How can central banks "retrain"
participants while maintaining their extreme policies of stimulus?
Human
habituate very easily to new circumstances, even extreme ones. What we accept as "normal" now may have
been considered bizarre, extreme or unstable a few short years ago.
Three
economic examples come to mind:
1.
Near-zero interest rates. If someone
had announced to a room of economists and financial journalists in 2006 that
interest rates would be near-zero for the foreseeable future, few would have
considered it possible or healthy. Yet now the Federal Reserve and other
central banks have kept interest rates/bond yields near-zero for almost nine
years.
The Fed has raised rates a mere .75%
in three cautious baby-steps, clearly fearful of collapsing the
"recovery."
2. Massive
money-creation hasn't generated inflation. In classic economics, massive
money-printing (injecting trillions of dollars, yuan, yen and euros into the
financial system) would be expected to spark inflation.
As many of us have observed, "official"
inflation of less than 2% does not align with "real-world"
inflation in big-ticket items such as rent, healthcare and college
tuition/fees. A more realistic inflation rate is 7%-8% annually, especially in
the higher-cost regions of the US.
3. Stock
markets are soaring but sales and profits are stagnant. Everyone knows
central banks are still pumping billions of dollars per month into the
financial system, and this (coupled with central
bank purchases of stocks and bonds) has been pushing
stocks sharply higher for the past 9 years, with only a few hiccups
along the way.
All of
these extremes generate mal-investment, diminishing returns and perverse
incentives for ramping up unproductive
and risky speculation, leverage and debt. Yet the central banks have trapped
themselves in this risky trajectory because they've pushed the accelerator to
the floorboard for 9 years. Any extreme held in place for 9 years has long
slipped from "temporary" to permanent.
Participants have now habituated fully to central banks extreme
stimulus of financial markets, and in a sense they've forgotten how to price
assets based on real-world private-sector measures.
How can central banks
"retrain" participants while maintaining their extreme policies of
stimulus? The only possible answer is: they can't.
See Chart:
In the source-art below
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