Much of the supposedly godlike power of central banks is participants’ faith in their powers to control not just finance but the real world that can be leveraged by finance.
The Grand Narrative of the global economy since the 2008 financial meltdown has been: whatever the problem, zero interest rates and more credit will fix it. Too much debt? Zero-interest rates and more credit will fix that. Government spending far exceeds tax revenues? Zero-interest rates and more credit will fix that. Economy sluggish? Zero-interest rates and more credit will fix that. Few jobs being created? Zero-interest rates and more credit will fix that.
Had a bad hair day? Zero-interest rates and more credit will fix it.
Implicit in this narrative is the notion that there are no hard limits on credit or central bank money creation. If creating $1 trillion in new credit-money and pushing it into the hands of financiers doesn’t do the trick, then push $2 trillion more.
Equally implicit is the assumption that the central banks repressing interest rates and creating trillions of dollars out of thin air can control any blowback or unintended consequences triggered by the free money for financiers tsunami. The central banks implicitly claim to be Masters of Universe: not only are there no hard limits on zero interest rates or nearly unlimited monetary heroin, there are also no limits on the power of the Federal Reserve and other central banks to bend markets and behaviors to their will.
These implicit assumptions have fostered a quasi-religious belief in the unlimited powers of the central banks and the freshly created credit they issue.
In other words: there are no hard limits on central banks or credit creation. If central banks want to keep interest rates at near-zero, they can do so with no limit. If they want to push the stock market higher they can do so with no limit.
My point is that manipulating markets strips markets of price discovery of assets and risk and the feedback that enables markets to recover equilibrium; decisions made when risk and price have both been suppressed or hidden by manipulation are necessarily catastrophically mis-informed.
But that is only one hard limit on central banks’ supposedly unlimited power to mold the world to their liking with unlimited monetary heroin: there are others. One is energy: central banks can create more credit with which to buy energy, but they cannot create more energy. Stripped of artifice, all central bank credit can do is bid the price of energy up to the point that only those with access to central bank free money can afford it.
When energy markets tighten up, free money for financiers will only exacerbate the inequalities of energy access and consumption; zero-interest rates and monetary heroin can’t and won’t stabilize access to energy or the extraction of more energy.
Another hard limit is leverage. Zero-interest rates and free money for financiers can push leverage higher, so every $1 in cash supports $25 in credit and $100 in derivatives, but it doesn’t stop the reverse leverage when the collateral declines in value: if the collateral underlying a bank that is leveraged 25-to-1 declines by 5%, the bank is insolvent.
As longtime correspondent Harun I. explained in Resolution #1: Let’s Call Things What They Really Are in 2014 (January 15, 2014), the Federal Reserve is itself leveraged 72-to-1.
Issuing more credit at zero interest does not increase the value of collateral. The only way to keep the value of phantom collateral rising is to inflate asset bubbles, one after another.
But inflating asset bubbles by injecting unlimited credit into markets is not a game without limits; indeed, recent history has shown that bubbles are intrinsically unstable and they deflate violently due to internal dynamics that cannot be controlled by central banks issuing more credit at zero interest. Reduce complex systems’ feedbacks to amonoculture or single input and you doom the system to collapse.
A third hard limit is the political loss of faith in the godlike powers of central banks.In the moment, it seems as if central banks have had their way for six years, and there is no reason not to believe they will have their way for another six years, or sixty years.
Serial bubbles that deflate violently, rising wealth inequality driven by free money for financiers, the crippling of market dynamics, including the markets for energy, risk and capital, the extraordinary increase in systemic leverage based on phantom collateral–any one of these has the potential to push the number of people opting out of “the central bank and state have godlike, unlimited powers” faith above the Pareto Distribution tipping point, where the vital few 4% influence the 64%.
In other words, much of the supposedly godlike power of central banks is participants’ faith in their powers to control not just finance but the real world that can be leveraged by finance.
Once this belief fades, so will the powers of central banks.
As I noted in The Coming Crash Is Simply the Normalization of a Mispriced Market, this line from songwriter Jackson Browne captures the false assumption of those who believe central banks can stave off crashes, not just of assets but of faith, forever: Don’t think it won’t happen just because it hasn’t happened yet.
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