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TheEndOfTheWorldOfFinanceAsWeKnowIt

PostedbyRalIlargiMeijerat11:53
January18,2015

pm

Finance

Taggedwith:centralbanks,EC B,Fed,GlassSteagall,

SE NON SEI
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impotence,omnipotence,QE,Yellen

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Ivesaidbefore,andquiteawhileagotoo,morethanonce,thattheworldofinvestingas
wevecometoknowitisover.Itsstillastrueasitwasthen,andIcanonlyhopethatmore
peopletodayunderstandwhyitistrue,andwhyIsaiditinthepast.Thebasicunderlying
argumentthenandnowisthatfinancialmarketshavebeendistortedtosuchanextentby
theactivities,theinterventions,ofcentralbanksandgovernments,thattheycanno
longerfunction,period.
Whatweveseensince2008notthatthingswerefineandrosybeforethatisthatall
privatelossesweretakenoverbythepublicsector,justsotheprivatesectordidnthaveto
fessuptowhatitlost,andtheappearanceofafunctioningmarketsystemcouldbeupheld.
AndthosewhoorganizedthischaradeweredeadoninthinkingthataslongasDowandS&P
numberswouldlookgood,andtheysaidrecoveryinthemediaoftenenough,peoplewould
believetherestillwasafunctioningfinancialmarketplace.Andtheydid.Butthosedaysare
over.Oratleast,theysoonwillbe.
WhatImeanbythatisthatthefunctioningmarketplaceislonggone,andonlynowpeoples
beliefs,too,aboutitarechanging,beingforcedtochange,andsoonquiteradically.The
entireideathatruledtheworldoffinanceandkeptitseeminglystandinguprightis
crumblingfast.Andweregoingtohavetofindawaytodealwiththat.Asoftoday,wehave
none,wecomeupzero.Theoverridingnarrativewhichoverrideseveryotherthoughtis
thatwereonourwaybacktorecovery.Andthenwellgetbacktobecomingeverricher,live
ineverbiggerhomesanddriveeverbigger,smarterandfastercars.Orsomethinginthatvein.
Thedownfalloffinancecanbetracedbacktoallsortsofpointsinhistory.ThinkNixonthe
goldstandardin1971,forexample.ButtherepealofGlassSteagallin1998,underBillClinton,
isundoubtedlyoneofthemajorones.Oncedeposittakingbankswereagainallowedto

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usethosedepositstoinvestread:gamblewith,itwasonlyamatteroftimebeforethe
trainwentoffthetracksinspectacularfashion.
Itnowseemstostupidtobetrue,butAlanGreenspan,BobRubinandLarrySummers,the
guyswhohadpushedsohardfortherepealandgotit,wereoncefeaturedonthecover
ofTIMEasTheMenWhoSavedTheWorld.Whilewhattheydidwastheexactopposite:they
threwtheworldintoafinancialabyss.Ittookawhile,sure,butthen,1617yearsisnotall
thatlong.Plus,ittookjust2yearsforthedotcombubbletoburst,and67moreforBear
Stearns,AIGandLehmantobewhackamoled.
Therestwouldhavefollowed,butthenthecentralbankssteppedin.Andnow,6yearsand
$50trillionlater,theiromnipotenceisbeingexposedasimpotence.Whichmeanstheres
nothinglefttokeepupappearances.Wellallhavetoleavethetheaterofdreamsandstep
outintotheblindingcoldfaintlightofanothermorning.Nochoice.Andwellfigureoutat
somepointthatwevepaidallwehadjusttowatchtheshow.
No.1)TheSwissNationalBankthisweekthrewinthetowel,bankruptedalotofforeign
exchangebrokersandinvestorsanddestroyedafewhundredthousandSwissjobsinthe
process.Andthatwasnotthefirstsignthatthegamewasup,theoilpricecollapsestarted
it.Or,tobeprecise,madethecollapsevisibleforthefirsttimetomosteveniftheydidnt
recognizeitforwhatitwas.Centralbanksarepushingonastring,aconceptlongpredicted:
theyhavebecomepowerlesstostopfinancialmarketseventsfromtakingtheirnaturalcourse
ofboomandbust.
No.2)TheBankofJapan.FromAsianNikkei:
JapansCentralBankersMullDiminishingReturnsFromBondBuying

SomeintheBankofJapanaregrowinganxiousaboutcontinuingits
massivepurchasesofgovernmentbonds,confrontedwiththeprograms
negativesideeffects.[..]TheBOJsbuyingofhugeamountsofJapanese
Lectures

governmentbondshaspushedlongterminterestratestounprecedented

WorldofChange

lows.Thishasmadeitimpossibleforinsurancecompaniestogenerate
sufficientreturnsonJGBinvestmentstopaybenefitstopolicyholders.
Thelongerultralowinterestratescontinue,themorelikelyotherinsurers

InviteNICOLE
FOSS
tocometalktoyou

LectureDates
Available

RequestLectures:
StoneleighTravelsat
gmaildotcom.
MoreGoodReads

aretotakesimilarsteps.Householdfinanceswouldsuffer.Moneyreserve
funds,usedforparkingindividualstockinvestorsunusedfunds,areanother
financialproducthitbyultralowinterestrates.MRFsputmoneyintoshort
termgovernmentbondsandothersafeinvestments.Generatingpositive
returnsonthebondsisbecomingnearlyalostcause[..]
AWorldofChangeDownload

