When Central Bankers Rule The Earth

Eight years ago, the US economy started to blaze a trail through uncharted territory.

Soon, the rest of the world was following.

Not much different than the Pilgrims leaving Europe for the New World, or the pioneers headed West, with the near-collapse of the financial system, nation's set out on a new economic path that at once was necessary as well as fraught with the dangers of the unknown.

We have left the world where financial institutions run the day to day activities of free markets. Those days are in the past.

We have arrived where central banks rule the world.

While this isn't the end of our journey, the repercussions of having free markets artificially sustained by national monetary policy is becoming clearer.

Beyond the Point of No Return

There are two things moving the markets right now: oil prices and the US Federal Reserve.

Oil prices are essentially a 'groupthink' indicator on how the global economy is doing. If oil is rising, stocks rise exuberantly, assuming the economy is rebounding. If oil is falling, the economy is losing ground and stocks sell off, hard.

The problem is, stocks are trading this way daily, sometimes hourly. Volatility is extreme because no one wants to be caught holding a position that may head south quickly, especially fund managers and institutional investors that make up most of the trading volume.

This hurts the individual investor more than the big traders. It hurts pensions, 401(k)s, IRAs, and CDs. Simply put, this hurts the individuals who drive the US economy buying, making and selling real goods.

This is why it's crucial that you stop listening to the noise about stocks and oil and understand what underpins all of it: the central banks' role in shaping our economy and the world's economy.

Our New Central Bank World

We are beyond the border of normalcy. We are bushwacking through new territory and no one knows how this will end.

But we do know where we are, relative to where we've been.

For many years, the US put in place 'quantitative easing' (aka QE) which was the Fed's first attempt to re-inflate the economy. But as it continued this, and other major countries joined in, the financial system got used to this 'financial system welfare' and readjusted its business to game the new system.

Now, all these financial institutions are living off the central banks' easy money policies and threatening that if they change their ways, they will collapse. The same argument they made initially – except it's 8 years later. This is the ulitmate realization of artificially saving the financial markets in 2008.

The problem for the central banks is that they really can't do much more to try to reinflate their economies. And knowing what they know, they have no desire to let the free market sort it out because the system would collapse. So, they're pumping air in a tire that still has a hole.

Buzzwords to Know: ZIRP and NIRP

After 4 rounds of QE, the Fed and others went to ZIRP – zero interest rate policy. This meant banks could borrow from the Fed, for example, at 0%. The goal was to get banks lending money again to small businesses and individuals.

But the banks decided that was too risky, so they simply bought US Treasuries and threw some money in the markets (hence the strong dollar and higher stocks for no reason). And continued to make it nearly impossible for any company without excellent credit to borrow at a low rate.

Bear in mind, if you're borrowing at 0% and buying US Treasuries yielding 2%, you've doubled your return.

The latter stage of ZIRP also brought on the junk bond craze, when banks started lending at high rates to lower credit companies. But that only works when an economy is on a growth track.

Growth in the US is a myth perpetrated by the politicians, bankers and corporate leaders to keep consumers cheery and buying.

Now, the junk bond market is collapsing like oil, and the institutions are moving their money back to Treasuries.

ZIRP has failed.

The next step is NIRP – negative interest rate policy. And it's already a fact in Germany, Japan, Sweden and many other nations.

What NIRP means is, companies pay the central banks to keep excess reserve deposits with the central banks. The goal here is to force the financial institutions to lend money to boost the economy and penalize them for not doing so.

What it shows is the banks are unable, even 8 years later, to survive without significant help from the central banks. The financial institution is now built around the central banking system's generosity.

There is a growing amount of discussion in the US about moving to NIRP. But the real question is, whether it's even feasible – or legal.

But the biggest issue is, all the money in money markets (a valued storage spot for individual and institutional short-term cash) would be hurt by NIRP and that would have significant negative repercussions across all markets and economies.

The junkie has a gun to the head of the dealer. Again.

NIRP in the US would be seismic.

As long as the global financial and industrial institutions are more concerned with their own viability than taking their place – and the ensuing responsibility – in the economy, most individuals are far up an unknown creek without a paddle and the sun is setting as it begins to rain.