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The end game?

1 year 10 months ago #1 by TH
The end game? was created by TH
The excellent Jonathan Tepper's interview touched the question of "What's the end game of this monetary experiment?"

I agree with the view that when inflation shows up in earnest, the central banks lose their ability to control the market and that's when the fun starts. The question that remains, is what causes the runaway inflation? It looks quite apparent that improving consumer demand or any major improvement in GDP growth in general won't be the trigger unless some new technology shows up and improves the productivity in a dramatic manner.

So... central banks may continue manipulating the price of money and nothing bad will ever happen? I don't think so.

My guess for the mechanism to cause runaway inflation is a "surprising" liquidity event somewhere outside the U.S. caused e.g. by the USD tightening. The Fed are using their policy tools according to domestic data only, forgetting that a lot of the dollars reside outside the U.S., in countries that are not actually recovering right now. Another cause may be a political turmoil that puts the credibility of a local financial system into question.

There exactly is no shortage for candidate sources for a liquidity event outside the U.S. Emerging markets in general, Japan, Italy, France, Deutsche Bank, China, Oil market, Eurosystem, etc. Markets generally assume, that whatever adverse happens in the world, the central banks will take care of it. This assumption worked earlier, when the size of the liquidity events was in the Lehman range. However, next time, the event will probably be of the size of a significant country and it will affect the trust in the financial system like never before. That will force central banks to provide huge amounts of new liquidity in a coordinated QE in a very short amount of time. When that happens in conjunction with already moderately accelerating inflation, the trust in the central banks will be put to a major test. If that test fails, the inflation picks up very rapidly and the end game is on.

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