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The Central Bankers’ Illusion of Last Resort

By Rick Ackerman Posted on January 18, 2012, 5:55 am EST Last Updated January 18, 2012, 2:44 pm EST

Although the stock market is unlikely to grind to a complete halt, it seems to be experiencing what could be called nervous paralysis. Yesterday, for instance, achieving a modest rally target at 1316.75 that we’ve been using for the E-Mini S&P should have been a piece of cake. In fact, buyers were unable to push the futures above 1302.50 before retreating into the close.  This tedious undulation has repeated itself perhaps a dozen times since Christmas, and although stocks have trended timidly higher over that period, the total gain has amounted to no more than about 220 points for the Dow Industrials.

Because there is evidently not much conviction among bulls, let alone a good reason to be bullish; and because bears have yet to recover from the trauma of the Dow’s 260-point short-squeeze on January 3, stocks have drifted nervously higher, unable to correct for reasons explained here yesterday. Those reasons mainly concerned the gusher of funny money that the central banks have channeled into the financial system. This is inflation, pure and simple, and although it provides a plausible rationale for buying stocks, we have our doubts that the stock market will ultimately prove to be the best investment vehicle for discounting inflation. Why?  Simply because inflation could play out as an instantaneously ruinous hyperinflation before subsiding just as quickly into a deflation far more destructive than the one we are now experiencing.

Waiting for News

In the meantime, it seems clear that the mountebanks who maneuver the markets up and down from one day to the next are waiting for the kind of news that will ease their task. Stories concerning Europe’s slow-motion collapse have been temporarily pushed beneath-the-fold by Europe’s seaborne disaster off Italy, but they are certain to re-emerge with a vengeance, and soon. It is of course possible that the dollar/euro swap arrangement that currently obtains will succeed in suppressing sovereign borrowing rates for longer than most of us might imagine. This mechanism of borrowing is about as brazen a fraud as has been perpetrated by the central banks since they began the era of “bailouts” a few years ago. Although no one actually believes the bankers’ hokum will save the day for Europe (or the U.S., for that matter), the status quo continues to hold — probably because, for most of us, what is all but certain to come next is too scary to think about.

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  • Paul January 22, 2012, 3:48 pm

    In Summary …

    Cash is gold … paper money is debt (ponzi money) … in a deflationary environment you don’t want to hold debt (paper money) … you want to hold cash (gold) … in an inflationary environment paper money loses value and gold buys more … so forget the debate over deflation or inflation …

    Bottom line … if you don’t want to be hurt in any coming inflation or deflation simply hold “all your savings” in gold (silver is good too) … and remove yourself from the banksters “ponzi money” scam.

  • bailintheboat January 19, 2012, 6:22 am

    Today you can no more build a sound economy on funny money than you can build a canoe out of play doh. Keep paddling though. A few of us may make it…somewhere.

  • Chris T. January 18, 2012, 9:44 pm

    Rick, what’s the source of the pictures (nice one)?

    John Jay:
    “…MF Global has likely caused small investors to exit the futures market before they get robbed in a bankruptcy.”

    And that may very well have been precisely what was intended (for those planning on delivery of PM), which is why Corzine’s blatant fleecing will prob. not be handled in the way it should be:
    lock the scum-bag up and throw away the key.

    • Seawolf January 18, 2012, 11:53 pm

      Corzine did such a good job of taking down MF Global and causing so many to lose money that the Democrats will probably run him for president in 2016. Spectacular failure begets spectacular reward.

  • dan January 18, 2012, 8:27 pm

    GOOD DEBATE BOTH SIDES..BOTTOM LINE

    GOT GOLD YET..

  • mava January 18, 2012, 7:38 pm

    Mark, I totally agree. And this can be seen in 1930, in how the government was abusing money, even though money was gold. No system, can survive the government, for the government knows no law, no rule, no limit, it is the ultimate predator.

    Robert,

    I keep reading Gary, and I just don’t get it. I don’t think he ever reads what others write. He is stuck in the Keynesian worldview, calling worthless anchor-less limitless paper “cash” for some reason, and falling prices – deflation. He keeps saying that something keep deflating… – but, I have not seen any deflation yet.

    If the price of a house is falling, that in turn means that the price of money is rising. So, how can this possibly be called deflation, when we can clearly observe movements in both directions: up (fiat) and down (houses)? A relative revaluation? Sure. A deflation? You must be crazy.

    I think the deflationistas should be renamed keynesians. This would be proper, because they bring no argument as to how a deflation may happen, but instead, they argue that falling prices of assets against fiat is the deflation, because they have read accounts from the 30-ies about cash gaining purchasing power, and that, they believe, always means deflation.

