Tuesday, January 13, 2015

Catch 22 - Reality Is Blurred

From Epsilon Theory:

The Army will grant your release request if you’re insane, but to ask for your release proves that you’re not insane. 

If X and Y, then Z. But X implies not-Y. That’s a Catch-22.
Here’s the Fed’s Catch-22. If the Fed can use extraordinary monetary policy measures to force market risk-taking (the avowed intention of both Zero Interest Rate Policy and Large Scale Asset Purchases) AND the real economy engages in productive risk-taking (small business loan demand, wage increases, business investment for growth, etc.), THEN we have a self-sustaining and robust economic recovery underway. But the Fed’s extraordinary efforts to force market risk-taking and inflate financial assets discourage productive risk-taking in the real economy, both because the Fed’s easy money is used by corporations for non-productive uses (stock buy-backs, anyone?) and because no one is willing to invest ahead of global growth when no one believes that the leading indicator of that growth - the stock market - means what it used to mean. 
If X and Y, then Z. But X implies not-Y. That’s a Catch-22.


  1. Ok,... But when do we FORCE-EXIT (no matter the power of the Fed to print money) THAT CATCH-22 ??????????????????????

    Not if. WHEN ?

    1. We all know this central bank driven fairy tale will end in disaster. The question has always been when, and unfortunately I cannot help there (and no one else can). I know many smart people that were watching what was happening in 1997 and writing at the time how insane it was. They had to watch the markets go vertical for 3 more years. I know a lot of other very smart people that wrote about the catastrophe coming in the housing sector in 2003. They also had to watch the market go vertical for 3 more years. No one knows when unfortunately. That's what makes the markets both frustrating and fascinating.