Business/Finance

Central Bankers are Clueless

1 U.S.A dollar banknotes

  • Central Bankers are indecisive on monetary policy.
  • Bank of Japan is buying bonds – The Federal Reserve and European Central Banks are unwinding their portfolio.
  • Attempting to control the market is like telling your wife to “calm down” when she is fuming.
  • The Federal Reserve has no clue what $4.5 trillion of unwound assets will do to borrowing rates and the economy.
  • Central Banker’s models are flawed.

“Economic forecasting was invented to make astrology look respectable.”John Kenneth Galbraith

The Bank of Japan or the BOJ said on Friday it would buy an unlimited amount of bonds – with intentions of putting a cap on domestic interest rates. Reasoning – the broad sell-off in developed market bonds.

Other central banks across the world are becoming more restrictive – with intentions of reducing their massive debt portfolios over the coming months (Federal Reserve and European Central Bank to name a couple). This is completely opposite of what the BOJ is trying to accomplish. Central Bankers are playing with the economy. They have no idea what they are doing. This is further proven on the undivided notion on when to unwind the Federal Reserve’s balance sheet.

The policy on which to enact within the Federal Reserve is divided. The policy makers didn’t reach an agreement in June on when exactly they should start shrinking their massive $4.5 trillion dollar balance sheet. Some preferred to start the process in a couple of months. Others want to wait until later in the year – giving them more time play with their models while assessing the economy. Think about that for a minute. The Federal Reserve – the most powerful force in the global markets – is unsure of when to unwind their balance sheet. If that doesn’t make you uneasy I am not sure what will.

I recently read an article explaining how Amazon could reach a trillion dollar valuation. If the Federal Reserve were a public company, their valuation would be at least $4.5 trillion. That is if you think the Fed should trade at 1.0x its assets. Think for a minute how big $4.5 trillion in assets is. That is like six Apple Corporations combined. Further, if you spent a million dollars a day ever since Jesus was born, you still wouldn’t have spent a trillion dollars.

$4.5 trillion dollars is a huge number – a massive amount that will get unwound back into the economy. No one knows how unwinding this balance sheet will affect the economy. Nothing like this has ever been done before. The Fed doesn’t know what effects this will have. They are clueless how selling off bonds will affect the borrowing rate – and more importantly – the economy. I challenge you to find a time in history where Central Bankers were actually right in their predictions. This feat is near impossible.

It is simply amazing how central bankers – or highly educated economists – think they can control the market. The free spirit of the market is uncontrollable – untamable. Who cares that there is a board sell-off in developed market bonds. Why try to subdue the beast? Putting gasoline on fire never ends well – unless you are looking to burn the world down.

Trying to control the market does more harm than good. Attempting to control the market is like telling your wife to calm down when she is fuming. It never works. In fact, it always does more harm than good. It’s always just best to just let your wife blow off steam and best to let the market flow in and out of its business cycles. Allowing economists to buy and sell bonds – with intentions of controlling the market – is complete tomfoolery. They are not that smart to understand the market. No one is.

Economic models do not work. Building economic models – and models in general – are excellent tools for understanding the ebbs and flow of the economy (or a business if it’s a DCF model). Models let you get down into the nitty gritty of how an economy or business actually works – you can actually understand the true valuation drivers when model building. Things get complicated (and I mean complicated) when there are a million of different inputs and billions and trillions of external factors. Do you really think individuals trained as economists can understand every single factor in the economy – subsequently making intelligent decisions on where to “stimulate” the economy through monetary policy? I’d think not.

The former is proven on the indecisiveness of the Federal Reserve on when to unwind the balance sheet. Individuals controlling the fate of the economy are just people – people with “prestigious” degrees, with their heads in the clouds. They are people like you and me. Every night they go home to their family, eat dinner, say their prayers and go to sleep. It’s completely asinine to give people the steering wheel to the global economy. It’s like telling your drunken husband to drive the kids to soccer practice every Friday. It might work a few times, but eventually it won’t end well.

Controlling the economy through monetary policy won’t end well either. Eventually the economy will come crashing down. There will be a deep dark recession unrivaled to past recessions. Hyperinflation is on its way – caused by lax monetary and fiscal policies. We have spent and spent and spent. The money spent and the debt raked up will need to get paid back. Either taxes will increase ten-fold or there will be massive amounts of hyperinflation to pay for this debt load.

The Federal Reserve will destroy this economy and country. It is the biggest threat to this nation’s security. It is the biggest threat to the health of the global economy. We are doomed.

 

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