Central Banking and why it's not as simple as people think

[Moonbox]

I've been saying this on this forum for awhile now that monetary policy and central banking is overwhelmingly complex beyond the average perception.  Explaining it is hard because unless you also have the foundational economic knowledge to understand the terminology and relationships, it's going to seem hopelessly esoteric and complex.  The number of people who are actually going to read (or listen to) an essay on it to get even a basic grasp are few, so as a popular media/discussion topic you end up with little but oversimplified and/or grossly inaccurate summaries/narratives that mostly confuse people.  This has made for fertile ground for negativity, with central bankers around the world under mountains of  criticism from folk who (at best) have no idea what they're talking about, but also those that do understand but see it as a useful political whipping boy. 

The reason I made this thread was a timely article in the CBC (I know - reee MSM fake news), where the author points out the challenges explaining this to the average layfolk and references the Deputy BoC Governor's attempts to make policy decisions more accessible. 

https://www.cbc.ca/news/business/inflation-interest-rates-column-don-pittis-1.6660112

The CD Howe Institute also had some interesting takes on how silly the politicization of monetary policy has become, but my favorite quote from the article was the comparison to "Doing Your Own Brain Surgery".  Most people would defer to the medical experts on this and can understand the obvious implications of mucking around as noobs, but because it's not so obvious or visible, they have trouble doing the same for monetary policy despite relatively similar levels of complexity.

I've done some crypto investing over the last couple years and made a lot of money off it, but it's been very much a Greater Fools game where I ride a delusional hype train and bail long before whatever sh*tcoin I'm buying inevitably steams off a cliff.  Central to the delusions of crypto bros and moonbois has been the theory that central banks were steering us towards hyperinflation and the imminent collapse of sovereign fiat currencies (pushed heavily in 2021).  These theories have predictably played out as false and crypto market caps have been devastated since Nov 2021, but the narrative that central banks are just printing piles of cash out on their money machines and using it to prop up their governments persists anyways.  Many of these folk sit at their computers reading charts that don't tell them what they think they do, and sharing tweets and blogs that reinforce their narrative, but all they're doing is reinforcing their poor decision making. 

The TLDR of this post, I think, is that people often don't know what they don't know.   Convincing yourself that you're capable of proficiency in deeply complex subjects that usually require years of formal education and/or practical experience is unwise.  I'm guilty of it sometimes and try as much as I can to recognize when it happens, but that's unfortunately sometimes long after the fact.  We don't have to blindly defer to authority, but at the same time we should be acknowledging that on many subjects, we're not really capable of commenting fairly or intelligently.  That's not because we're stupid.  It's because we have no idea what we're talking about and because spending our after-hours prowling the interweb is not going to solve that.  Sometimes, we have to let the experts be the experts.   

 

[eyeball]

You could have written the very same thing about several other complex issues our society is faced with.

It's too bad we couldn't have a technocratic chamber or branch of government to turn to when it's appropriate.

There's just too much mistrust in the world. The confidence that people once had in not just governments but governance itself has been eroded to the point it's now  threadbare.

[Moonbox]

5 minutes ago, eyeball said:

You could have written the very same thing about several other complex issues our society is faced with.

Yes, but I tried to pick one that wasn't pure poison.  

6 minutes ago, eyeball said:

It's too bad we couldn't have a technocratic chamber or branch of government to turn to when it's appropriate.

Well we sort of do, in that we have specialized administrations looking after specific things.  We have physicists and engineers etc looking after our nuclear reactors.  We have doctors running health files, generals running the military, highly economists running the BoC etc.  They're not always perfect and sometimes they lose sight that they're working for the people, rather than the other way around, but in that case the government can turn to outside consultants and experts to help unravel what's going on.  

 

[Dougie93]

it's not that complex

in order to stave off any correction at all since 2008

the central banks have been printing new dollars, flooding them into the economy

at first, only by buying bonds to induce net negative interest rates,

inciting the public to take on ever more leverage

but since the pandemic, those dollars have been flooding into the retail economy

now Canadians are burning in the fire of rapid money supply inflation

this entirely debt based system is a house of cards

the central banks now desperately need to remove dollars from the economy

by raising interest rates well above the rate of inflation

but the nation is at this juncture so debt burdened

that if the Bank of Canada did that, it would incite  massive devastating correction in all asset classes

including a cascading sovereign default, starting with the provinces, Newfoundland the first to fall

so the Bank of Canada is trapped, between runaway inflation, or a depression

so buckle up, because there is no soft landing

[eyeball]

26 minutes ago, Moonbox said:

Yes, but I tried to pick one that wasn't pure poison.

