23 2 mins 9 yrs

The Chairman of the Federal Reserve has said that money-printing will wind down. The result is massive sell-offs and declining prices today in all asset classes.

This is no surprise.

Investment markets and asset prices have become the plaything of central banks. The trillions that he Fed alone has pumped out must go somewhere. There is some $3.4trillion sitting in bank reserves, going nowhere, but trillions more have gone out, since 2008, into property, stocks and commodities. The result has been gross economic distortions, little open price discovery and even more malinvestments on the back of rock-bottom interest rates.

When the money tap is turned off, or even signalled as with Bernanke’s words, markets fluctuate massively as investors run for cover.

Corrections should have been allowed to happen in 2008. Instead, governments and central banks responded with the greatest exercise in money printing ever, which not only blocked any possiblity of economies correcting themselves, it piled more malinvestments on top of those already existing. All it did was delay the reckoning, because markets always, in the end, win out over government distortions.

Today’s falls indicate that gains across asset classes in the last few years have been down mainly to the money press. When the tap is turned off properly is when we’ll get the real correction. Prices won’t just fall, the queston is by how much. It is inevitable and unavoidable.

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  1. The US markets are down a massive 1%. I have seen two 50%+ declines in the US markets in the time I have been investing. I am sure I will see at least a couple more before I am done.

  2. I was just going to say the same thing.

    We have not seen a massive selloff. This looks like another bad day, but we will leave.

    Don’t freak out over everything for God’s sake.

    The Fed has done a good job since the crisis. Period.

  3. Sorry Pete, this article that I’m linking to isn’t directly on point but it doesn’t fit anywhere else today either. Vanity Fair has an article online that discusses the views some Europeans have about Americans – though written better, the same words, arguments, discussions have occurred here on ATW. Crass, ignorant, soulless, naïve: such is the sneering, infectious, embarrassing view of America among Europe’s most enlightened denizens… http://www.vanityfair.com/culture/2013/07/america-with-love-aa-gill-excerpt

  4. mairin2,

    I meet that attitude all too frequently, – to the point that I rarely mention in casual conversation, that I have lived in America for a lengthy time. It is almost as if I had told them I had leprosy.

    Narrow-minded sneery bigotry doesn’t begin to describe the wide variety of responses.

    They go to Disney a few times, or to New York on a shopping trip, and then think they ‘know’ America and Americans! – all very sad! I almost pity them in their ignorance and their addiction to Coronation Street and the all too realistic East Enders!

    The other side of the coin is that there are some Americans – usually from the NE – who think similarly of their more southerly compatriots.

    As has frequently been said – we are “Two nations seperated by a single language”, I would add that we are also seperated by a quite marked difference in attitude to life in general.

  5. Ernest

    I think that a lot of that regional antagonism / looking down has greatly faded away.

    It did cut both ways too, at one time.

    I spend some considerable time in Pensacola Florida when in the Navy ( or ” LA ” as some called it, for ” Lower Alabama ” way over west in the central time zone / panhandle, and I would hear the odd anti NYC crack. I supposedly did not have a NY accent, so I heard the comments, like when one guy referred to ” Jew York “.

    Then there was the one woman from Oklahoma, when hearing from NY, put arm on my shoulder and said, ashen-faced ” Oh, I’m so sorry “!

    Seems like a million years ago.

  6. BTW, when she said ” I’m so sorry “, I burst out laughing, and she didn’t know how to react.

  7. Hi Ernest,
    You caught me out! I am guilty of that negative northeast attitude toward southerners but more so when I was younger. Part of it is that I grew up in the ‘the country’ (in the NE though) and all I wanted to do was escape my little town. The townees all seem so small-minded and fearful (proud to be rednecks/hayseeds/etc.). I equate southerners with that attitude though I know that isn’t fair. When my daughter worked a few summers down on one of the Carolina beaches my only fear was that she’d come home with ‘one of them’ and never see the rest of the world. In my younger days, on road trips to Georgia, Kentucky, and Tennessee, my girlfriends and I used to stop and ask directions (when we weren’t lost) just to hear people talk and then we’d imitate them and laugh our way to the next town. I’m feeling so ashamed now…;-/ It used to be like that in Ireland too…lots of joking about culchies. And OMG those Brooklyn accents really grate on the ears…;-P

  8. Some Americans view Europe as a tired and exhausted culture that has lost its soul. Last century they almost battered themselves into non-existence and had to be saved by the USA. This century they cannot manage themselves well and have an identity problem. There have been very few good new ideas out of Europe in well over a century. For Americans Europe is a place to study the past, not be enlightened.

