As we keep insisting, monetary central planning systematically falsifies asset prices and corrupts the flow of financial information. That’s why bubbles seemingly inflate endlessly and egregiously, and also why financial crashes and economic corrections appear to come out of the blue without warning.
Back in the winter of 1999-2000, for example, we were allegedly in the midst of a “new age economy”. The revolution in technology then underway, it was claimed, meant all historic valuation benchmarks–like PE multiples, cash flow, and book values—– were irrelevant to stock prices.
Likewise, in the fall of 2007, there was nary a cloud in the economic skies. That’s because the Great Moderation superintended by the geniuses at the Fed had purportedly engendered a “goldilocks” economy destined to expand indefinitely.
Within months of the dotcom epiphanies, however, the highflying NASDAQ 100 crashed—eventually hitting bottom 83% below its new age apogee, and 15 months after the S&P 500 reached its goldilocks peak of 1570 in October 2007 it staggered around in smoldering ruins at 670—down 57% from its housing bubble high.
Needless to say, we are again on the precipice of a crash and correction that no one sees coming, but this one has an added fillip. Namely, three strikes and you are out!
What we mean, of course, is that the Fed and other central banks are out of dry powder. They are now stranded near the zero bound with bloated balance sheets that have actually reached hideous girth relative to current GDP and all historical experience—-meaning they will have almost no capacity to reflate the next busted bubble, as they quickly did in 2001 and 2009.
The BOJ is the most extreme case, of course, but it does dramatically illustrate the central banker insanity at loose. That is, if what you see below represented some kind of loony tunes outlier, Mr. Kuroda would have been scorned, belittled and drummed out of the global financial establishment long ago.
Instead, he appears year after year as an honored guest and thought leader at the IMF and G-20 confabs, among countless other global gumming forums. Yet since 2008 he has expanded the BOJ’s balance sheet by nearly 5X, and, more crucially, from 21% of Japan’s GDP in 2008 to 90%today.
For point of reference, consider this. Back during the heyday of booming industrial growth under the pre-1914 gold standard, the Bank of England’s balance sheet rarely exceeded 3% of GDP.
Similarly, when the US economy was at the top of its game in 1960, the Fed’s balance sheet under the hard money leadership of William McChesney Martin was only $25 billion or just 4.5% of the nation’s $550 billion of GDP.
Indeed, it was still at just $190 billion or the same 4.5% of GDP level when Ronald Reagan made the unforgivable historical error of appointing Alan Greenspan as Chairman of the Fed (actually he was more or less tricked by his advisors, who didn’t tell the gold standard supporting Gipper that Greenspan had long since jettisoned his earlier embrace of the same).
