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Wednesday November 12, 2008 - 13:59:41 GMT
Black Swan Capital - www.blackswantrading.com

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Von Mises doesn’t think much of ZIRP!

Key News
• A number of deals designed to cure the global financial crisis were in danger of unraveling on Wednesday, with losses mounting at banks and economies showing further signs of serious deterioration. (Reuters)
• The World Bank is set to provide up to $100bn in new aid to developing countries. (FT)
• Key Reports (WSJ):
No economic events are scheduled for today.

Quotable
“A monster horrendous, hideous and vast, deprived of sight.”

          Virgil

FX Trading – von Mises doesn’t think much of ZIRP!

Commenting on Bank of England Governor Kings recent utterances, Bloomberg shared this story today:

Nov. 12 (Bloomberg) ``We are certainly prepared to cut bank rate if that proves to be necessary'' to hit the central bank's 2 percent inflation target, said King at a press conference in London. He indicated the central bank would be prepared to push its benchmark to zero if necessary.

Inflation will fall ``well below'' the bank's goal from the middle of 2009 and gross domestic product will contract by an annual 1.8 percent in the first three months of the year, forecasts by the Bank of England released today in London show. The predictions are based on market expectations of the interest rate just above the current 3 percent in the next quarter.

The British pound didn’t seem all that thrilled with Mr. Kings views this morning:


GBPUSD 240-min:

(Chart unavailable in text format.) 

ZERO INTEREST RATE POLICY (ZIRP) seems to be in the works amongst a whole host of central banks we know and love.  But haven’t we seen this movie before?  And doesn’t it end badly?

Japan applied ZIRP to extricate itself from its deflation in the early 1990’s when its credit induced bubbles in stocks and real estate popped.  ZIRP worked so well that it only took Japan about 14-years before the economy emerged from the bear grip of deflation; the same deflation it’s about to revisit now.  One wonders why our illustrious central banks believe this is a policy that will fare any better now outside of Japan.

In a world in which political correctness, political connections, and fake compassion rule over common sense and reason we end up with convoluted policy actions from exactly the group of people who should know better.  Manipulation of money and credit will save everyone, they sadly imply.   And this act of so-called “compassion” with our money only prolongs the pain. 

The Master, von Mises, says it best:

“However conditions may be, it is certain that no manipulations of banks can provide the economic system with capital goods.  What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media.  The credit expansion boom is built on the sands of banknotes and deposits.  It must collapse.

“The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and begin to abstain from further credit expansion of credit.  The boom could continue only as long as the banks were ready to grant freely all those credits which business needed for execution of its excessive projects, utterly disagreeing with the real state of the supply of factors or production and the valuations of the consumers.  These illusory plans, suggested by the falsification of business calculation as brought about by the cheap money policy, can be pushed forward only if new credits can be obtained at gross market rates which are artificially lowered below the height they would reach at an unhampered loan market.  It is this margin that gives them the deceptive appearance of profitability.  The change in the banks’ conduct does not create the crisis.  It merely makes visible the havoc spread by the faults which business has committed in the boom.

“…It [economics] must realize that the depression is in fact the process of readjustment, of putting production activities anew in agreement with the given state of the market data: the available supply of factors of production, the valuations of the consumers, and particularly also the state of originary interest as manifested in the public’s valuations.”

Let’s hope someone in our government (our “monster horrendous, hideous and vast, deprived of sight”) becomes infused with less fake compassion and more common sense before 14-years pass.  

This next stage of the crisis, which we expected, let’s call it the, “What a surprise government help ain’t working,” stage, is why we expect yet another big leg down in the euro against the dollar.  Tomorrow we will share our logic (or guesswork) on why. 


Jack Crooks
Black Swan Capital LLC

 

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