  9. New Yorker

    What new idea has America had over the past 50 years? Sarah Palin’s assemblage of tweets?

    The idea that corporations are people too, with political rights?

    The ever expanding list of grievances by gun lunatics?

    Which continent has the gleaming 200 mph trains everywhere you look, and which one has the bridges that fall down?

    I can argue either side of that argument.

    Europe has a lot of issues, but we can match them, big time.

  10. Phantom

    The US has an admirable record on new ideas, especially in science and technology. The best minds in Europe usually settle in the US. Trains are not new ideas.

    The best things in Europe are older things, including ideas. I believe the US remains the best place for new ideas.

    I agree that we have some dummies that have stupid ideas, but the US was the birthplace of democracy and generally leads the way in its good practice.

  11. In the modern era the US is the birthplace of democracy. There are no other contenders.

  12. You can make the case that democracy only started in the US in the post Lincoln / Civil War era.

    How could it be democracy when slavery was practiced in a large scale before then?

    Same deal with the Greeks back then.

  13. Also, in the pre Civil War era there were massive ethnic cleansing of Indians, etc.

    That was no democracy.

    Abraham Lincoln was the one who estabished democracy in the US. Can we agree on that? The real founding father.

  14. The Deputy Governor of the Bank of England said last week that the greatest threat to the world economy was the massive bubble in government bonds, fuelled by money printing on a massive scale in the last three years. It’s surprising that his warning got so little attention.

  15. Sorry, it wasn’t the Deputy Governor, it was director of financial stability, Andy Haldane. Here is what he said to the Treasury select committee:

    “If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally.” he said. There had been “shades of that” in recent weeks as government bond yields have edged higher amid talk that central banks, particularly the US Federal Reserve, will start to reduce its stimulus. Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history,” Haldane said. “We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.”

    You read it here first.

    Link here

  16. And some more:

    “The Bank of England later issued a statement, describing Haldane’s remarks as his “personal view” and stressed that if it raised interest rates – stuck at record lows since March 2009 – too quickly the consequences might be severe. “Any attempt to return interest rates quickly to more normal levels would recreate recession conditions,” the Bank of England said.

    Haldane said the FPC was on alert to any bubbles created by the help to buy mortgage guarantee scheme for first-time buyers and house movers, stressing the scheme should be temporary. Referring to the US, he said: “Fannie Mae and Freddie Mac were temporary schemes and 75 years later they were still in place and blowing the world up.”

  17. Peter –

    Yes, I saw Haldane’s statement. It’s one of the most significant statements of recent times, despite the anodyne language. It’s hugely significant. It’s also an admission that the bond market and government spending is driven by funny money and a massive high alert. I think in the end Haldane is putting down a marker for when it blows so he can say he issued warnings.

    I was going to post on it, but then blew out my cheeks and wondered why I should bother. Maybe ATW had gone dysfunctional again around then.

  18. Pete

    Yes, but the next big thing will be the melt-down in China:

    “What is the significance of the recent turmoil in China’s money markets, the sharp reduction in the flow of credit between banks and the rising cost of loans between banks? Its trigger has been a tightening of credit provision to the financial system by the Chinese central bank, the People’s Bank of China. But its more fundamental cause is the perception – apparently shared by the central bank – that Chinese banks and so-called shadow banks have lent far too much, too recklessly over the past five years, and that a reckoning may loom.

    There are two implications.

    First that the Chinese authorities have lost one of their most important economic levers, which they have deployed with powerful effect since the 2008 global financial crisis – namely to create vast amounts of credit to fund investment, and stimulate economic growth to offset deflationary forces imported from the rest of the world.

    Or to put it another way, the widespread recognition that excessive amounts of debt have been accumulated by speculators, property developers and local governments, inter alia, makes it much riskier for the central bank to continue the recent policy of stoking up an investment boom each time there is a blip in China’s growth.”

    It’s being so cheerful as keeps me going.

  19. Yes, money-printing will soon hit the buffers. We have had (at least) two decades of governments living beyond their means (borrowing every year) and economies living beyond their means (trade deficits every year). The main culprits are the USA and the UK, but there are many others. In desperation, they have resorted to printing money to keep the train on the tracks. But the buffers are getting closer.

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