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Central Banks Ready To Panic — Again

Less than a decade after a housing/derivatives bubble nearly wiped out the global financial system, a new and much bigger commodities/derivatives bubble is threatening to finish the job. Raw materials are tanking as capital pours out of the most heavily-impacted countries and into anything that looks like a reasonable hiding place. So the dollar is up, Swiss and German bond yields are negative, and fine art is through the roof.

Now emerging-market turmoil is spreading to the developed world and the conventional wisdom is shifting from a future of gradual interest rate normalization amid a return to steady growth, to zero or negative rates as far as the eye can see. Here’s a representative take from Bloomberg:

Cheap Money Is Here to Stay

For decades, central banks lorded over markets. Traders quivered at the omnipotence of monetary authorities — their every move, utterance and wink a reason to scurry for safe havens or an opportunity to score huge profits. Now, though, markets are the ones doing the bullying.

The Fed’s Countdown
Take New Zealand and Australia. Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.”

Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero. But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6 percent) and Australia (2.3 percent), it’s hard not to conclude that ultralow rates will be the global norm for a long, long time.

Indeed, the major monetary powers that are easing — Europe, Japan, Australia and New Zealand — have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile — the Federal Reserve and Bank of England — are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus.

“As interest rates continue to fall across most of the globe, central banks are also united in their main message: Once rates have come down, they’re likely to stay down,” says Simon Grose-Hodge of LGT Bank. “And when they finally do tighten, the ‘normal’ rate is going to be a lot lower than it used to be.”

Could the People’s Bank of China be next? “With underlying GDP growth still looking weak, more monetary policy moves are likely,” says Adam Slater of Oxford Economics. “And China may even face the prospect of short-term rates dropping towards the zero lower bound.”

This is not how the Fed, ECB or Bank of Japan envisioned the year playing out. They see ultra-low rates as an emergency measure, temporary in nature and to be dispensed with asap. From MarketWatch:

Here’s the real reason the Fed wants to raise rates

Federal Reserve policy makers are hoping, even praying, that no unexpected domestic development or international crisis intervenes to prevent them from taking the first baby step to normalize interest rates at the Sept.16-17 meeting.

Why? Fed officials point to a number of reasons: the unnatural state of a near-zero benchmark rate; the potential risk of financial instability; an improving labor market; diminishing headwinds; and yes, expectations of 3% growth just over the horizon.

Fed Chairman Janet Yellen, usually considered a member of the Fed’s dovish faction, sounded determined to act when she testified to Congress last week.

“We are close to where we want to be, and we now think that the economy cannot only tolerate but needs higher interest rates,” Yellen said during the Q&A. “Needs,” as in the patient needs his medicine.

What’s the urgency with an economy chugging along at 2-something percent and low inflation? I suspect Fed officials are terrified of being caught with their pants down, in a manner of speaking. Should some unforeseen event come along to upend the economy, the Fed’s arsenal would be dry. They’d like to put some space between their policy rate and zero.

That “unforeseen event” has arrived, leaving most central banks with a stark choice: Let the deflationary crash run its course at the risk of blowing up the quadrillion or so dollars of interest rate, credit, and currency derivatives hidden on bank and hedge fund balance sheets. Or push interest rates into negative territory pretty much across the developed world. Since option number one carries a statistically-significant chance of ending the modern financial era it is absolutely unacceptable to Goldman et al, and is thus a non-starter. Which leaves only option two: more of the same but bigger and badder.

So…the central banks will panic. Again. Countries that retain some control over their monetary systems will see their interest rates fall to zero and beyond, while those that don’t will be thrown into some kind of new age hyperinflationary depression. Not 2008 all over again; this is something much stranger.

35 thoughts on "Central Banks Ready To Panic — Again"

  1. Pingback: forex
  2. Lets face facts, the Central Banks are at the behest of the top World elite and are only there to protect their wealth and allow them to shift wealth from vast middle class to this tiny elite. Eventually they will let the whole bag of crap drop when the counterparty risk is all with the small investors. Don’t trust these people. They are despicable self serving narcissists.

  3. The Founding Father’s warned us about central banks but we failed to listen … and the final bill is coming due.

  4. Central Bank controlling oligarchs have created a system which in the short term feeds them great wealth at the expense of the great majority of people. There is no plan for the long term however. So the printing and transfer of wealth will continue. When the masses are finally left with nothing and nothing to lose, they will lose it. The only question is how much longer can this go on? The natives are getting restless. The rich are getting nervous. But no one seems able to stop it. So we continue to head for the cliff not knowing where the cliff is.

  5. “Money” should be cheap because it’s not really money.

    Still, seriously, I’d like to know what I’m missing. All I experience in sunny South Florida is over the top prosperity and “consumption”. I have to assume maybe I/we’re just “blessed” and that isn’t so everywhere else (except Atlanta, New York, Boston, Dallas, San Francisco, Seattle, Honolulu, which I’ve visited recently, and who knows about other countries.) I don’t mean to sound insensitive but I don’t get it.

    True story: I own a construction company. An old customer calls me up and says they just bought a new house and want it to be/look like their old house. Old house: Modern, new house: Victorian/Colonial. Every selling point of the new house has been discarded. (Why didn’t they just buy a different house?) Conspicuous consumption. Now, multiply that by one hundred thousand and that’s the South Florida market. Okay, let’s look at Naples….

    1. Once it’s complete, you should hire some teenagers (minimum wage!) to throw rocks through the new windows. They can file an insurance claim to cover the cost, the teenagers get paid, you get to install more windows, and the economy gets a free ‘boost’.
      Everybody wins, right!

  6. I think it was already time to change the name of your website 5 years ago. I bought your book in 2009 and I’m still waiting for the dollar collapse.

    1. Pete, grow a pair and have some patience, you wuss. It finally happened in Greece and then they brought in even more debt. It takes a long time to collapse when you keep getting more credit cards to max out on.

    2. I personally spoke with numerous people in 2006-2007 who could not understand how the boom we were living in could and would go bust, but blow it did, as the 2008 debacle exhibits. This one will be far worse because the 2008 mess was papered over and still exists. Not only does it still exist but the global bankers chose to treat it with more debt. Hang on , you’re about to get the confirmation you’re looking for the debt bomb is set !

      1. I wanted to buy a house or condo but could not believe the prices of these houses and i refused to buy what i could afford which was a studio condo in a bad neighborhood with 1 parking spot. I waited until after the bubble burst and bought a large 3 bedroom house in a nice neighborhood for the same price as that other property. Point is my heart would not let me do it and i kept having a nagging feeling about the house being way too overinflated. GOD I AM GLAD I WAITED! (housing market was chicagoland area)

  7. Aw come on … Have you ever had a problem that couldn’t be solved if you had only had more money?

    Central bankers are thinkers: They know that for any thought problem there is always a way to solve the puzzle, as long as you persist.

  8. Central Banksters seem immune to the idea that you can only ‘pull demand forward’ for so long before you have exhausted credit. Tgrow in govt debt and malfeasance, and you end up with quite the “witch’s brew” of ass backward, centrally planned economies.

    Get ready for the Oligarchy, because as we see from events in the EU, it’s coming no matter who is president.

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