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.
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