License to Kill Gophers
August 22, 2019·3 comments·in the trenches
Central banks have declared war on recession, but their escalating weapons are leaving the battlefield scorched. Rate cuts that worked a decade ago no longer work. The next phase requires extraordinary measures that solve nothing and destroy everything.
• The concept of a neutral interest rate no longer exists. Lower rates create a reflexive cycle that pulls the neutral rate lower still. Each policy move reshapes the very target it's trying to hit.
• Global financial markets have already moved beyond what central banks can handle with conventional tools. Over 15 trillion dollars in negatively yielding debt signals investors have lost faith in traditional safe harbors. The rates market is screaming that a slowdown is coming.
• The Fed's policy space for the next recession is almost gone. Previous downturns required 500 basis points of rate cuts. The current policy rate leaves only 250 basis points of room. Ordinary cuts won't work.
• When that moment arrives, central banks will do what they've already prepared for: buy equities and other assets directly. This spreads damage across a wider playing field but doesn't fix the underlying problem. Japan has already done it.
• By the time real economic data confirms what bond markets already know, it will be too late. Equity markets always lag the rates market. The question isn't whether this ends, but whether the tools used to prevent it will have destroyed more than the recession itself would have.
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Comments
Caddyshack and Happy Gilmore - The Truth and Nothing but the Truth!
And, in the end, the gopher survived. What does that suggest for the future? Gophers, gophers and more gophers all the way down.
Gophers can’t be killed.
Even at the height of the British empire (ie pre-1850,) financial crises that shook the core of the system occurred at regular intervals.
Asset inflation simply can’t be allowed to go on forever. The more it continues, the more unproductive people and processes are paid to be unproductive. The top elites don’t want such a world. They profit from being more prepared than the rest of us for both asset inflation and deflation. Asset deflation and the economic pain that goes with it are allowed to occur once a target of blame, that doesn’t implicate the core world system, is firmly in place.
How firmly is the common narrative associating Trump and the trade war with a bust? That’s how close we are to such a bust.
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