Mario Draghi Extends Martial Law – ‘State Of Exception’ Is Permanent

Engineering a state of exception comes with considerable risk. The Fed (and central banks in general) carries an implicit responsibility for orderly reemancipation of the markets, which makes stimulus unwind especially tricky. This highlights the deep dichotomy of power: While a state of exception is an exercise of power, there is a clear tendency to disown that power. And the only way to avoid facing the underlying dilemma is to never give up the power. This creates a new status quo — a permanent state of exception.

In essence, it is all about diluting the possible downside of stimulus unwind — an attempt to have an option to obfuscate without losing one’s credibility. With traditional market rules and relationships breaking down, central banks appear to be chasing the illusive target, which means that victory and the final goal are not well defined, which in turn insures the persistence of the “battle” and indefinite continuation of the state of exception. This implies indefinite suspension of traditional market exchange, which means continuous uninterrupted exercise of power that must be won every day.

That’s from Deutsche Bank’s Aleksandar Kocic and I think it’s important to think about those passages in the context of what we’re seeing recently in terms of heightened tensions on the Korean peninsula and the rapidly deteriorating situation in American politics.

The problem with keeping crisis-era policies in place a decade on from the actual crisis is that if you wait around long enough, they’ll invariably be another crisis. Which means the state of market martial law will have to remain in place for even longer. Before you know it, what was “extraordinary” has become the norm. The “state of exception” has become “permanent.”

We’ve variously argued that the latest escalation in rhetoric between Washington and Pyongyang combined with the debt ceiling debate in the U.S. and Trump’s growing list of political problems will make it exceedingly difficult for the Fed and the ECB to move ahead with policy shifts in September. Simply put: getting aggressive about balance sheet normalization in the current environment risks adding fuel to the fire in terms of giving markets a reason to sell off.