ARTICLE

Three Crazy Things We Now Accept As "Normal" For The Economy

News Image By Charles Hugh Smith/Activist Post February 13, 2018
Share this article:

Humans habituate very easily to new circumstances, even extreme ones. What we accept as "normal" now may have been considered bizarre, extreme or unstable a few short years ago.

Three economic examples come to mind:

1. Near-zero interest rates. If someone had announced to a room of economists and financial journalists in 2006 that interest rates would be near-zero for the foreseeable future, few would have considered it possible or healthy. Yet now the Federal Reserve and other central banks have kept interest rates/bond yields near-zero for almost nine years.


The Fed has raised rates a mere .75% in three cautious baby-steps, clearly fearful of collapsing the "recovery."

What would happen if mortgages returned to their previously "normal" level around 7% from the current 4%? What would happen to auto sales if people with average credit had to pay more than 0% or 1% for a auto loan?

Those in charge of setting rates and yields are clearly fearful that "normalized" interest rates would kill the recovery and the stock bubble.

2. Massive money-creation hasn't generated inflation. In classic economics, massive money-printing (injecting trillions of dollars, yuan, yen and euros into the financial system) would be expected to spark inflation.

As many of us have observed, "official" inflation of less than 2% does not align with "real-world" inflation in big-ticket items such as rent, healthcare and college tuition/fees. A more realistic inflation rate is 7%-8% annually, especially in the higher-cost regions of the US.


But setting that aside, there is a puzzling asymmetry between low official inflation and the unprecedented expansion of money supply, debt and monetary stimulus (credit and liquidity). To date, most of this new money appears to be inflating assets rather than the real world. But can this asymmetry continue for another 9 years?

3. Stock markets are soaring but sales and profits are stagnant. Everyone knows central banks are still pumping billions of dollars per month into the financial system, and this (coupled with central bank purchases of stocks and bonds) has been pushing stocks sharply higher for the past 9 years, with only a few hiccups along the way.

This is pushing valuations out of alignment with traditional metrics of valuing assets such as sales and profits-a process known as "price discovery." In essence, traders and investors have habituated to central banks driving private-sector markets higher, not because the assets are generating more value or profits. but simply as a function of centralized money creation and asset purchases.

All of these extremes generate mal-investment, diminishing returns and perverse incentives for ramping up unproductive and risky speculation, leverage and debt. Yet the central banks have trapped themselves in this risky trajectory because they've pushed the accelerator to the floorboard for 9 years. Any extreme held in place for 9 years has long slipped from "temporary" to permanent.

Participants have now habituated fully to central banks extreme stimulus of financial markets, and in a sense they've forgotten how to price assets based on real-world private-sector measures.

How can central banks "retrain" participants while maintaining their extreme policies of stimulus? The only possible answer is: they can't.

Originally published at Activist Post - reposted with permission.


Other News

October 17, 2018Chaos In The Streets: Portland Civil Unrest A Sign Of What Is To Come?

The "left" hates the "right" and the "right" hates the "left", and the mainstream media and many of our leading politicians are having a g...

October 17, 2018Growing Number Of Witches & The Upcoming Hex On Justice Kavanaugh

Black magic is making headlines as a group of actual witches have been bold enough to publicize a planned hex on Justice Brett Kavanaugh o...

October 17, 2018The Christian Arab Dilemma

While Israel is not perfect, Netanyahu is right when he says that it is the only place in the Middle East where Christian communities can ...

October 17, 2018Israel & So-Called 'Social Justice'

Social-justice warriors and progressives went berserk this week when Israel exercised its right, as any sovereign nation, to determine who...

October 15, 2018Social Media Purge Intensifies As Midterms Approach

The digital nanny state strikes again... just in time for midterms. Facebook has removed 559 pages for various offenses but many alternati...

October 15, 2018Christians Sentenced To Death Under Sharia Law

When radical Islam gains power, every article in the constitution becomes contingent on compliance with sharia. The rights that are promis...

October 15, 2018The Expansion Of Assisted Suicide North Of The Border

How is it that a nation known for its politeness has become so committed to killing its most vulnerable citizens?...

Get Breaking News