TheBOJhasdiscussedthesecostsatitspolicyboard.Whentheboard

givingtheimpressionthatthebondpurchasingprogramisactuallyascheme

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toenabledeficitspending.Theboarddecidedtostepuptheprogram
anyway,judgingthebenefitstooutweighthecosts.
Sincenominalinterestratesarealreadyathistoricallylowlevels,the

MishShedlock

$14.95

membersraisedthespecterofhurtingearningsatfinancialinstitutionsand

marginalimpactofmoreeasingaimedatputtingupwardpressureon
SteveKeen

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tookupadditionaleasingmeasuresinalateOctobermeeting,some

consumerpricesisnotstrong,policyboardmemberTakehiroSatosaidina
speechlastmonth,explainingwhyheopposedadditionaleasinginOctober.

YvesSmith

Wehavecausedtremendoustroubleforthefinancialindustry,aBOJofficial

TylerDurden

says.Ihopewewillbeabletoscalebackmonetaryeasingsoonby

JohnRubino

achievingthepricestabilitytargetasprojected.

JimKunstler

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Letmebeclear,thereisnoFedequitymarketput,WilliamC.
Dudley,presidentoftheNewYorkFed,thecentralbankswatchdogon
financialmarkets,saidinaDec.1speechinNewYork.Becausefinancial
marketconditionsaffecteconomicactivityonlyslowlyovertime,this
suggeststhatweshouldlookthroughshorttermvolatility.
TheconceptofaFedputtookholdunderGreenspan,whoin1998cut
thebenchmarkfederalfundsratethreetimesinresponsetomarketstress
arisingfromaRussianbonddefaultandthefailureofhedgefundLongTerm

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CapitalManagement.Theeconomyexpanded5%thatyearand4.7%in

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BernanketoldFedofficialsinanAug.16,2007,conferencecallasthey
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preparedtocutthediscountrate,accordingtotranscripts.Bernanke

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recommendedresistingacutinthefedfundsrateuntilitisreallyveryclear
fromeconomicdataandotherinformationthatitisneeded.Idreally

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prefertoavoidgivinganyimpressionofabailoutoraput,ifwecan.
Theputisthereitisjustfurtheroutofthemoney,saidMichael
Gapen,chiefU.S.economistatBarclays.Asthecentralbankraisesrates,
therecouldbemorevolatilityandtheFedcouldbeOKwithit.

No.4)TheECB.Whichissupposedtocomewitha$1trillionorsoQEpackagethisweek.
Whichhaslongbeenpricedinbythemarketsandwillhavenoothereffectthantobringdown

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theeurofurther.QEeverywhereisalwaysonlyagamethatshiftswealthfromthepublicto
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theprivatesector,whichisanotherwayofsayingfromthepoortotherich.Butthenyouend
upwiththepoorgettingsomuchpoorer,youdonthaveafunctioningrealeconomyanymore,
andthereforenofunctioningfinancialmarketseither.
Theproblemtodayisnotoneoflending,butofborrowing.Banks,eveniftheywouldwantto,
cannotlendtopeopletoopoortoborrow.Orspend,forthatmatter.Andifpeopleinthereal
economy,whichaccountsfor6070%ofGDPindevelopednations,dontspend,becausethey
simplyeitherdonthavethemoneyorhavenoexpectationsofgettingany,deflationsetsin
andcentralbankersarerevealedastheimpotentoldfartstheyare.
Butthatwillbynomeansconcludethestory.Theeffectsoftheillfatedmegalomaniac
centralbankpolicieswillreverberatethroughoursocietiesfordecades,ifonlybecause$50
trillionisalotofmoney.Muchofitmayhavegonesomewhere,insomezerosumgame,but
mostofitjustwentupinthethinairofwagersliketheonestheforextradeismadeof.
Peoplekeepaskingwheredidthemoneygo,well,nowhere,orratheritwentbacktothe
virtualstateitcamefrom.
Thedifferencebetweenthepast6yearsandtodayisthatcentralbankscanandwillno
longerpropuptheillusionaryworldoffinance.Andthatwillcauseanearthquake,atsunami
andameteoritehitallinone.Ifoilcangodownthewayithas,andcoppertoo,andironore,
thensocanstocks,andyourpensions,andeverythingelse.
PerhapsYellenetalarenotallthatcrazyforcuttingQE,andsoonraisinginterestrates.
Perhapsthatstheonlysanethinglefttodo,assaneastheSwisscuttingtheireuropeg.
ThatdoesntmeantheFedunderstandswhatsgoingtohappentotheUSeconomybecause
ofit,butitmayjustmeantheyhaveaninklingofthelackofalternatives.
Japanisgone,itsborroweditselfintooblivion.Chinasmiraclewasdebtfinancedtoamuch
largerdegreethananyonewishestoadmit.Europewillendupseeingitsunionfallingapart,
becauseitcouldonlyeverbeheldupintimesofplenty,andthosetimesaregone.Andthe
USwontmakeittoolongeitheronpeoplemakingalivingflippingtheirneighborsburgers.
Butthecentralbankbillswillstillcomedueallover.Thatsthebummeraboutdeflation:your
wealthevaporates,butyourdebtdoesnot.

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