Arrogance Waiting for Comeuppance
Bloomberg informs us that there is a “Yellen Message to Europeans Divided on QE: Do Whatever It Takesâ€. The belief that central bank bureaucrats can “rescue†the economy by printing more money evidently remains as firmly ingrained as ever. As Paul Singer, the head of Elliott Management, remarked on this in a recent letter to investors (note that Mr. Singer has an excellent track record as an investor spanning four decades):
“Central bank manipulation of prices and risk taking has become the norm over the last six years, because it is so hard for investors to see the downside. QE and ZIRP have been ‘free,’ as far as most people are concerned, in terms of stability, asset price and economic growth, and economic recovery. ‘Free’ in this context means devoid of future countervailing negative consequences. Unfortunately, this particular magic bullet is illusory — the negative consequences are only in their early stages of unveiling…
“Central bankers do not understand that it was their tinkering, manipulation, bailouts and false confidence that encouraged and enabled the insanity that led to the fragility and collapse. Partially as a result of that misunderstanding, the developed world has doubled down on the same policies, feeding the central bankers’ supreme self-confidence. Political leaders have been content to stand aside and watch the central bankers do their seemingly magical and magnificent work.
The believers in the wisdom of this central-banker-centric economic world have been crowing and gloating that those (like us) who have raised concerns about the risks posed by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing inequality, lower growth) are just ‘wrong’ and should apologize for a ‘massive error.’ This, shall we say, ‘Krugmanization’ of a substantial portion of the economics profession and punditocracy is in its triumphalist phase, and whether its smug non-stop ‘victory lap’ ultimately represents an embarrassing high-water mark is for subsequent events to reveal.â€
Paul Singer of Elliott Management – his warnings will of course be ignored.
(Screenshot by FOCUS Online/Wochit)
Indeed, the very same crowd that was patting itself on the back so much it must have hurt back in 2006-2007 is at it again. At the time it was also widely held that the economic developments following the crash of the Nasdaq bubble “proved†that central bank manipulation of the economy “workedâ€. All this smugness that is currently on display will turn into embarrassment soon enough, but the lack of humility just six years after these bien pensants almost managed to blow up the entire financial system certainly seems a bit out of place to us.
This is especially so as it is an apodictic certainty that the “doubling down†on the same policies that have failed so spectacularly last time around will eventually bring about an even bigger failure. We know this because the laws of economics have not been magically suspended. Money printing has consequences, and in many respects it is simply too late to head them off.
Readers may recall two charts (see: chart 1 and chart 2) we recently showed, which document – admittedly imperfectly, as is always the case with aggregated economic data – how distorted the US economy has become over the past six years of the printing presses running overtime. Certain inferences are inescapable: even more capital has been malinvested and consumed as a result of central bank manipulation since the last crisis. This cannot tell us anything about the timing of the next crisis, which depends on variables that cannot be foreseen with certainty, but it can tell us something of its likely severity. Among the aforementioned unknowns are future policy decisions and the state of the economy’s pool of real funding. The former are easier to guess at than the latter, but given the sluggishness of the “recoveryâ€, we must assume that the structural condition of the economy is quite weak indeed.
