Well, it’s Thursday, and SocGen’s Albert Edwards thinks that’s about as good a reason as any for the oppressed masses to stage a popular revolt.
One thing we and plenty of others have noted is that when central banks refuse to acknowledge that their inflation targets are antiquated or otherwise useless, the only thing that persisting in accommodation is going to achieve is inflating asset bubbles.
Put differently, if inflation targets are for whatever reason (maybe disinflation has become structural) not achievable, then the only inflation you’re ultimately going to get by pumping liquidity into the system is asset price inflation.
And to a certain extent, that’s fine if it means inflating the value of people’s 401ks. But the rather obvious flaw in the whole “wealth effect” scheme is that the vast majority of financial assets are concentrated in the hands of the rich and so, when you inflate those assets but fail to do anything that changes structural imbalances in the real economy, you by definition exacerbate the wealth divide.
The real problem here is that there’s a certain fatalism to it. That is, what usually happens to bubbles? Well, they pop. And sure, some millionaires will take a header off a penthouse balcony and some lowly traders making $400k will get scapegoated and be trotted out as proxies for the “fat cats,” but in reality, rich people tend to stay rich (relatively speaking) and the burden from catastrophic collapses like we saw in 2008 is disproportionately (and invariably) shouldered by regular people.
Here’s Edwards criticizing Larry Summers:
This comment shows exactly the same lack of insight that he and most of the economic elite showed in the run-up to the 2008 crisis – for there is loads of inflation. It resides in asset prices but it is wanted inflation the object of QE. The problem though in creating asset bubbles to try and reflate the economy is that when the asset bubble bursts and blows up the economy, you are more likely to get the very deflation outturn that you were seeking to avoid in the first place. Even after the GFC these dudes simply have not learnt that loose money polices to blow asset price bubbles is a catastrophic policy destined to end in failure.
Well, with central banks having pumped something on the order of $21 trillion into the system in a largely futile effort to reflate the global economy…
…and with that liquidity impulse showing up in everything from FAAMG to real estate to art to vintage cars to cryptocurrencies…
… it’s just a matter of time before something snaps again and waylays the system, a state of affairs which will, as it always does, affect real people more so than it does the wealthy.
So if you’re Albert, all of this leads to one inescapable conclusion (and I’m paraphrasing here): society’s frustration with the distortions and boom-bust cycles facilitated by central banks has manifested itself in the rise of populism, but once the masses understand that central bankers are the real problem, they’ll grab the torches and pitchforks and storm the castle.
Here’s the executive summary from Edwards’ latest, although the full note is definitely worth a read if you can get your hands on it:
While politics in the West reels from a decade of economic crisis and stagnation, asset prices continue to surge on the back of continued rapid growth in G3 QE. In an age of “radical uncertainty” how long will it be before angry citizens tire of blaming an impotent political system for their ills and turn on the main culprits for their poverty – unelected and virtually unaccountable central bankers? I expect central bank independence will be (and should be) the next casualty of the current political turmoil.
Evidence of the impact of monetary madness on assets prices is all around if we care to look. I read that a parking spot in Hong Kong was just sold for record HK$5.18 million ($664,200)! What about the 3.5x oversubscribed 100 year Argentine government bond? Sure, everything has a market clearing price, even one of the most regular defaulters in history. But what concerned me most about the story was it was demand from investors (reverse enquires) that prompted the issue. Is it just me or can I hear echoes of the mechanics of the CDO crisis? But no one cares when the party is still raging and investors, drunk with the liquor of loose money, are blind to the inevitable catastrophe that lies ahead.
There is a lot of anger out on the streets, as demonstrated most visibly in recent elections. Even in France where investors feel comforted that a moderate has gained (absolute?) power, it is salutary to remember that the two establishment parties have just been decimated by a man who had never before stood for public office! This is perhaps even more radical than Trumps anti-establishment victory under the Republican umbrella. The global political situation is incredibly fluid and unpredictable. While a furious electorate has turned its pent up anger on the establishment political parties, the target for their rage is misguided. I am not completely alone in thinking it is the unelected and virtually unaccountable central bankers who are primarily responsible for the poverty of working people and who will be ultimately held to account in the next crisis.
In the immediate aftermath of the 2008 financial crisis, politicians skilfully diverted the publics anger away from themselves by scapegoating the bankers. After another eight years of economic stagnation that excuse no longer is tenable and politicians themselves are now taking the flak. But citizen revolutionaries will, I think, soon turn their fire on those who I believe are truly responsible for their plight. We explained back in January 2010 in a note entitled Theft! Were the US & UK central banks complicit in robbing the middle classes? how central banks in the US and UK had deliberately stocked up massive housing bubbles prior to the Global Financial Crisis (GFC) to disguise the rapid rise in income inequality in both countries. Rapidly rising house prices allowed the middle classes to maintain the illusion they were getting richer so that despite stagnant real incomes they could continue to consume by extracting housing equity. We know how that party ended!
After the GFC central bankers have collectively spent the last decade stepping up the pace of money printing to new extremes in an attempt to drown the global economy in liquidity, while couching their actions in plausible theories such as secular stagnation. There is no recognition at all by central bankers that it may well be their own easy money and zero interest rate policies that are actually causing the stagnation in growth while at the same time wealth inequality surges to intolerable heights. Yellen et al will inevitably be sacrificed at the altar of political expediency as citizen rage explodes.
Here’s Albert if he were a mid-twenties African American man in Baltimore…