    Trouble is, that if we do follow these keynesians, and allow our logic to be muddled by accepting this definition of deflation, then, as keynesians wanted, the deflation is actually happening every single day and everywhere, because something goes down in its price every second. Then we can say that the deflation is an everyday phenomena. Then the government, finally, can say that you see, we don’t just create inflation by printing money, we also have an everyday deflation to counteract that, so don’t you worry. Never mind that the inflation the government creates is an increase in quantity of mine, while supposedly opposite trend – the deflation (so called) – is a decrease of some price level somewhere.

    • Rick Ackerman January 18, 2012, 10:50 pm

      The very word “deflation” is such a vivid and precise a metaphor for describing what is happening in the housing sector that it requires no justification or further explanation, Mava — certainly not the obfuscating point you’ve made that falling home prices “increases” the “value” of “money.” I’ll offer my own definition of deflation — one that everyone can understand because it describes deflation’s most pernicious, palpable symptom: an increase in the real burden of debt.

      I’m with Gary on this one — and I am NO Keynesian, not by any stretch.

    • Mark Uzick January 19, 2012, 2:01 am

      Mava:

      Words can have different meanings: If the tires on my car deflate from a drop in the temperature, even though the quantity of air molecules remains constant, would calling it deflation make me an automotive Keynesian? Would saying that “tire deflation” is a decrease in the quantity of air molecules in a tire make me an automotive Austrian?

      The answer is “No.” to both questions.

      In economics there is both “price inflation” and “monetary inflation”; your confusion lies not with your definition of “inflation” but with its conflation with all the other definitions.

      It’s important to understand which meaning is implied by the context of a word’s usage but since there seems to be so much confusion over “inflation” I always try to say “price inflation” or “monetary inflation” to be clear.

  • gary leibowitz January 18, 2012, 4:53 pm

    I find it ironic that after 3 years of debt implosion we are still talking about hyperinflation as being the only recourse for governments. The arguments as to why we had deflation in the 30’s are not fully explained. While liquidity and lack of government action was blamed I wonder if it could have been avoided. This experiment and “corrective” action we see today hasn’t exactly shown deflation is a non-issue. I would argue that the natural cyclical nature of inflation-deflation is a function of capitalism swinging from one extreme to the other. To suggest that the advent of a Federal Reserve changed this formula is one where I argue strongly against. In fact I would argue that because there were forces trying to prevent deflation these last 70 years a debt implosion was inevitable as is massive deflation.

    The number one investment winner these last few years has been long term bonds yet we still talk about the destruction of the dollar and massive inflation wiping out most assets. I am actually expecting deflation to show across the board this year. CPI, PPI, bond yields, should go to historic lows within 2 years’ time. The world governments have run out of options. They can no longer use a loose monetary policy to cure all ills. They are now being forced to allow devaluation to run its course.

    Anyone who bought 30 year government bonds 3 years ago hasn’t lost sleep over a hyperinflation scenario. The replacement of cash with credit is now going in reverse. Faith in credit is being destroyed and as a result cash will be the big winner, as it was in the 30’s.

    • Robert January 18, 2012, 6:49 pm

      “The replacement of cash with credit is now going in reverse. Faith in credit is being destroyed and as a result cash will be the big winner, as it was in the 30’s.”

      Gary-
      In today’s world, cash IS credit. How do you rationalize your scenario when cash can not exist without government incurred debt?

      The only way printed currency becomes scarce in markets is when the issuers (Fed/Treasury) stop issuing, the spenders stop spending, and the holders lock it away (hoard).

      In the 30’s Gold was cash (and no, I am not going to expand this point any further, but the fact is the fact)

      The Gov’t stole privately held gold, and the Treasury devalued the dollar against gold from 20 to 33 (allowing the Fed to expand the printed currency supply by 60%), but this did not improve faith (many say it destroyed faith further), nor did it improve monetary spending velocity; but it did manage to raise general price levels, just as one would expect from a dilution exercise (since prices are not representative of value- prices are representative of relative scarcity between two items LEVERAGED by personal valuation)

      So, in the 30’s, cash was king because people knew they could go to the bank and redeem said cash for SOMETHING.

      Today, cash represents coupons irredeemable for anything but the product proudly labelled on the front of the coupon; and that product is: all DEBTs public and private.

      Nowhere does the coupon say it is redeemable in exchange for any real property, nor can the gov’t compel, coerce, or otherwise force people to accept said coupons in exchange for their real property or work.

      Faith is a mysterious thing….