It's poisoned too

[Moonbox]

1 minute ago, Dougie93 said:

it's not that complex

in order to stave off any correction at all since 2008

the central banks have been printing new dollars, flooding them into the economy

at first, only by buying bonds to induce net negative interest rates,

inciting the public to take on ever more leverage

but since the pandemic, those dollars have been flooding into the retail economy

now Canadians are burning in the fire of rapid money supply inflation

this entirely debt based system is a house of cards

the central banks now desperately need to remove dollars from the economy

by raising interest rates well above the rate of inflation

but the nation is at this juncture so debt burdened

that if the Bank of Canada did that, it would incite  massive devastating correction in all asset classes

including a cascading sovereign default, starting with the provinces, Newfoundland the first to fall

so the Bank of Canada is trapped, between runaway inflation, or a depression

so buckle up, because there is no soft landing

Here is a very good example of what I'm talking about.  Some of his points are true (albeit simplified), some are exaggerations and many are flat out wrong, including the final conclusion.  This will bear out over the next year or two and he'll of course be proven wrong, but the narrative has been repeated so many times that it's become the only reality to many.  

 

[Tony Hladun]

As Dougie93 says QE is the new variable.  The US started in 2008 but  Japan has been at it for a longer time and it's not turned out well for them.  No gain in Nikkei since 1990.  Central banks can now influence long term bond rates and that's deadly.  It's like having drunks control the price of liquor.     

Edited November 23, 2022 by Tony Hladun

[Michael Hardner]

I am having a problem getting through the OP but I *think* it will end being my favourite OP of the year based on what I'm seeing...

[Dougie93]

5 minutes ago, Moonbox said:

Here is a very good example of what I'm talking about.  Some of his points are true (albeit simplified), some are exaggerations and many are flat out wrong, including the final conclusion.  This will bear out over the next year or two and he'll of course be proven wrong, but the narrative has been repeated so many times that it's become the only reality to many.  

 

it's not that complex

these central bankers try to maintain authority by pretending that it is too complex for the public to understand

but the math is actually quite simple

the inflection point is that they have to raise interest rates well above the rate of inflation

but they won't do that, because it would incite a depression

so they are trapped in a puzzle of their own making

the debt has been amassing for decades,

so they can no longer raise interest rates without inciting a catastrophe

they basically just fake it, everything the central bankers say publicly is nonsense

but they simply hope the public are too ignorant, apathetic or disinterested to even notice

any layman can understand that

[Dougie93]

17 minutes ago, Tony Hladun said:

As Dougie93 says QE is the new variable.  The US started in 2008 but  Japan has been at it for a longer time and it's not turned out well for them.  No gain in Nikkei since 1990.  Central banks can now influence long term bond rates and that's deadly.  It's like having drunks control the price of liquor.     

QE in of itself did not incite inflation

because at first, the central banks were simply buying the bad assets & government bonds

so that was contained

but those net negative interest rates have incited a totally debt based economy since 2008

money basically became credit

then came the pandemic, wherein the government shut the economy down

at which point, the dollars had to go beyond the banks and flow into the retail economy

this burst the dam,

these new dollars flooding out of the bank vaults onto the streets has induced an inflation crisis

the workers wages can never keep up with going from net negative to double digit inflation

but most homeowners could not survive the interest rates required to contain the money supply

so either Canada burns in the fire of inflation

or freezes in the dark of a prolonged secular bear market correction

on a scale greater than the Great Depression

thus you can easily see why the central bankers are paralyzed with trepidation

moreover, any central banker which informs the public as to the dire nature of the crisis

will simply be fired and replaced with a crony who will tow the party line

[dialamah]

37 minutes ago, Dougie93 said:

these central bankers try to maintain authority by pretending that it is too complex for the public to understand

And surgeons pretend that brain surgery is too complex for the average Joe to do so they can keep making scads of money.

[Dougie93]

6 minutes ago, dialamah said:

And surgeons pretend that brain surgery is too complex for the average Joe to do so they can keep making scads of money.

the central bankers don't do it for the money, they are already very wealthy long before they are appointed

central banker is a political appointment, they do it for the prestige

[Moonbox]

47 minutes ago, Tony Hladun said:

As Dougie93 says QE is the new variable.  The US started in 2008 but  Japan has been at it for a longer time and it's not turned out well for them.  No gain in Nikkei since 1990.  Central banks can now influence long term bond rates and that's deadly.  It's like having drunks control the price of liquor.     

