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Global Central banks’ reputations are on borrowed time.
ALL of the so called, “economic recovery” that began in 2009 has been
based on the Central Banks’ abilities to rein in the collapse.
The first round of interventions (2007-early 2009) was performed in the
name of saving the system. The second round (2010-2012) was done because it
was generally believed that the first round hadn’t completed the task of
getting the world back to recovery.
However, from 2012 onward, everything changed. At that point the Central
Banks went “all in” on the Keynesian lunacy that they’d been employing since
2008. We no longer had QE plans with definitive deadlines. Instead phrases
like “open-ended” and doing “whatever it takes” began to emanate from Central
Bankers’ mouths.
However, the insanity was in fact greater than this. It is one thing to
bluff your way through the weakest recovery in 80+ years with empty promises;
but it’s another thing entirely to roll the dice on your entire country’s
solvency just to see what happens.
In 2013, the Bank of Japan launched a single QE program equal to 25% of
Japan’s GDP. This was unheard of in the history of the world. Never before
had a country spent so much money relative to its size so rapidly… and with
so little results: a few quarters of increased economic growth while
household spending collapsed and misery rose alongside inflation.
This was the beginning of the end. Japan nearly broke its bond market
launching this program (the circuit breakers tripped multiple times in that
first week). However it wasn’t until late 2014 that things truly became
completely and utterly broken.
We are, of course, referring to the Bank of Japan’s decision to increase
its already far too big QE program, not because doing so would benefit the
country, but because it would bring economists’ forecast inline with governor
Kuroda’s intended inflation numbers.
This was the “Rubicon” moment: the instant at which Central Banks gave up
pretending that their actions or policies were aimed at anything resembling
public good or stability. It was now about forcing reality to match Central
Bankers’ theories and forecasts. If reality didn’t react as intended, it
wasn’t because the theories were misguided… it was because Central Bankers
simply hadn’t left the paperweight on the “print” button long enough.
At this point the current financial system was irrevocably broken. We
simply had yet to feel it.
That is, until, in early January when the Swiss National Bank lost
control, breaking a promise, and a currency peg, losing an amount of money
equal to somewhere between 10% and 15% of Swiss GDP in a single day, and
showing, once and for all, that there are problems so big that even the
ability to print money can’t fix them.
Please let this sink in: a Central bank lost control last month. This will
not be a one-off event. With the Fed and other Central banks now leveraged
well above 50-to-1, even those entities that were backstopping an insolvent
financial system are themselves insolvent.
The Big Crisis, the one in which entire countries go bust, has begun. It
will not unfold in a matter of weeks; these sorts of things take months to
complete. But it has begun.
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