Here’s What Central Bankers Will Do Next

By Bill Bonner, Chairman, Bonner & Partners:

We’ve been meaning to write about what hasn’t happened yet. Not that we claim any knowledge of tomorrow or the day after. But we can look at the present. And here’s a guess about where it might lead.

The middle classes – aka “the voters” – expressed themselves last week. They have been sorely used and they know it.

The biggest money-fabricating program of all time – the Fed’s QE – has done nothing for them. Instead, it has made their lot worse.

Investment in new business output has gone down. Their meager savings produce no revenue. And “breadwinning jobs” are scarce.

For all the talk of an “improving labor market,” there is no sign of it in wages. The typical household has $5,000 less income than it had when the 21st century began.

Cold, Dark and Desperate

Meanwhile, Europe and Japan grow cold, dark and desperate. Last week, ECB chief Mario Draghi announced the central bank would buy another €1 trillion of bonds to try to light a fire under the euro-zone economy.

And Bank of Japan governor Haruhiko Kuroda got out his matches the week before, claiming potentially unlimited tinder.

Can the US resist the worldwide slump?

Our view is it’s just a matter of time before either the US economy or US stock market begins to wobble. We could see the Dow fall 1,000 points or more… or we could hear GDP growth has gone negative… or both. Then what?

It’s a good bet that the Yellen Fed would intervene again – hoping to keep a small problem from becoming a bigger one.

Ever since the 1930s, central bankers have learned that they will scarcely ever be criticized for overreacting. But if they sit on their hands, they will be damned to hell. And ever since Alan Greenspan’s 1987 “put,” the Fed has backed up the stock market with whatever policy it deemed appropriate.

Lower rates? QE? It’ll do “whatever it takes.”

Janet Yellen is aware that the two previous Fed chairmen were hailed for having saved the economy from destruction. She won’t want to be the first to let it fail.

While we are guessing, we’ll suppose each rescue effort will be more costly and less effective than the one that preceded it.

That’s the way “stimulus” works. Like looking at naughty pictures, the first are exciting and titillating. Later, they are just boring and sordid.

Still, a vigorous new response from the Fed would probably produce another rise in financial asset prices. But then what?

Coaxing Stocks Higher

Central bank activism – stimulating credit creation with artificially low interest rates – only works when people see little risk of default or rising rates. But that risk cannot be ignored forever.

It’s called a “credit cycle” for a reason. Rising rates come around sooner or later – often ferociously – after a long period of apparent stability, over-optimism, overpriced equities and artificially suppressed yields.

When that happens, the central banks lose their ability to coax stocks higher with lower rates.

The Fed has been interfering with the credit cycle for the last 20 years. But when it believes it can overturn the cycle for good… that is when it becomes a big loser.

At that point, and it could be months – or years – ahead, we are likely to see central banks become more creative.

What else can they do?

They will still be fully committed to “saving” the economy. When their policy tools fail, they will have to come up with something different.

What? We see three things:

1) Central banks will buy stocks. Japan, as usual, is ahead of the curve.

2) Governments will bring out large fiscal stimulus packages aimed at infrastructure “investments” that are supposed to pay for themselves.

3) Some form of Direct Monetary Funding from central banks will finance these stimulus packages. Central banks will simply “print” the needed funds.

All of these measures are either already in service or much discussed in the leading financial journals. What will they mean to stocks? Bonds? The dollar? Stay tuned…. By Bill Bonner, Chairman, Bonner & Partners.

Stocks are trading at a new record. Works of art hit a new record too. “Hey… you want a wealth effect? I’ll give you a wealth effect!” Read…  How to Commit Financial Suicide

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  14 comments for “Here’s What Central Bankers Will Do Next

  1. Julian the Apostate
    Nov 12, 2014 at 5:58 pm

    You forgot bail-ins and outright confiscation of 401ks;-)

  2. LG
    Nov 12, 2014 at 11:16 pm

    I believe interest rates will shot up to around 6% in the coming months taking the stock and housing market down 50%!
    Ala 1980s.

    • Jungle Jim
      Nov 13, 2014 at 6:26 pm

      I wish I agreed with you. But in the 1980s we had a real Federal Reserve. The Chairman was Paul Volcker. You could hear his balls clank as he walked down the hall. But, the people who’ve replaced him are no substitute.

      QE as bad as it is is not the real problem. The real problem is the ZIRP. It has distorted the entire concept of investment worldwide. Today money scurries around looking for a place to hide. If you doubt that, look at the oil business. Money is being poured into holes that will probably NEVER be profitable merely because there is a potential of return. It’s appalling.

      Whatever their credentials, or intentions, the members of the FOMC are political hacks who will do as they are told by their real masters, the banks.

  3. Vespa P200E
    Nov 12, 2014 at 11:24 pm

    The equity, bond and property markets are like drunkards/drug addicts begging for 1 more drink/heroine from global CB cabals to lengthen their drunken stupor/high rather than face the nasty hangovers/withdrawals and sober up to reality.

