.

He didn’t rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector. “The balance-sheet capacity of the central bank can also be used,” said Mr. Praet, whose views carry added weight as he also heads the ECB’s powerful economics division. “This includes outright purchases that any central bank can do.”


(emphasis added)

'Outright purchases' would be 'QE', euro-system style. The ECB is not allowed to finance governments directly (neither is the Fed by the way, for reasons we have explained before), but it certainly does accept government bonds  as collateral in its open market operations. The fact that Praet is the one launching this verbal trial balloon in the media is probably significant. This is likely the next thing coming down the pike from the ECB. It will be interesting to see whether its modus operandi will have more similarities with that of the BoJ or that of the Fed, but we suspect the former. The set-up in the US is fairly unique in that respect ('QE' by the Fed always creates a lot of deposit money directly, in addition to bank reserves).

After Praet's words hit the wires, the euro cliff-dived a bit, as currency traders saw it as a currency war salvo, so to speak a small skirmish instigated by an ECB advance party.



A congregation of one-armed opponents …

(Image via / author unknown)



Little did they suspect that another currency warrior was lying in wait, getting ready to spring an ambush. Later in the day, Janet Yellen's prepared remarks to the Senate were somehow let loose early. Take that Praet! Here is a Reuters report on this consummate professional's return salvo:


“Investors made short shrift of the dollar early in Asia on Thursday after dovish comments from Fed Chairman-elect Janet Yellen suggested the U.S. central bank might not be near scaling back its stimulus, sending Treasury yields lower.

Yellen, in remarks prepared for her nomination hearing before the Senate Banking Committee later on Thursday, said the U.S. jobless rate was still too high and both the labor market and economy were performing "far short" of potential.

Investors responded by driving the benchmark 10-year Treasury yield down as far as 2.688 percent, from a high of 2.772 percent, which in turn undermined the greenback.

The dollar index .DXY skidded to one-week lows at 80.740, before steadying somewhat at 80.804. That saw the euro jump towards $1.3500, pulling up from Wednesday's low of $1.3390. Against the yen, the greenback slid to 99.20 yen, down from a two-month peak of 99.80 set just two days ago.

Traders said Yellen's comments dented some expectations that the Fed will begin to taper its bond-buying stimulus program by December or January.


(emphasis added)

Elsewhere it was also reported that she thinks there is 'not enough inflation' (surprise!):


Inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time," she said, according to a copy of the testimony made available on Wednesday in advance of the hearing.”


(emphasis added)

All we can say to that is: told you so (admittedly no great feat). The constant belly-aching about 'tapering' in the media is simply hogwash. The Fed tries to give the impression that it is something that is seriously considered, discussed, etc. – mainly because it actually doesn't want inflation expectations to rise. As long as the rubes (that's anyone holding/using the dollar) believe that one fine day, the inflationary policy will be stopped or even 'taken back', no-one panics out of money substitutes and tries to actively reduce cash balances, at least no critical mass of people does.

In the same report it was mentioned (to our great amusement) that the central banking bureaucrat widely hailed as some kind of superhero for his proven ability to find the print button on a keyboard, Mark Carney at the BoE,  actually thinks the 'glass is half full'. However, he made at the same time absolutely sure that no-one could possibly misunderstand this remark by mistake:


“For the first time in a long time you don't have to be an optimist to see the glass is half full," Carney said, although he was quick to stress the BOE was not about to raise interest rates anytime soon.”


(emphasis added)

When London house prices rise by 10% in a single month, the glass is probably not just 'half-full', but bubbling over.

The crazies have evidently taken over the asylum in its entirety. This is almost as good as Keynes' one world currency wet dream, the 'bancor': since they are all inflating together, it will take a while for people to wise up, as exchange rates won't be signaling much. Moreover, gold is currently afraid of its own shadow – it's a perfect world!



Euro-1 dayCrossing of the verbal debasement swords – via BarCharts – as reflected in the euro



currency war 2
We're already past the Wile E. Coyote moment of contemplative levitation above the abyss …

(Image source unknown)




Just wait until Kuroda hears about all this! Oh wait, it has already been mentioned in the press that he “may be forced to implement additional stimulus as early as January”, so no worries on that front – they have it covered.

Where and how is all of this going to end? We don't know, but we doubt the end will be anything but painful for all around. The problems that were caused by too low interest rates and way to much credit and money creation are supposed to be cured by not merely more of the same, but by veritable wagon-loads of more of the same, for as far as the eye can see. It can and will do lots of things, but what it won't do is 'work'. Money is not capital. Creating more and more of it cannot help society at large, it can only lead to more malinvestment and capital consumption. For a while, it feels good, we won't deny that – but the amplitude of the boom-bust cycles keeps growing. At some point something will go very wrong, and when it does it will probably happen in a manner that indicates 'control has been lost'.



valutaoorlogThe miracle cure …

(Image via / author unknown)




Dear Readers!

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