The Central Bankers Dilemma

We are playing with fire.

How quickly we forget about the power of compounding interest - in reverse.
The world is limping along at ultra low interest rates. Otherwise benign movements from
such extreme lows are magnified beyond comprehension. An equivalent interest rate
move up from 10% has a tiny overall effect, compared with the same move up from
lower rates.
Human perception struggles with the non-linear.
Again, when rates are 10%, a 100 basis point move is only 10%. When rates are 2%, a
100 basis move is 50%
What we see in China and Greece, along with untold others, are mere nodal points in a
complex and fragile daisy chain - held together by quadrillions of dollars in derivatives
and ultimately promises backed by faith.
The point is that small changes at these extremes can be dangerous. They can result is
ripples that spread out much further than rationally imagined.
This perpetual state leads to a constant and evermore desperate attempt to rationalize
faith by referencing periods of time where things seemed better.
That this faith is held together by an ever-shifting set of legal and accounting
classifications is another matter. At this point, these are laws of the jungle and no longer
laws of the land.
The following is a must read perspective about central bank omnipotence, written by
Mark St. Cyr
The Central Bankers Dilemma: The Pendulums Back Swing
Today, July 5th, a referendum is to be voted on in Greece as to whether they should vote
Yes for the austerity measures demanded by the bankers of the Euro Zone (EZ.) Or,
vote No against such demands. Where a no vote will in effect all but ensure an exit
from it (whether voluntarily or not.) How this vote will come down no one knows. For
when a populace is scared, many times theyll vote blindly for what they perceive in the
present as the lesser of two evils, and let longer term consequences be damned.
On the other hand, when a populace is both scared and mad what was at first thought to
be implausible (i.e., against what many outsiders may perceive as in their best interest)
within the confines and privacy of the voting booth. Anger, as well as a disgust for the

present can over-rule. Where its the consequences of the moment that will be damned.
Where an overwhelming affinity for the possible future suddenly reins supreme. Whether
realistic or not.
It is this latter point that catches most (i.e., outsiders looking in) flat-footed. Especially
those that tend to think everything is based only in numbers, models, or rationality, and
its ultimately controllable. This form of thinking implies: If you control the numbers,
and can interpret the models you can control the rationale, as well as an outcome.
Not only is line of thinking rampant throughout academia. It is followed with a near
religious zeal. However, theres the inherent problem: Yes you can till you cant. And
thats where the most critical issue fails within Ivory Tower thinking. For they dont ever
contemplate, or anticipate the till you cant part. For them it shouldnt exist. Therefore
it mustnt.
Yet, anyone with just a modicum of business acumen knows all too well: More often than
not what youre convinced wont happen; is exactly what will. Usually at the most
inopportune of times.
Here is where we find many of the Central Bankers today. Suddenly their implied
omnipotence is being turned on its head from omnipotent to oppressive. From
rescuer of an economy to destroyer. And the distaste as well as grumblings against
this Central authority is growing. Why? As I stated before: Central Banks are now
perceived as the body politic. No-matter how much they rail against the inclusion. And
the vitriol (as well as the impending implications) are just getting started in my opinion.
Over the last week the IMF dropped what was for all intents and purposes a bombshell of
a revelation. It stated (Im paraphrasing) that Greece was indeed in need of a debt
reduction (i.e., write-offs) just as much as it was in need of restructuring of those said
debts. Otherwise, it would all be for naught because Greece would never be able to
surmount them.
This singular point has been at the heart of all Greeces arguments. However, what has
been argued back to Greece by the Troika has been nothing less than Tough deal with
it. Thats your problem not ours. Well, it seems thats not so much the case anymore.
Regardless of which way the vote goes, it is the Troika itself that may find the problems
are just beginning. And those problems are theirs.
In a previous post I drew an analogy from the Iron Man 2 movie. The premise was: If one
can make the gods bleed, no matter how small, people will not only will lose faith, but
will turn on them. It seems Greece did in fact strike the first in what might be a mortal
blow. Not so much with the degree of the initial cut, but with the ever-growing infectious
nature to follow. Even if Greece votes yes this Sunday the damage has already been
done to the EZ as well as the central banks within. While quite possibly to Central Banks
everywhere.

