Why Can’t It Work “This Time?”

by Chris

If the question is, “what can’t it be different this time?” my answer is that it’s never different this time.  [Note: To provide a more complete answer, I’ll pull a few charts from Part II of this report.]

At least that’s history speaking.  All throughout history it has never been different, always the same.

Bad economic decisions are always bad.  Money is just a marker for things, but it is not reality itself.  So, if you have a bad idea and it loses more markers than it makes, then it’s not a good idea.

I don’t care if the markers are conch shells or digital fantasy bits.  That’s just always how it has worked.

If the question before us is if the laws of economics have been repealed in some fundamental way, the answer has to be definitively “no.”  Either efforts produce more value than they consume, or they do not.  Imperfect though it is, the money-marker system is our way of keeping score on that front.

The gold standard was a more immediate and direct way of keeping score.  It worked pretty good.  But humans being what we are, many disliked that system because it was rather immune to cheating, hiding, stealing and lying.

Debt-based money offered far more opportunities to concentrate wealth, cheat the little people and small countries, while pushing the bills off to people as-yet-unborn.  Great system!

The problem with such a system is that it requires ever more debt.  One way to allow that is to continually drop the rates of interest.  Another way would be to allow a debt jubilee.  For a variety of reasons, most of them related to the idea that the holders of debt are the same people who both make the rules and would eat the losses in a jubilee, that’s not really in the cards.

Maybe, but not likely.

So we got this:

Yes, driving interest rates to zero allowed a lot more debt accumulation than if they had remained higher. This was true the world over and there are still $6.5 trillion of negative yielding sovereign bonds out there.

Along the way the savers and pensions got absolutely ruined by this, but that’s a different story.

At any rate, now that a 30-year regime of ever lower interest rates has drawn to a close, (which could change, but for now that’s the plan), it’s time to ask “what’s next?”

In this next lesson, we discover that debts really DO matter.  Of course they do, otherwise we have to concede that the basic economic principle of getting a return for one’s effort doesn’t matter.  Try telling that to a cheetah that’s failing to capture any prey.   We might as well concede that perpetual motion energy machines exist without any working models to point to.

For the same reasons that Dave has articulated above I don’t consider Japan a great model here. We’re going to find out how Japan’s demographics, export challenges and 100% reliance on imported oil collide with their expansionist monetary policies at some point over the next few years.

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For now, let’s turn the fact that propping everything up has been the Federal Reserve, et al., dumping thin-air money hand over fist into the “markets” in four protracted periods over the past ten years:

All of these central banks are now publicly committed to ending QE.  They cannot change that for anything less than something major.  We can quibble over the meaning of “major” but not the fact that they are currently in word and deed dedicated to finally ending QE.

Let’s also consider that interest rates are now rising and that equities have suffered badly each time in the recent past when interest rates were hiked.

Those three red circles can be mentally lined up with the equity behaviors below.  It’s only the thrid red circle that now stands apart (so far).

I really have a hard time looking at that last chart, above, and finding any explanation for why ‘this time is different.’  Looks like “more of the same” to me.  A lot more.  Didn’t work the first two times, why should it work this time?

Why did equities do so poorly?  Because they were inflated on the backs of credit bubbles.  These were not business cycles.  Credit cycles go higher and crash deeper.  At least the last two have.

So what’s possibly different about this third one?  Have “they” finally figured out how to prevent crashes and the downside of credit cycles?    Maybe.  Here we’d have to consider:

  • Behind the scenes market control via such mechanisms as providing Citadel with a Fed credit line that doesn’t have to be paid back in the event of losses or the Fed using VIX manipulation to drive market moves.
  • Coordinated central bank action at key moments (say, the SNB buying the FAANGs at key moments, the BoJ buying eMinis at others…)

But even for such things to work the world has to be somewhat stable.  There cannot be any major wars or squabbles going on.  China cannot be dumping US Treasuries and Russia cannot be waging electronic war against financial markets, let alone either running about sinking ships in the ocean or lobbing scary missiles.

Further, the price of oil cannot spike to any unreasonable levels which I will define here as over $100/bbl without causing some serious distress at the edges.

Yes, zero percent interest rates are fun and games, but they do not exist in a vacuum.  They cannot make super-expensive oil any more palatable.  They cannot fix a failed harvest or a shortage of cobalt.  They are purely a human construct as artificial as a botoxed forehead.

Has this gone on longer than I thought? You bet. I thought ‘we’ were smarter than this. What’s my big concern? That the longer this goes on the worse the eventual fall. 2000 was bad, 2008 was worse and 20?? Will be the worst of all.

Of course “they” will not admit defeat and will almost certainly try more shenanigans in the future.

Daniel Lacalle said it well in this recent piece:

If we look at the 180 most important economies in the world, only six have in their estimates of 2018, 2019 and 2020 an evident improvement of their fiscal and commercial imbalances. In other words, almost no government in the world plans to reduce the rate of debt increases. If we look at the corporate sector and families, the situation is much better, because private debt is somehow more contained -except in China- and especially in terms of solvency, compared to profits and assets.

Given that it is more than likely that central banks will continue to Japanize the economies through financial repression, these “red cards” are becoming more frequent and, in addition, there comes a point at which the saturation of monetary and debt measures stops working even as a placebo.

Governments and their central banks always start from a wrong diagnosis. They always believe that the problems of their economies are due to lack of demand and that turmoils are caused by external enemies, not by their policies.

By appointing themselves as a solution to the problems they create, they only perpetuate the imbalances, and the solution is increasingly complex

Above all, the tools that central banks and governments have always used (lowering rates, increasing liquidity and increasing spending), generate very evident diminishing returns. In the past eight years, for every $1 of GDP, there were $3 of debt created.

This week’s tantrum will probably recover because the incentive to continue inflating the risky assets is high. But we already have had several warning signs and we keep ignoring them . Even worse, episodes of volatility are being used to increase imbalances and generate further problems in the long-term.

When societies are based on incentivizing spending and debt and not saving and prudent investment, we are always going to throw ourselves into a bigger problem based on the conviction that nothing is happening. When it bursts, governments and central banks will blame anyone except themselves. And repeat.


Either things are truly different now, or they are not.  While I may be wrong, I am not confused; it’s not different this time.

Grotesquely extended and deformed, yes.  But not different.



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