    • Mark Uzick January 18, 2012, 7:09 pm

      Faith in fiat money is based on a groundless faith in fiat government. Faith in gold is grounded in reality.

      The problem of money printing lies not with fiat money but with the fiat form of of government we call the state.

      The lawless anarchy that is the state rules by means of arbitrary or capricious decrees that it has the arrogance to call laws: fiat government makes fiat law and even when it backs its money with something real, it’s done by fiat decree and therefore it’s still fiat money.

      As long as there’s fiat government with a monopoly over money, not even a gold standard will prevent the state from engaging in one of its favorite activities: The counterfeiting of money and other forms of devaluation to fund its wars, persecutions and other depredations.

      The only real gold standard is private (voluntary) gold backed money.

    • gary leibowitz January 18, 2012, 7:33 pm

      Credit derivatives such as credit cards, leasing, longer term loans, lay away, etc… created a credit driven society where it no longer mattered how much cash reserve you have. I am not talking about the faith in our government’s credit being secure but rather the circumvention private citizens were given to leverage their money way beyond common sense would dictate. There is no longer any expectation that private citizens be able to have collateral against that credit, instead the only worry is whether that person can get even greater credit to sustain the payments. That’s what we have morphed into. Credit has replaced cash only starting around 1980. The greatest bull market was created not coincidentally at the very same time frame.

      We are going to be forced back, pre-80’s, and that will cause pain. How long it takes and how painful it becomes will be the result of government’s policy. The facts remain, in my opinion, that we will be forced back to reality, where credit must be backed by collateral. The deleveraging of credit.

    • Robert January 18, 2012, 10:25 pm

      So, just to be sure that I understand your point Gary:

      People are not fleeing credit for assets, but they are fleeing leveraged credit for real collateralized credit (or the collateral instruments themselves)…

      I think we agree in principle more than you might realize… Except that I am simply not afraid to call Gold an asset, or to call it collateral, or to call it cash.

      People say Gold is not cash because it is not easily circulated (ie- you can’t trade it for a loaf of bread at the neighborhood Safeway). However, these same people will tell you that the Euro IS cash, even though I have found the same level of limited success exchanging Euros for bread at my neighborhood Safeway…

      Que Pasa?

  • John Jay January 18, 2012, 3:39 pm

    I think the problem for the market is they are running out of suckers to fleece. I have read that retail investors are still pulling money out of the market, that is those that still have any money left. MF Global has likely caused small investors to exit the futures market before they get robbed in a bankruptcy. All the rubes have left the carnival and the barkers are just yelling at each other now. So, some combination of flight from rigged markets, and people either cleaned out over the last decade or forced by unemployment or retirement to cash in what chips they have left. More and more market action may be dueling computer programs trying to outsmart each other. With hours of flatline interrupted by brief spikes of activity. More layoffs at big banks and Wall St firms might confirm this as trading profits become more difficult to achieve.
    Endgame? Could be. As the wealth becomes evermore
    concentrated you own it all and there is nothing left to rob from the proles.

    • fallingman January 18, 2012, 10:28 pm

      Uh huh.

  • mario cavolo January 18, 2012, 8:57 am

    Pray for “muddle along” rather than a nasty financial global event which will have much more devastating impact on the wealth-less masses.

    I would suggest that overall, the global society is very far from Ride The Wave’s “…sense of no hope and no faith”.

    Taking it region by region, US has 180 million smiling, well-employed, busy, spending Americans.

    India, Latin, BRIC’s have rising societies in general.

    China, good grief, oceans of cash and equity beyond imagination, investing across the globe, so spare your worries about the Middle Kingdom. Europe; weak with a strong Germany so I’m not really sure about where this continent stands, is there any good fundamental news able to hold it up?

    I think we need to clarify that “hyperinflation” is an event as a result of a specific decision/set of related financial decisions by a government/banking entity, not a trend or development.

    Cheers, Mario

    • Mark Uzick January 18, 2012, 11:11 am

      mario:
      It’s not like what you or I hope for will change what will happen, but what’s important is that we understand the implications of your hopes versus those of my hopes.

      You “Pray for “muddle along” rather than a nasty financial global event” but that “global event” is precisely what we really need.

      To “muddle along” implies the continued papering over the books of insolvent state and financial institutions; it will result in the destruction of savings, financial chaos and economic collapse that come with galloping inflation, so I think you’re mistaken. (unless you mean that we should muddle along on our way to the cliff)

      You said:

      “I think we need to clarify that “hyperinflation” is an event as a result of a specific decision/set of related financial decisions by a government/banking entity, not a trend or development. ”

      I whole-heartedly agree! (unless you’re speaking of political, not economic, trends) but to avoid it requires that we take our medicine (meaning defaults bankruptcies and cleansing liquidation of underwater assets); then we can rebuild on a solid foundation consisting of all the global productive enterprise and industrial might that you always so eloquently point out; and that’s hardly what I would term as just “muddling along”.

