4 New Central Bank Credibility Issues

January 16, 2015

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Building on last week’s theme of crumbling credibility in the world’s current Fiat Money system, there was a great deal more evidence on view this week. There were 4 new issues that came up under the following headings:

  1. Swiss National Bank
  2. Deflation myths
  3. Gallup vs Bureau of Labor Statistics
  4. Ignoring Debt

Swiss National Bank

Swiss National Bank completely reverses policy as the FT reports:

“On Monday evening, Jean-Pierre Danthine, vice-chairman of the Swiss National Bank, said the SFr1.20 ceiling against the euro was a fundamental part of the central bank’s monetary policy. By yesterday morning it was gone.”


For many a retreat from central bank control is a beautiful thing. All the Swiss national Bank really achieved was massive losses on its Euro purchases. Peter Schiff argues that this new freedom in the Swiss currency will be a great improvement for the Swiss people, and the “first significant counter-attack against our current global system of monetary insanity.”


Deflation myths

For most people deflation is typically not a major issue. How many people do you know who have complained about the falling price of computers? However, deflation is unambiguously bad for any entity that leverages debt to make incredible returns, like the banks.

So perhaps the real question should be why should the economy bend to the needs of leveraged debtors? This highly influential group needs to demonize deflation and believes it is necessary to control the economy so deflation never happens. A simpler solution could be that leveraged debtors should not be protected by everyone else for the consequences of their greed. This is what really lies behind the absurd actions and capitulation by the Swiss National bank.

As Charles Hugh Smith puts it:

“Rather than being the Monster Under the Bed in central bank nightmares, deflation is the natural result of a competitive economy experiencing productivity gains.”


Gallup vs Bureau of Labor Statistics

Central bankers naturally want to project the image that they are a necessary and essential element to any successful economy, and typically growing bank loans and higher stock prices coincide with a growing economy. However, when the economy needs a natural adjustment to rebalance debt levels in the economy, any attempt to avoid this process and extend the “good times” indefinitely, requires an astonishing hubris and power over nature that can only be temporary and propped up by misleading propaganda.

Over time the gap between the narrative and underlying conditions will continue to grow and become harder to hide. The report that came out this week from Gallup simply does not square with the narrative created from the BLS data. What do you believe?

Ignoring Debt

Does $10 trillion dollars of debt change an economy? Would this have generated more spending in the GDP statistic? What are the interest costs and are they a burden on the economy? Was it invested in a way that will enable comfortable repayment with remaining durable benefits? How much distortion could it have created in markets and economic activity? To what extent has the current economy become dependent on the continuation of exponential debt creation?

The silence on these questions is deafening and it could be that entities that are dependent on massive leverage of debt would rather not talk about it. However, enquiring minds should probably try to at least make some adjustments.

The investment landscape has become extremely complex largely because investors have to trade two opposite narratives at the same time. What are attractive prices given what is really happening in the economy, and what is distorted by the controlling central banks and how long will it stay distorted?

At last the Central Banks have had to retreat. The hubris that they believe that they can command the multiple interactions in a complex system is astounding. Now they find they have driven into a cul-de-sac. The great irony is that their debt obsession has a natural deflationary consequence that they are unable to resolve. The tide has just begun to turn, and we should all breathe a sigh of relief.

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