    Alas the CB cabals may have to really print the FIAT currency well beyond QE hoopla as last resort but it is mere extension of house of cards falling down with streets filled by people protesting unbearable inflation with the police states clamping down and declaring martial laws. Yep that’s what happens in banksters control the world and just may usher in some kind of savior leader of the world as prophesied by Book of Revelation.

    Brave new world indeed…

  4. NotSoSure
    Nov 12, 2014 at 11:51 pm

    Hm, don’t know. I am betting this prolonged QE business must have hurt banks’ trading profits as well. They too want to start trading again, and maybe that will be the catalyst.

  5. matt
    Nov 13, 2014 at 3:35 am

    When you strip away the feds b s , the manipulation of GDP it is and has been negatives for over a year . The crap they use for detereming it? Has anyone really looked at it /? Come on people! Itune sales , investments, Airplane sales? Who in the right mind can afford a airplane? CD sales The list of stupid stuff goes on and on

  6. dc.sunsets
    Nov 13, 2014 at 6:24 am

    This is simply restating the obvious, but misses one key point.

    Central banks have enabled the creation of more IOU’s (debt instruments) than in all prior history of Mankind, raised to a large exponent. Each and every one of these IOU’s is counted as someone’s wealth, and with interest rates near zero, each is deemed worth basically face value.

    We now have an OCEAN of all this “wealth.” It’s “value” rests on two false assumptions, 1) the issuers of all those IOU’s can make good on repayments and 2) the value returned will not be debased.

    Central banks have announced, OPENLY, that neither assumption is valid. By directly buying financial assets with “money” they create from nowhere they are openly debasing the value of the currency, and the main borrowers in the world’s economies never “pay off” debts, they simply roll them over perpetually. This is Ponzi finance 101.

    Today, all that stands between placidity and panic is inertia. People look to the right and left and see their neighbors, coworkers and “the experts” nodding at the Emperor’s fine new clothes, then they scratch their heads and watch his rolls of fish-belly white fat jiggle when he rides by on his horse. They still shrug their shoulders and cheer. Group-think is a POWERFUL tool of inertia.

    Eventually the group-think spell will be broken, and recognition of self-evident truth will spread like a firestorm through the minds of people. Placidity will turn to all out chaos.

    • brian
      Nov 13, 2014 at 9:51 am

      I guess that as outsiders to all this then, you and I could deduce that IF the central planners are rational, they are wagering that the group-think spell they are weaving will prove itself stronger than it has in the past and will not be broken so easily.

      With all the hours many of us sit in front of televisions, movie theatres, touch screens and other forms of “entertainment” and media it is almost as if we as a species have been trained to suspend disbelief, view reality as more malleable than it really is and come to the false view that living on planet earth requires so little effort from us only for the fact that we allow some self appointed others to just take care of things.

  7. Julian the Apostate
    Nov 13, 2014 at 6:27 am

    While I don’t share Vespa’s faith his point is well taken. I’ve long felt Obama to be a Von Hindenburg or Kerensky character. We all know who followed them. However, the Framers knew this moment would come. We are different in that we are an armed society and an armed society is a polite society. We will not go quietly into that dark night. The Japanese did not attempt an invasion of the mainland because of it. “Be like the promontory against the waves continually crash, but it stands firm and tames the fury of the water around it”-Marcus Aurelius

    • brian
      Nov 13, 2014 at 9:43 am

      While I do not share your faith in the strength of the American people, your point is well taken.

      Please remember, that although we as Americans have managed to retain some of our God given rights, we have completely failed for running decades, if not over a century, as a nation of people, to live up to the burden of liberty. Generation after generation has been led to convince itself or has otherwise been swindled into ceding more and more of the burden of its liberty onto the shoulders of others.

      One can churn through the reasons, justifications and explanations all the live long day, but at the end of the day the framers had it right when they simply pointed out that an immoral society cannot govern itself and a nation of people incapable of living up to the tasks necessary in maintaining this republic will inevitably loose it completely.

  8. Julian the Apostate
    Nov 13, 2014 at 6:40 am

    “Ordo ab Chao.” Masonic motto

    • brian
      Nov 13, 2014 at 9:57 am

      This then begs the question, is such a motto merely a motto or is it a mantra?

  9. brian
    Nov 13, 2014 at 9:31 am

    Its not really all that complicated when you boil it down. The name of the game is confidence, and there is no better way to gain peoples confidence than to force it through dependency. Expect more and more assaults on common sense, self reliance and liberty. Expect more and more clumsily tongue wagging and deceptively worded calls for “measured actions”, “sustained efforts to relieve”, “disciplined fiscal prioritization” and “appropriately effective implementation of stability supporting controls”.

  10. Julian the Apostate
    Nov 13, 2014 at 3:56 pm

    The reason I threw out ordo ab chao is because it is the nature of the universe. Mankind has recognized that order dissolves into chaos for centuries, but only recently proved that the opposite is also true. Society oscillates between the two poles. Too much chaos and you cannot live, too much order and you cannot breathe. That is why leaders such as Washington or Augustus Caesar appear ‘spontaneously’ on the scene. No one can know specifically how the future will unfold, but the cycle will repeat. We are in a moment of transition, and to paraphrase G’Kar on Babylon 5, the future will be born in a moment of revelation. We know only that it is always born in pain.

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