Central Banks have always been able to influence long term bond rates.  The Fed Chair could tweet a picture of Pug and that would probably affect long term bond rates.  

Japan's problems are more fundamental in nature than just central banking.  Wild speculation, poor capital controls/regulation and rapid global/liberalization blew the whole thing up by the 90's. The beginning of that mess coincided with the beginning of a demographic crisis which has only worsened since, with the working population shrinking from over 70% in the early 90's to less than 60% by the time COVID hit.  That Japan's problems are markedly different than here should be evident simply by the fact that they've spent the last 25-30 years struggling to reverse deflation, rather than inflation.  

 

[Moonbox]

1 hour ago, Michael Hardner said:

I am having a problem getting through the OP but I *think* it will end being my favourite OP of the year based on what I'm seeing...

It's a pretty big wall of text, isn't it?  ?

[Moonbox]

1 hour ago, Dougie93 said:

it's not that complex

these central bankers try to maintain authority by pretending that it is too complex for the public to understand

but the math is actually quite simple

No Dougie.  The math isn't simple.  

Not only do you not have the knowledge to write or calculate inflation prediction models, you don't have the data to populate them anyways.  It's far beyond the scope of a single person to undertake, and even large teams of economists and statisticians can't make accurate predictions, nor do they even try.  Rather, they provide guidance and best-guesses - probabilities of different scenarios based on how the unknowable future plays out.  

...but sure.  It's so simple.  Dougie has it all figured out at home.  ?

[Dougie93]

22 minutes ago, Moonbox said:

No Dougie.  The math isn't simple.  

Not only do you not have the knowledge to write or calculate inflation prediction models, you don't have the data to populate them anyways.  It's far beyond the scope of a single person to undertake, and even large teams of economists and statisticians can't make accurate predictions, nor do they even try.  Rather, they provide guidance and best-guesses - probabilities of different scenarios based on how the unknowable future plays out.  

...but sure.  It's so simple.  Dougie has it all figured out at home.  ?

it is honestly a very simple calculation

the inflation of the money supply has to be contained by raising interest above the inflation rate

but they can't do that without inciting a massive debt crisis incited catastrophe

so they are trapped, marking time, waiting for events to overrun them

[Aristides]

No one understands crypto, that's why it's called crypto.

All currencies rely on trust to hold their value, crypto is no different. Central Banks are about maintaining that trust. There is no such restraint on crypto, it's just another ponzi scheme. 

Edited November 23, 2022 by Aristides

[Dougie93]

26 minutes ago, Aristides said:

No one understands crypto, that's why it's called crypto.

cryoto is easily understood

crypto is a classic Ponzi Scheme

the rise of crypto is being incited by the net negative interest rates

investors desperately looking for returns by arbitrage

this is no different than the scam Bernie Madoff was running

except it is on an exponentially greater scale

this is how & why the whole financial system is going to implode, everywhere at the same time

musical chairs

when the music stops, the wrath of God will befall the masses

the money lenders shall be hurled from the temple then

murmuring like distant thunder

hear the trumpet loudly roar

Edited November 23, 2022 by Dougie93

[Moonbox]

1 hour ago, Dougie93 said:

it is honestly a very simple calculation

It's not, and you repeating that thought makes you look sillier every time.  

1 hour ago, Dougie93 said:

the inflation of the money supply has to be contained by raising interest above the inflation rate

and that's everything there is to it, huh?  ? 

1 hour ago, Dougie93 said:

but they can't do that without inciting a massive debt crisis incited catastrophe

so they are trapped, marking time, waiting for events to overrun them

Thanks for coming out Dougie.  You've been a wonderful example of what I was talking about in the OP.  

[Dougie93]

3 minutes ago, Moonbox said:

It's not, and you repeating that thought makes you look sillier every time.  

and that's everything there is to it, huh?  ? 

Thanks for coming out Dougie.  You've been a wonderful example of what I was talking about in the OP.  

again, it's quite simple

inflation is too many dollars flooding the economy driving prices above what wages can sustain

the only remedy is to remove dollars by raising interest rates above the inflation rate

when the Bank of Canada raises interest rates to 3.75% when the inflation rate is 7%

that's when you know, by logical deduction, that the central bankers are not serious

because they can't raise the interest rate to what it needs to be, at something like 12%

because Canadians and their governments are too indebted to handle that rate

[Hodad]

5 hours ago, Moonbox said:

I've been saying this on this forum for awhile now that monetary policy and central banking is overwhelmingly complex beyond the average perception.  Explaining it is hard because unless you also have the foundational economic knowledge to understand the terminology and relationships, it's going to seem hopelessly esoteric and complex.  The number of people who are actually going to read (or listen to) an essay on it to get even a basic grasp are few, so as a popular media/discussion topic you end up with little but oversimplified and/or grossly inaccurate summaries/narratives that mostly confuse people.  This has made for fertile ground for negativity, with central bankers around the world under mountains of  criticism from folk who (at best) have no idea what they're talking about, but also those that do understand but see it as a useful political whipping boy. 