    • mario cavolo January 18, 2012, 2:33 pm

      Hey Mark, I’m thinking of it in terms of that “event” being the instantaneous destruction of savings, whether as a currency deval or a hyperinflation event, such as what I believe is what happened in Argentina. Wakeup one morning to find out that your 100k is worth 10k, etc…. sorry, I prefer muddle along 🙂

    • Mark Uzick January 18, 2012, 4:37 pm

      mario:

      It’s the “muddling along” that “we” have been doing that will lead to that cliff I referred to; what you refer to as that “event”.

      The other “event” – the cleansing liquidation of bad debts – is not a fall into the abyss, but the first step on a journey upward.

      These “events” are mutually exclusive; are you proposing that “we” can rapidly alternate between changing directions toward these polar opposites during a time when unsustainable debts have been allowed to reach their current magnitude without things getting out of control, triggering one of them?

      Is this alternation of policy the “muddling” you’re speaking of? It’s this type of “muddling” (meddling) that got us into the situation we’re in today. The central banks don’t fine-tune the economy; they create the manic swings that lead to destabilization and final collapse. To statists, this only proves that the market failed; that they need more control.

      You don’t really believe that a “hands on policy” is going to bring the wild oscillations under control – do you? Even if it could, (though it can’t) what are the odds that the people in control will act without the disastrous influence of short term political and personal agendas? In fact, it’s these agendas that lead me to believe that the “event” will probably be an inflationary collapse of the dollar.

  • RideTheWave January 18, 2012, 7:06 am

    To some degree all of this can-kicking to the extent that at even works to delay the inevitable is based on faith and hope.

    If the Western governments, and for that matter, all world governments can convince the investor and consumer collective, that things are better than they seem, then they can sow the seeds of some of level of confidence. Then in turn, if that confidence turns into spending that dynamic may create the actual better economy that the gov’t initially suggested to the people that was not real when initially it was suggested. All this really means, with regards to the economy, is that if you believe the economy may actually be good, and as such your belief is acted upon causing you to do things that are beneficial to the economy at the margin, such as buying that new car etc, then the economy may actually become better…….to a point….

    So to that extent in any credit based non-backed fiat economy, all you really have is hope and faith. Credit is extended on the faith that the debtor will pay it back. Then that promise becomes the asset for which the creditor can secure credit for one-self also based on faith.

    So without faith and hope, you have a collapse.

    To me it is when there is finally a sense of no hope and no faith, perhaps what we saw at the worst levels of 2008 or early 2009, that fear begets fear. Until then however, the can kicking will work until the sheeple realize they are missing their coat.

    Right now, they feel warm even if the coat is a little patchy. And all they need to be told by the people that “matter” (sarcasm) is that the patches will grow back. And for now it appears that they buy it…..

    Of course this MOPE (management of perspective economics per Jim Sinclair) will work until it doesn’t. Stocks at least for the interim reflect that the hopium as prescribed by the politico’s, feds, and the media mouthpiece, is in fact working.

    So it will take a blind-side of unforeseen proportions (a true black swan by definition) to catalyze a turn from the effectiveness of MOPE to that real descent…..Europe is discounted and I think now that worst fears of Greece departing the Euro have been postulated and titilated in the minds of the Bears to the point of diminishing its actual affect once it happens….no Greece leaving the Euro union IS NOT A BLACK SWAN. IT’S KNOWN AND ITS PREPARED FOR.

    To the extent hyperinflation does come and I think it will…that Rick, is a real black swan to unwind the melt-up in the markets and the ponzi-based confidence upon which this whole house of cards continues to rest…..

    I really don’t think people believe they will see bread cost $20 a loaf as much as they didn’t believe us so-called polli-anna’s that said housing would not always rise and in fact would collapse when we said so in 2004 to 2006 among most of this HP crowd on this board, forum and site. When the housing debacle did happen however – the unthinkable for the sheeple, at least for them and many, that was a black swan.

    That black swan will be just as horrific and jarring just as seeing as the price of your mortgage eventually being less than your monthly gas bill. But when it does, that will be black swan that the sheep never thought would “really” happen and did…..

    And when it does the market and economy as measured by destroyed faith which is the true foundation of everything will collapse with all the hope deflated……

    Until then carry on….


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