I’ve been reading Doug Noland since 2001, and have come to enjoy his commentary for its concise ability to frame what we’re facing.
From a critically timed post today titled “Draghi Ready to Fight”
The collapse of the Soviet Union coupled with the Greenspan Fed’s push into activist central banking ushered in what was almost universally accepted as an epic victory for free-market capitalism. Too much of this was a quite powerful illusion. U.S. finance was becoming increasingly state-directed. The Fed manipulated interest-rates and the shape of the yield curve. The Washington-based GSEs moved to completely dominate mortgage Credit. The massive U.S. “too big to fail” financial conglomerates came to dictate securities and derivatives-based finance – and market-based finance monopolized the real economy. And each faltering Bubble ensured more aggressive central bank “activism” – lower rates, greater market intervention and increasingly outlandish talk of “helicopter money” and the government printing press.
With the bursting of the mortgage finance Bubble, the Fed and global central banks resorted to desperate measures – reckless “money” printing, manipulation and market liquidity backstops. Along the way, virtually the entire world adopted U.S.-style market-based finance and policymaking. The process culminated with communist China adopting U.S.-style finance. So long as inflating financial markets were supportive of central planner objectives, everyone could pretend it was a move toward free markets.
What began with Greenspan’s early-nineties covert bank recapitalization evolved into Bernanke’s foolish policy to openly inflate risk markets with new central bank Credit. Amazingly, U.S. inflationism took the world by storm.
The issue today goes much beyond a stock market correction, a bear market or even global financial crisis. Contemporary central banking has failed. Theories have failed. Doctrine has failed. The inability to spur self-sustaining economic recovery has been a major issue. Yet, from my perspective, the critical failure has been the incapacity to generate general price inflation. The delusion has been that central bankers would always enjoy the capacity to inflate away excessive debt levels. Bubbles needn’t be feared, not with central banks “mopping” up with reflationary monetary stimulus. And for quite a while it seemed that “enlightened” contemporary inflationist doctrine had it all figured out.
Central bankers and market-based finance are a dangerous mix. Over the years, I have referred to market-based finance as the most powerful monetary policy transmission mechanism in the history of central banking. Greenspan could inflate the markets – and the entire system – with inklings of a 25 bps rate cut. Later it took Dr. Bernanke Trillions – the dawn of “whatever it takes,” and markets rejoiced.
Central banks around the world abused their newfound power and the power of financial markets. And for seven years egregious monetary inflation has been used specifically to inflate global securities markets. And “shock and awe,” “whatever it takes,” and “push back against a tightening of financial conditions” all worked to ensure the markets that central bankers would no longer tolerate crises, recessions or even a bear market.
For seven long years, risk misperceptions and market price distortions turned progressively more severe. Inflating securities markets around the globe became, as they do, self-reinforcing. “Money” flooded into the markets – especially through ETFs and derivatives. Trillions flowed into perceived safe equities index and corporate debt instruments. With central bankers providing a competitive advantage for leveraging and professional speculation, the hedge fund industry swelled to $3.0 TN (matching the $3 TN ETF complex). Wealth effects and the loosest financial conditions imaginable boosted spending, corporate profits, incomes, investment, tax receipts and GDP – not to mention M&A, stock repurchases and financial engineering.
But this historic wealth illusion has been built on a foundation of false premises – that central bank monetization can inflate price levels and spur system inflation necessary to grow out of debt problems; that securities markets should trade at higher multiples based upon contemporary central banker capacities to spur self-reinforcing economic recovery and liquid securities markets; that 2008 was “the hundred year flood.” In reality, central bankers inflated history’s greatest divergence between global securities prices and economic prospects.
The entire piece is worth a read and helpful to disabuse folks of the notion that the worst is now behind us.
Far from it.