The revelation that the IMF concurred in secret with what Greece was proclaiming all
along; while demanding the opposite; siding with the more austerity demands by their
fellow members; as not only the people suffered but as the politicians themselves (i.e.,
ridiculed or voted out) will not be lost on Italy, Spain, Portugal, ____________ (fill in the
blank.)
Yet, as damaging as it is to have one of the three parts (e.g., Troika) acknowledging what
Greece has been insisting was needed all along via a leaked document. To now have it
leaked that all three were of the same conclusion yet: wouldnt budge or acknowledge it?
This is quite another, and will be used by any and all as an excuse (whether rightly or
wrongly) to demand new terms. Or worse, like Greece just refuse to pay until the
bargaining table is reopened.
Suddenly its not the borrowers that have a problem. Rather; its the other way around.
And its only been days since these revelations. Yet, theres now blood in this evergrowing pool. And thats a problem no bazooka or printing press may be able to
overcome. However, this is just Europe
In China the financial markets are tumbling faster than any other time in history since
2007. What many forget (and what the main stream financial media will not speak of) is
that right before the financial crisis took hold here in the U.S., It was none other than
Chinas Shanghai Composite Index that was the harbinger of what lay ahead as it
tumbled from that meteoric rise in 07 to within a year it would go on to lose some twothirds of its value.
Right before the crash the Chinese markets were assumed unstoppable (sound
familiar?) as they went parabolic to near vertical assent when viewed on a chart. Then:
they fell in spectacular fashion entering bear market statistical valuations in mere
weeks (i.e., losing 20%.) This had never been seen since. That is until now.
Suddenly there are reports of extraordinary measures being allocated behind the scenes
by Chinas central banking authorities. The problem? So far, by all accounts it aint
working. The index continues to fall. Many of the components (I would like to say
businesses however, there are far too many reports these businesses are in name only)
that make up these composites are opening up daily to limit down selling pressures
with no relief in sight.
So much so it has been reported the only way for this rout to be reeled in is for the PBoC
to directly buy the market in one form or another. Yet, the rout is so wide-spread, and
so fierce (imagine 10s of millions of first time traders all heading for the one and only
exit door all at the same time) that it is being openly questioned if the PBoC itself has
the monetary firepower to overcome it. And just for perspective, Chinas market isnt
some backwards market in size or scope those in the general public might think of
when they first hear. For those not familiar: Chinas market is number 2 in the world,
right behind the U.S. And last time such a thing happened the contagion effects were here
seemingly overnight and the great financial meltdown of the U.S. markets were upon
us.

Is this time its different? Who knows, but one thing is for sure: The general public
today is still enamored with the main stream medias push that what ever bad happens
in the world or markets: The Fed. has their back, or The ECB or Chinas growth
will solve our malaise or ______________(fill in the blank.)
Today one thing is more certain than any other time before. With the Federal Reserves
unwillingness to allow the markets to stand on their own feet, and not be so dependent on
their interventionism with QE for years, and Zero interest rates for the same the tool
box may in fact be empty at the most inopportune time.
So here we are, once again, waiting or watching for what could possibly be the start of
another contagion effect to ripple through the markets that has the potential of resembling
2008, or worse. And the only thing to stand in its way will be the faith and/or belief in
their omnipotence.
For it seems thats all they have left. All while we watch the same crumble in the eyes
of others across the waters as their Central Banks are being perceived daily more as
villains or worse inept.
Ive stated many times in what Ive coined the pendulum rule. Its not the first swing
that can ruin you. Its when you get up thinking youve dodged a one time fatal blow and
act as if it cant happen again. You dont prepare. You dont harden your resources. You
act as if it were a one time only thing. And just when youre at your most vulnerable the
back swing is what takes you out.
It would seem the pendulum is indeed still swinging. What transpires from here once
again is anyones guess.
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