There was a very important exchange on CNBS just a few minutes ago in which the following was said (start at about the 5.00 mark if you don’t want to watch the whole thing):
“No central bank has ever exited.”
The answer, it would appear, is “Never.”
And this is something to consider carefully, because markets have a habit of dislocating every four to five years from the bottom of the previous cycle. Oh sure, there are exceptions, but this is the pattern.
Once a central bank “decides” to take extraordinary measures it has given up control to the crack addicts in the capital markets, most-specifically the banks that own it. By taking those measures it has placed its thumb on the scale of financial intermediation and decreed that it “shall be easier to borrow than it should be” in a market economy.
This in turn spurs asset prices to go higher because uneconomic decisions become (temporarily) economic ones. That sounds like a great idea if you’re one of the people who can profit from it, but the premise is a false one, because there is no such thing as a free lunch.
Economies, in short, behave markedly similar to thermodynamic systems when you examine them closely. This is one of the problems with so-called “classical” economists, along with the “New Age” folks. The classical folks are similar to those who proclaimed that the Earth was flat because they couldn’t see a curvature with their naked eye. When it was pointed out that the entire premise of a horizon required that the earth be round, never mind the fact that a flat earth would eventually drain the contents of the oceans and thus result in everyone dying due to a lack of liquid water the people pointing that out were burned at the stake as heretics.
The “New Age” folks are those who posit that they have found a source of perpetual motion — “over unity” energy, in short. But when challenged they are unable to explain where the energy came from. We know, for example, that you can exchange matter and energy under equation E = Mc2 but this requires that you be able to show the loss of “M”. That’s an experimentally-verifiable thing, but those arguing they have found “free energy” seem to lose their minds when you insist that they run their experiment controlling for the mass of reactants and product, and show you where the loss of mass occurred.
So when a Central Bank starts playing with the “price of money” through “extraordinary measures” it boxes itself into an inextricable corner. The laws of thermodynamics state that one cannot obtain a free lunch nor can you break even; everything you do has an inevitable loss associated with it.
Economic pundits always seem to argue that this premise doesn’t apply to “their” chosen endeavor. They do so with the same sort of zealotry that a Priest will argue that God is omnipotent and exempt from the same physical laws. The problem is that both are bald assertions bereft of proof.
In the case of the spiritual world proof is not required; you either believe in it or you don’t, and that’s that. Indeed, the very premise of religion rests on that which you cannot prove; by definition belief in a “higher power” must reach beyond human comprehension.
But no such claim is acceptable in the fields of physics, chemistry or economics. Economists continue to try to claim that compound functions (that is, exponential relationships) will not inevitably run away from one another, yet arithmetic, which is grounded in relationships that are constant says this is impossible, just as thermodynamics says you cannot obtain over-unity energy from any process.
The cheerleaders are out screaming that one should “buy buy buy” — but they have something to sell you. Their interest is obvious; they cannot turn theirpaper profit into realized gain unless someone believes that the price will be higher tomorrow so they can sell.
The obvious conflict of interest is also ignored — why would you sell if you think the price will be higher tomorrow? Yet this is the premise all of these people wish you to believe — that they are willing to sell to you foregoing a certain gain, which they are giving to you instead of keeping it for themselves.
That’s as logical as believing that the world is flat.