"Whatever It Takes" Wasn’t Enough
By Tyler Durden
Excerpted from Doug Noland's Credit Bubble Bulletin blog,
Credit booms are powerfully reinforcing. New Credit provides additional purchasing power that spurs spending, economic output, corporate earnings/cash-flow and income growth. Monetary expansions, as well, fuel inflating asset prices, most notably in securities and real estate. In both the Financial Sphere and the Real Economy Sphere, Credit expansion and its myriad inflationary effects beget more self-reinforcing Credit.
Importantly, the upside of a Credit Cycle feeds off the commanding forces of cooperation and integration. The economic pie is expanding, and it becomes easily-recognized that working together offers more than zero-sum outcomes. In prolonged booms, a “virtuous cycle” appears almost a certain, natural outcome.
Yet the inevitable Credit cycle downturn ensures a vicious sequel. The bursting of the Bubble sees so many rewarding boom-time endeavors turn infeasible, unprofitable or unworkable. Hopes are dashed and dreams are crushed. Confidence, flowing over-abundantly throughout the boom, is suddenly in such short supply; faith wanes in policymaking, the markets, finance and in institutions more generally. Meanwhile, the unfolding bust illuminates the inequities and nonsense from the Bubble-period. Powerful forces then shift to tearing at the fabric of cooperation, integration and good faith that were so crucial throughout the boom period. Yesterday’s partner is today’s competitor.
Nowhere did this historic global Credit Bubble have greater integrative influence than in Europe. The euphoria of the victory of democracy and free-market Capitalism, along with technological advancement, financial innovation and developments in contemporary monetary management, emboldened Europe’s leaders to take the fateful plunge toward unprecedented integration, including a common currency.
To appreciate the complexities of the current market, economic and geopolitical backdrop, it’s helpful to return back to that fateful summer of 2012. European integration was under existential threat, though the seriousness of the situation was appreciated by few. A potentially momentous crisis of confidence had gathered powerful momentum. Fear of a European periphery debt crisis was being transmitted to a more general questioning of the solvency of the European banking system. And with Europe’s banks major operators in derivatives and throughout EM, European travails had begun reverberating throughout global markets.
Markets were increasingly questioning the viability of the euro currency – and such concerns invariably raised doubts as to the stability of global finance and, accordingly, economic prospects around the globe. As I chronicled the seriousness of developments back in 2012 (in the face of the media and pundits generally downplaying associated risks), my analysis appeared extremist and misguided. It was only later that inside accounts (notably from the Financial Times) confirmed the extent to which European policymakers had worked to avert acute financial and economic crisis.
Bond manager Jeffrey Gundlach made headlines this week with the comments “central banks are losing control.” I would suggest that central bankers actually lost control back in 2012. Mario Draghi’s “whatever it takes” pledge was part of desperate measures to save the euro. Yet “whatever it takes” actually amounted to concerted central bank intervention to shield global markets and economies from the intensifying forces of the downside of a historic …read more
Source: "Whatever It Takes" Wasn’t Enough
