We’ve endured quantitative easing, tightening, loosening, accommodative, restrictive…
Drop interest rates too far? Property prices and sharemarkets BOOM!
Don’t act fast enough, inflation kicks in…then interest rates,…BOOM! Markets collapse.
Is this a sign of good stewardship, or this a sickness?
We’re at the knife-edge of the most anticipated market correction of all time. The only reason nobody cares, is because they still have a job.
When a recession is the cure to the sickness (inflation), being able to retain our jobs may actually be a bad thing though. We’re delaying the inevitable. After all, the main reason interest rates are able to go as high as they are, is because the unemployment data is so strong. This is happening around the world.
Choose your adventure: Rising costs continually, or less income for a season?
So what happens next?
Well, and this is coming from someone who didn’t think rates could get this high so fast, interest rates may indeed have to rise even further. (Until something breaks, explodes, or collapses).
So markets shall fall further? Murphy’s Law you’ll take a punt, and it’ll be the opposite. I’d be careful to be certain on any direction markets may take for a season. Shares, bonds, property – no matter the market, things could get worse (and it might), before it gets better (and it will). The economy (and financial markets) could get stressed in the process but if all goes well, it won’t be fatal. Put a boot on the neck right up to the edge, then release. That’s kind of the whole point. Paying the piper now, may be the lowest cost strategy. I find myself pondering if a recession during the lockdown would’ve been better though.
Interest rates have to rise to remedy the damage caused by a Central Bank policy error.
Is this a sign of good stewardship, or this a sickness?
Is the Reserve Bank of New Zealand, and other Central Banks around the world, suffering from a funny-tummy? Has it been affecting their judgement, or are they on to some killer new science we just can’t understand yet?
Let’s try and figure this out if we can. Everyone’s primed to to listen ‘to the experts’ right now, but attempting to control the global financial system? Is it even possible?
Diarrhoea is a condition in which faeces are discharged from the bowels frequently and in a liquid form.
Monetary – Diarrhoea is what happens when the global banking system can’t keep its liquidity going to where it ought to go.
Now there’s stories coming out that the Swiss Central Bank received $9bn from the US Fed on behalf of nine financial institutions recently. Italy, pension funds, war funding? There’s a few fires being put out at the moment and I wonder when faith in the markets may begin to fail.
It’s kind of like the movie the Big Short, just in a different part of the financial system. The small holes in the dike are being plugged up but we’re running out of thumbs. If this decreases the banking appetite to lend (aka counter party risk increases), we have problems. Credit constipation can only last so long though. Pressure builds up, which inevitably shows up elsewhere.
When you’ve been told the banking system works a certain way, it’s hard to see what’s going on. It’s impressive how Central Banks can steer economies by influencing financial markets. For the most part, we assume they’re in control and I think so far, financial markets have a degree in confidence in the bankers.
This is an important, although a really hard area to understand. What happens in the financial system, can affect every part of our lives, and in a really significant way. From here on in, investing boom times may be more severe and sustained, as a byproduct of a financial system trying desperately to save itself. There could be ways we lose out in the world to come, but if we hold assets inflated by continual money creation, we should be fine. In fact, if that’s ever untrue for too long, then we have far more more to worry about. Either way, there could be ways to factor this into your own master plan.
So am I suggesting Central Bankers worldwide [who in theory run the world] are doing a bad job?
I’d struggle to do any better, but I think they’ve shat themselves.
“a range of symptoms including diarrhoea and vomiting”
Ironically, one of the symptoms of diarrhoea, is in fact more diarrhoea!
Monetary intervention was always going to require further intervention. We’ve travelled too far to get back to the free market, and any further toward centralisation within global banking, may yield marginally less benefit for the energy it consumes.
No matter how smart we think we are, real life is far too complex for humanity to control it. This applies to the conspiracy theorists and Government-pets alike.
Let’s go a bit further through this crap analogy though. Perhaps ‘faeces’ is analogous to surplus new currency created post-pandemic which brought the wrath of inflation.
