In response to an FT article by Gillian Tett on 14th October 2016, entitled ‘Investors are ill equipped for our unfathomable future’
"The danger in finance is that investment groups will be wiped out by price swings from political shock…Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as the Britain’s vote to leave the EU, herald new protectionism?...
...Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science" - Gillian Tett
Swap the word 'investors' with 'central bankers' and the sentence is equally true...but it gets worse...the assumptions that underpin the number crunching are context dependent, not universal truths. For example:
1. Clearly, aggregate demand does not behave in a predictable fashion at the debt levels we have reached, e.g. individuals refuse to buy more 'crap' they don't need with money they haven't got
2. Contrary to the idiotic pronouncement of Ben Bernanke that 'the difference between 0.25% and minus 0.25% is half a percent'...the difference between 0.25% and minus 0.25% is 'I need to save more', and 'these people don't know what they're doing'...which is why, irrespective of what he thinks 'should' happen, NIRP is deflationary not inflationary
Keynes would roll in his grave if he saw what our policymakers have done with some of his ideas, as I suspect would Friedman. Giving politicians 'intellectual cover' to do anything is a dangerous activity, particularly if it gives them a means to bribe the electorate with unaffordable 'promises' - as is the case with the economic doctrine of 'easy money'.
So…Central Banks will continue to ignore these warnings…because they don't understand them. Their assumptions of what the economy is, and how it functions are wrong - the economy is not an equilibrium machine, it is a complex natural system. Until that is understood, they will continue to prescribe larger doses of the medicine that is making the patient sick – more debt.
I suspect the next crisis (which is actually the same crisis) will manifest in the bond markets. Personally I would not go near sovereign debt or bank stocks with a ten-foot barge pole and a nose peg.