In looking around a "What if?" moment seems to be arriving.
What will policymakers do as this phase of contraction becomes more obvious?
More of the same?
Or perhaps they have one last trick?
Markets are beginning to suffer central bank fatigue, and now the establishment
is beginning to talk about the wonders of fiscal manipulation.
Many are getting concerned about what policymakers may do as frustration forces
even more desperate measures.
Also, policymakers are fully committed to theories that have been impractical
since they were first confected. The establishment does not understand this
and will not willingly quit - well - policymaking.
Incapable of self-criticism, the only way it will end is to have the public
condemn and then constrain radical central banking.
From around the early 1700s to the 1920s the senior central bank (Bank of
England) dedicated itself to maintaining the gold backing of the currency.
At times of financial distress it was an acute challenge (there was a lapse
of discipline from 1797 to 1819). Eventually, speculative positions in the
markets would be liquidated. This would clear and all would be well. Until
the next outbreak of speculation. Which would be followed by another liquidity
crisis. A hundred years of growing intrusion has not changed the basic patterns
that recur in financial history.
It was widely understood that the ultimate challenge to central banking was
to maintain a sound currency. Also it was widely appreciated that free markets
would provide goods and services better than any other system. Urges to commit
mercantilism were always lurking, but constrained.
Notions about government intervention to make things better have been around
since at least the 1618 Crash. In 1873, the esteemed editor of The Economist
wrote that with the injection of sufficient liquidity the central bank could
prevent a contraction. This has been trashed frequently since. The 1873 Bubble
peaked that summer and crashed in the fall. By 1884 the contraction was enduring
and bad enough to be called the "Great Depression". It ended on its own in
1895.
Generally, intrusion was considered impractical. It was best to let the imbalances
clear on their own. This is still practical, but since the early 1900s a culture
of economic intrusion has been continuously imposed.
Even celebrated, as the pitch has been versatile. Business expansions can
be made better and made to last longer than otherwise. Setbacks need not happen,
but in case they do, the Fed can prevent them from being worse than otherwise.
This ideology was shocked by the severity of the "Great Recession".
The big concern now is not so much about another phase of the contraction
with weakening commodities and dislocated stock and bond markets. It is what
policymakers may do in extreme desperation. Policymaking itself is increasingly
seen as a threat. The irony is that prior to the world of busy-body intrusion
it was widely known that excesses always cleared on their own.
The consequence of the drive for arbitrary perfection is a world of serial
and dislocating bubbles.
The problem with intrusive policymakers is that they don't understand the
self-correcting nature of financial markets. Instead of allowing corrections,
central bankers have been ambitious for constant growth.
Some of the concern is from sources that some years ago became famous for
predicting a "crack-up" bust that would drive gold's price to $10,000. Decades
ago we could find nothing in financial history that would enable the Institutional
Advisors team to seek such fame. Not even half a unit of fame.
We did find that in a typical post-bubble contraction gold's real price would
almost double. This has had a proportionate increase in operating margins for
gold miners, making it a premier industry in a Great Depression.
Now there is the growing dread about what harm inspired policymakers can really
do to the social and business fabric. It is important to understand that the
most intense experiment in authoritarian government has been on for over a
hundred years. The last example ran for over a hundred years and ended in the
early 1600s.
In England, it took decades to complete the Great Reformation with the concluding
step being the "Glorious Revolution" of 1688.
Another severe contraction is inevitable and the ultimate threat from policymakers
(whatever it may be) could be overwhelmed. In the meantime and specifically,
how would even more desperate measures be imposed?
Actually, most ideas about intrusion were imposed in the 1930s.
Banning cash transactions would be disruptive but it might please the governing
classes, briefly.
Price and wage controls would be a natural. These were tried in Rome in the
late 300s to stop government-induced inflation. Even when backed by the sword,
they did not work. They were tried in Canada and the US in the early 1970s.
Then there was the control system with no price mechanism. Called Communism,
it was tried in Eastern Europe and in China.
The latter's historical failures were massive and well-understood. As will
soon be the current experiment in big business and big government, otherwise
known as fascism.
Virtually all of the tools of intervention have been or are being tried now.
But no matter how intense the effort, all they are doing is trying to prove
that correlation is indeed causation.
Fed credit expansion always forces economic expansion.
Except when it forces asset bubbles.
The best way out of compulsive intrusion is that the contraction will hit
all asset classes, from high-end real estate to carbon credits. And fast enough
to completely overwhelm any day-to-day attempts by central bankers to stem
it.
A severe enough break could prompt the general taxpayer to condemn the waste
of money on impractical schemes promoted by so many generations of financial
adventurers.
Forensic accounting and forensic medicine have been around for a long time.
There is a screaming need for forensic economics and forensic policymaking.