Think of this as a borrower: We’re being hit right now with rising costs, AND higher interest rates, because back in March of 2020, the Reserve Bank of New Zealand made a policy error.
Yes, a war and a virus didn’t help on the supply side, but how easy we forget what came first. Stoking our demand (low interest rates) right at the time supply would inevitably become restricted (lockdowns)? Instead, Central Banks were ‘justified’ in making that call?
*It should be noted in around 6 months prior to March 2020, the US Fed was already engaging in significantly higher rates of quantitative easing.
Inflation is just one of the side effects of too much new currency [which stokes demand, which, when mixed with a falling supply of goods and services to buy, forces prices higher]. Inflation is what happens when too much money, chases too few goods and services. This is Milton Friedman’s conclusion, and who causes it again?
As the supply of money rises, the global financial system needs more new money just to ‘keep it together’. Refer to the Dollar Milkshake Theory by Brent Johnson if that’s of interest. Currency creation must continue at an accelerating rate. It is the way. The die is cast. It’s like that chicken you really shouldn’t have eaten. We instinctively know it ends with a mess.
Let’s simplify this.
If you borrowed to buy your home, that money didn’t exist before you summoned it from the bank. Your act of borrowing is in a sense, inflationary. You and I are guilty then, along with the bank, of creating money out of thin air (this is contrary to the intermediation and fractional reserve theories of banking).
Banking from a global perspective sounds like a shell-game. Maybe, but it’s also essential we don’t stop believing those in charge, aren’t full of crap. The way the thing seems to work, is that it depends on new currency creation though. Like the Tin Man needing another drop of oil after the rain, things can seize up occasionally.
Bring it back to the value of your own home:
Is it the economy bringing down the value of your home right now, or the value of your home bringing down the economy?
When the housing market slows, new credit creation slows. This creates stress in the system, as there’s less money moving into parts of the economy that once had it plenty. You can see this happening in the property industry now. Given property is one of the main sources of new credit creation in the country, this will no doubt hit small to medium-sized business, which employ the vast majority of New Zealanders. Prepare for a wall of redundancies (hard to believe this right now!).
Let’s get back to the explosive diarrhoea metaphor. Indirectly, Central Banks (like the Reserve Bank of New Zealand) allow for, or facilitate the creation of new currency through our retail banking system. Remember this as you consider the pain caused by less credit expansion.
It’s easy to think it’s all over then in some ways, but these things always come in waves. New currency creation must continue. This is a worldwide phenomenon.
War’s expensive, re-building’s expensive, getting off fossil fuels… phew! There’s plenty to soak up new money creation outside of property and shares (for a season).
The thing with losing your bowels in a most uncontrollable fashion, is that no matter the strength of your sphincter, it’s coming out somehow, sometime, and somewhere. Most likely with a vengeance.
It’s probably nothing-burgers in terms of a theory, but war, social justice, and environmental concerns, provide yet another sinkhole for complicated leveraged products to find a home in. In a Ponzi-scheme, the success of the venture rests on ever-increasing new members taking part. This is far too simplistic an explanation around how the global banking system works, and it’s not even that accurate I know. Some would no doubt will claim it’s racist, but hopefully it’s just evidence to support the case of a genuinely open mind.
Now, why all the talk of poops, recessions, inflation and bankers? Simple: I’m concerned we may only be at the early stages of a ‘great cost’ to pay, and there’s a chance this could influence the way we invest from here.
2.5 years ago we were ‘saved’ from a recession by Central Banks. All over the world. We’re just starting to see the cost.
And that all brings me to this:
Will interest rates go higher, then stay there for longer?
Can’t say, but this I could suggest: Things are already starting to break in so many parts of the world. At just the right time, when the world needs a shot of courage and Frankenstein’s monster needs another jolt, Central Banks will reverse course and interest rates will drop again. We need to be certain of this if we’re trying to invest for your future.
Quantitative tightening is as credible as transitory inflation. Just because bankers can’t control their bowels (aka monetary policy), doesn’t mean the show won’t go on. It will.
So if things get a little scarier, then they get better, what’s a rationale response?
The largest ponzi-scheme of all time is far too big to fail.