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"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

Magical thinking divorces markets from reality - Jim Grant nails it

In response to an FT article by Jim Grant on 20th July 2015, entitled 'Magical thinking divorces markets from reality'

Excellent Mr Grant, thank you.

It seems the mission of Central Bankers worldwide is to 'tame' the markets - on the one hand keeping it safe for the banks; on the other, enabling the politicians to duck the tough choices, and bribe their electorates with ridiculous promises and unfunded entitlements which will either never be paid or leave our grandchildren in penury, most probably both. 

In Britain this quest for 'control' was expressed best by the phrase 'No more boom, no more bust', a favourite saying of Gordon Brown, when he wasn't busy selling gold at the bottom of the market, raiding pension schemes, complicating the tax system or plotting to get rid of his arch rival next door at number ten.

Our current crop of CBs seem to view the economy as a machine rather than a complex natural system. To my mind trying to understand the economy using equilibrium models that do not include money, banking or debt, is as ridiculous as trying to understand the weather without understanding the effect of air pressure. Switching metaphors, they are trying to turn a forest into a plantation. Of course, that then necessitates putting out every little fire...which, given markets, like life, always find a way, leads to a build up of deadwood and tinder, and eventually a bigger fire. Our foresters learned this a long time ago, our CBs haven't got it yet.

We had a fire in 2000, and another in 2008. They put out the fire with easy money...and in the process build up more debt - the root cause of the problem. The deadwood that is littering the forest floor is tinder - it consists of zombie companies, banks that would be insolvent under mark-to-market, and a huge mountain of derivatives. Markets will deleverage eventually, and there will be another big fire.  Personally I think there is one smouldering right now. The next one will be bigger, because the bubble this time is not the stock market, not the housing market, but the big daddy himself - the bond market - specifically sovereign debt. Greece is a signal, a symptom of what's coming.

Expecting Central Bankers to change course now is daft - they are totally invested in the system. They've spent decades marking each other's homework, issuing each other PhDs, inviting each other onto panels and competing to see who can draw the best map of a world that doesn't exist.

I agree with your conclusion Mr Grant:

"What is to be done? Why, restore the integrity of prices and of accounting conventions. Simple as that"

The only thing I'd add is that they won't. They will kick the can down the road and the market will do the job for them. The debt and the mal-investment that have been built up over twenty years of easy money, crony capitalism and socialism for the rich, will get flushed. Unfortunately this will hurt a lot of people who won't have a clue what's happening.

What the politicians and the central bankers will do then is what they always do - blame someone else. They'll blame capitalism, they'll blame short sellers, they'll blame 'rentiers', they'll blame lack of 'aggregate demand', they'll blame everyone but their own foolish policies. They won't 'own' a damn thing - they never do.

Hypocrisy alert - Hank Paulson advises China

Cameron apes Blair and beats his chest in America