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MarkGB 

"Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world" - Henry Kissinger

and yet...

"Sooner or later everyone sits down to a banquet of consequences" – Robert Louis Stevenson

El-Erian says China needs to learn how to talk to markets. They're not the only ones

In response to an FT Exchange by Mohamed El-Erian on 1st September 2015, entitled 'China needs to learn how to talk to markets'

1. "The Chinese leadership is discovering that financial markets have a tendency to punish governments for doing the right thing at the wrong time".

True...yet in a world saturated in debt, where the central bank of the so-called healthiest economy in the developed world is agonising over a 0.25% interest rate rise, after 7 years at zero, there is no right time.  It's too late.

2. "Recognising that it cannot (and should not) be in the business of supporting overvalued stocks".

True again, yet I would argue that neither should Japan be buying stocks with Mrs Watanabe's pension, and neither should the Fed have been juicing the NYSE for the last 6 years with QE/ZIRP. As for buying stocks the Fed also has ways of 'hitting the bid' without getting it's hands dirty. Anyone looking at the behaviour of the VIX and the eruption of HFT buying over the past couple of weeks might conclude that we don't have markets any more, we have monetary tools and wealth redistribution indices.

3. "(and this does not include the intimidation of sellers and the public shaming of financial journalists)".

Yet again, spot on, but let's face up to the fact that whilst Beijing is behaving like an angry tyrant going after people who should NOT be prosecuted for selling or shorting stocks, our regulators have behaved like complicit poodles for not prosecuting who SHOULD - for example - senior Wall Street figures for egregiously manipulating markets.

Finally:

4. "Otherwise, the credibility of the Chinese government itself, including its history of admirable policymaking and vision, would be repeatedly tested by disgruntled and unstable financial markets; and, were this to materialise, the repercussions would inevitably be felt by financial markets in the rest of the world"

Central Banks around the world have already lost credibility - the penny just hasn't dropped in the media as yet. Personally I think a tipping point was reached last week - Markets are waking up to the fact that the academics running the world are scared, haven't got a clue what they are doing, and are caught between a rock and a hard place, both of their own making.

***

A fellow reader replied:

I agree with a lot of what you say.  However, when you say " the academics running the world are scared, haven't got a clue what they are doing, and are caught between a rock and a hard place, both of their own making."  I find myself thinking that, given the lack of historical parallels for the current situation, and the lack of consensus amongst the "experts" about the right course now, it would be amazing if they had a "clue".  Whether or not the problems are of their own making (and I would agree that they are, at least in part), at least some of them are showing signs of having learnt from the past.  In this novel situation, without any tested models to guide them, I would settle for a cautious approach, learning as they go!

MarkGB:

Thanks.

I don't think they have learned much at all, and won't, so long as they try to understand and manipulate the real economy through models which take no account of money, banking or debt.

The Fed was warned about the housing bubble - they chose to ignore these warnings, dismissing the idea of a collapse. In 2009, in a paper entitled 'No-one saw this coming', Dirk Bezemer of the University of Groningen, identified 12 individuals including academics, government advisers, consultants, investors, stock market commentators and one graduate student, who between 2000 and 2006 had warned specifically about a housing led financial crash. In alphabetic order these people were:

Dean Baker, Wynne Godley, Fred Harrison (UK), Michael Hudson, Eric Janszen, Steve Keen (Australia) Jakob Madsen & Jens Kjaer Sørensen (Denmark), Kurt Richebächer, Nouriel Roubini, Peter Schiff, Robert Shiller.

In 2010, Real World Economics Review ran a reader poll to identify the three economists who "first and most clearly anticipated and gave public warning of the Global Financial Collapse and whose work is most likely to prevent another GFC in the future". The eventual winner of this was Professor Steve Keen, who is now Professor of Economics at Kingston. 

Earlier this year the IMF held a conference supposedly to rethink macro-economic policy. None of the people on the above list were invited. By contrast, the panelists at the IMF conference were (in order of appearance):

Viral Acharya, Anat Admati, Philipp Hildebrand, Robert Rubin, Hyun Dong Shin, Paul Tucker, Ben Bernanke, Gill Marcus, John Taylor, Marco Buti, Martin Feldtein, Brad DeLong, Agustin Obstfeld, Luiz A. Pereira da Silva, Ricardo Caballero, Jaime Caruna, Zeti Akhtar Aziz, and then for the finale: Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff, Lawrence Summers.

Leaving aside any judgement on the merits of these panelists, what explains the total absence of anyone on the first list? Apart from Mr Godley, now sadly deceased, I believe that these folks are still around. Steve Keen most certainly is, and he has been warning that the problems that caused the 2008 crash are now worse. 

Finally, whilst it is true that this is the first time in history that all the major central banks have been 'printing money' it is not the first time that governments and central banks have encouraged the expansion of credit to paper over structural problems and keep a bubble inflated.

Here is what Ludwig von Mises said about this:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” 

The problems that have been building were hinted at before the tech bust, but not followed through on, by Dr Greenspan - a man who should have known better and did know better.  Since then? Dr Bernanke just 'doesn't get it', neither does Dr Yellen.  

Next time they will not be able to claim that no-one could have seen it coming - next time it's three strikes and you're out.

Mark Roe says share buy-backs are not the problem

Once a lawyer, always a lawyer - Hillary Clinton splits a hair