Moral Hazard Spectacular

Stop(ped) Making Sense

Pleiades wanted me to write a bit about this today. He’s sent me a couple of interesting links behind the AFR paywall. I can’t link to them a a result but I can offer my opinion on a few things.

You have to hand it to Central Banks. They’ll jawbone anything and everything to get the economy to roughly go in a direction. Usually, what the Central Banks want is for asset prices to be stable and go up, while an inflation of about 2-3% eats away at cash so people have to do something with their money apart from shove it under the mattress. You can put them in equities, bonds, commodities, property, but the 2-3% is there to eat away at your pile of cash if you keep it stationary.

Of course, that’s why interest rates move the way they do, which is to say whenever the equity markets sag, the Central Banks cut interest rates and every time they hit new highs, they take some points off. We’ve been watching this game for something like 30years since the RBA went independent of the Federal government, and since the days when Paul Volcker as the head of the US Fed set about taming inflation.

…but what if all this was a crock?

Share markets in the USA are at an all time high, but interest rates are close to zero, and Quantitative Easing is, while being tapered back, still pumping liquidity into the market in exchange of bad debts. You’d have to look at all this and say that the narrative we’ve been led to believe is broken. It’s also been 7years since the GFC broke, 6 since liquidity got pumped into he market, and QE is still continuing. The American markets are talking about a ‘Recovery’, but the mere fact that interest rates are at zero and QE is still going on should tell you we’re nowhere near any kind of recovery.

If there were a ‘Recovery’, how could there be stories like this?:

Driven by economic necessity — Rohr has been chronically unemployed and her husband lost his job last year — she moved her family back home with her 77-year-old mother.

At a time when the still sluggish economy has sent a flood of jobless young adults back home, older people are quietly moving in with their parents at twice the rate of their younger counterparts.

For seven years through 2012, the number of Californians aged 50 to 64 who live in their parents’ homes swelled 67.6% to about 194,000, according to the UCLA Center for Health Policy Research and the Insight Center for Community Economic Development.

The jump is almost exclusively the result of financial hardship caused by the recession rather than for other reasons, such as the need to care for aging parents, said Steven P. Wallace, a UCLA professor of public health who crunched the data.

“The numbers are pretty amazing,” Wallace said. “It’s an age group that you normally think of as pretty financially stable. They’re mid-career. They may be thinking ahead toward retirement. They’ve got a nest egg going. And then all of a sudden you see this huge push back into their parents’ homes.”

I’m sort of lost for words when I read that because that’s a surefire sign that the economy has not made any kind of credible recovery – but for some miraculous reason US equity prices have punched through the previous highs from prior to the GFC meltdown. What QE has accomplished is to reinflate all the asset bubbles, up to and including the housing bubble in America. If you think this is somehow not true then hey presto, subprime mortgages are back. Maybe these people in California living in their parents’ houses can score one of those loans that only need 3% upfront.

The point is, Ben Bernanke said the whole QE thing and TARP thing was to shore up banks so they would keep lending and that liquidity would not dry up and businesses would stay open. What’s happened instead is that the money got sent out of America on financial markets to places with high risk and high yields – affectionately known as emerging markets – and has subsequently inflated commodity prices and real estate prices around the globe. More to the point it didn’t exactly save jobs.

We’re Really Going To Fight For The Grey Zone On The Eastern Front?

This is nuts. The US is sending 600 troops for an exercise in eastern Europe. Airborne troops are allegedly going to Poland, Lithuania, Latvia and Estonia. All of it in response to the crisis in Crimea. There are a few things I am not convinced about America’s willingness to follow through and fight a war in Ukraine.

First of all is how willing the NATO allies are, in supporting America. Germany in particular makes me doubt NATO’s resolve. Are the Dutch and Spaniards and Belgians and Italians willing to send troops out to Ukraine and shed blood for Ukrainians, even though they’re not even a member of NATO or the Euro zone? It seems incredibly unlikely the commitment is there. Germany in particular might still be culturally traumatised by the World War II campaign in Ukraine and the political fall out ever since. Do they want to send troops there? I’d hazard a guess and say no.

Secondly, Europe still relies on Russian gas supplies from the pipeline that runs through Ukraine. They’re not in a position to bite the hand that feeds it. And contrary to opinions flying around that America’s shale gas boom is big enough to fill in the gap it has two giant hurdles to getting to Europe: the gas has to be liquefied and then shipped across the sea. It’s not economically viable to be doing so.

Which brings me to the third conceptual bump in seeing the West fight in the Ukraine against the dark forces of Mordor Putin’s Russia is that there’s no money in the coffers to sustain this war effort. A lot of the Eurozone and the USA are simply carrying too much debt to finance yet another war (after the squandered expenses of the Iraq misadventure and the mismanaged Afghan misadventure). The Central Banks are tapped out printing money to buy back the crappy subprime debt that needs to get written off. Who are the idiots who are going to line up and buy war bonds to fund this misadventure into the grey zone of history where mighty empires go to die as they dash themselves upon the borders of Russia?

Putin must know all this. So this has to be a bluff. Right? Of course one imagines this is exactly how people felt in the 1930s in the aftermath of the 1929 bust as the world marched to World War II. I can’t believe I’m even writing of this on an ANZAC Day weekend. You’d be worried if you’re the Baltic states and Poland.


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