One Central Bank Head Departs Groupthink

Hong Kong Monetary Authority Chief Executive Norman Chan speaking at a conference last year.

Hong Kong Fed’s Epiphany: Is Bernanke Wrong About Everything? | ZeroHedge.

Norman Chan, head of the Hong Kong Central Bank, diverges from the mainstream regarding the Western central bank’s ongoing printapalooza. He believes that the process of deleveraging occurring in the wake of the GFC could be disrupted by quantitative easing, and as a result asset prices could fall off a cliff and remain volatile.

In his estimation, overborrowing is what caused the GFC and the current eurocrisis. It is interesting that he differentiates the two. In my opinion, the eurocrisis is merely an extension of the GFC. All this euro-trouble started in 2009 and has continued ever since.

Mr. Chan believes that

The disruption in the deleveraging process is leading to asset price increases that are unwarranted by the fundamentals. In that case, households are unwilling to increase spending and the economy will remain stagnant.

This is an interesting hypothesis. Basically, he is saying that people are not stupid. They regard the price increase in assets such as homes and 401k’s as illusory. Since they do not recognize these gains, there is no increased consumption from a so-called wealth effect.

Furthermore,  averring that markets will crash because deleveraging has been disrupted implies that deleveraging is a natural process that needs to occur in the wake of a financial crisis. Market crashes are self-fulfilling deleveraging events as margin calls force investors to sell assets to pay debts.

I agree with Mr. Chan. The consequence of this line of thinking is that Since the deleveraging must eventually occur, all of this money printing is merely forestalling the inevitable. Each round of easing is doing less. Various ZeroHedge charts show the diminishing returns of each successive round of central bank action.

This chart published today illustrates that for the first time markets failed to bounce on the day of the Fed’s easing announcement:

Another chart from earlier in the day details that the Fed is becoming desperate to hold up asset prices with easing becoming more frequent. The time between the announcements of unsterilized, meaning expansionary, interventions has declined in four steps from almost 600 days to less than 100:

It is apparent in this chart that each successive round does less and less. Intriguingly, Fibonacci may recognize the pattern, which roughly follows the golden ratio Φ.

There is a stimulative effect on the economy from these interventions, but they have been fading, too:

We are quickly approaching a turning point. One of these rounds will fail to stimulate markets. When that event occurs, it will portend the next crash. The deleveraging that should have take place since 2008 in addition to other imbalances built up within the system since then will be thrust upon the system in a disorderly fashion. The beginning of the GFC pale in comparison to its end.

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