The reason I made this thread was a timely article in the CBC (I know - reee MSM fake news), where the author points out the challenges explaining this to the average layfolk and references the Deputy BoC Governor's attempts to make policy decisions more accessible. 

https://www.cbc.ca/news/business/inflation-interest-rates-column-don-pittis-1.6660112

The CD Howe Institute also had some interesting takes on how silly the politicization of monetary policy has become, but my favorite quote from the article was the comparison to "Doing Your Own Brain Surgery".  Most people would defer to the medical experts on this and can understand the obvious implications of mucking around as noobs, but because it's not so obvious or visible, they have trouble doing the same for monetary policy despite relatively similar levels of complexity.

I've done some crypto investing over the last couple years and made a lot of money off it, but it's been very much a Greater Fools game where I ride a delusional hype train and bail long before whatever sh*tcoin I'm buying inevitably steams off a cliff.  Central to the delusions of crypto bros and moonbois has been the theory that central banks were steering us towards hyperinflation and the imminent collapse of sovereign fiat currencies (pushed heavily in 2021).  These theories have predictably played out as false and crypto market caps have been devastated since Nov 2021, but the narrative that central banks are just printing piles of cash out on their money machines and using it to prop up their governments persists anyways.  Many of these folk sit at their computers reading charts that don't tell them what they think they do, and sharing tweets and blogs that reinforce their narrative, but all they're doing is reinforcing their poor decision making. 

The TLDR of this post, I think, is that people often don't know what they don't know.   Convincing yourself that you're capable of proficiency in deeply complex subjects that usually require years of formal education and/or practical experience is unwise.  I'm guilty of it sometimes and try as much as I can to recognize when it happens, but that's unfortunately sometimes long after the fact.  We don't have to blindly defer to authority, but at the same time we should be acknowledging that on many subjects, we're not really capable of commenting fairly or intelligently.  That's not because we're stupid.  It's because we have no idea what we're talking about and because spending our after-hours prowling the interweb is not going to solve that.  Sometimes, we have to let the experts be the experts.   

 

This is a very good post. The machinations of the central bank are extraordinarily sophisticated. I have extensive economics education (as a student, it's not my profession) and have no problem admitting that it's way over my head.

I don't mean to say that it's unlearnable, but one would need both a good foundation and a lot of specialized training on top of it--and a good bit of practice. We're talking multiple textbooks. Nobody's going to do it in a blog post 

[Dougie93]

in 1981, the inflation rate reached a high of 13%

so the central bank raised interest rates to 18%

but at the time, the deficit was only 1.5%, the debt was only 25% of GDP

but now the deficit is 15%, the debt to GDP is 135%

so not only can deeply indebted mortgage holders not handle increased interest rates

neither can the governments, particularly provincial governments

if the Bank of Canada raises interest rates to what they need to be

that will bring down the Communist traitor governments in Ottawa and the provinces too

since everyone who works at the Bank of Canada is a Communist traitors too at this point

they won't bring their treasonous cohorts down by raising interest rates

the Bank of Canada is now trapped into propping up the Communist traitor Woke lunatics by default

[Dougie93]

13 minutes ago, Hodad said:

This is a very good post. The machinations of the central bank are extraordinarily sophisticated. I have extensive economics education (as a student, it's not my profession) and have no problem admitting that it's way over my head.

how does a 3.75% interest rate posted by the BoC address a 7% inflation rate ?

I'm not going to admit that it is over my head to understand that the BoC is compromised and so full of shit

because it's simple math

the interest rate needs to be above the inflation rate

but the BoC won't do it, because they are corrupt

I mean, duh

Edited November 24, 2022 by Dougie93

[cannuck]

I am endlessly amused at the doings of economists and bankers.   They have managed to codify and institutionalize a mess of hogwash that can precisely calculate and predict things they actually know very little about.  Spoken by someone once trained as a banker and still involved peripherally with compliance and regulation.

[Dougie93]

20 minutes ago, cannuck said:

I am endlessly amused at the doings of economists and bankers.   They have managed to codify and institutionalize a mess of hogwash that can precisely calculate and predict things they actually know very little about.  Spoken by someone once trained as a banker and still involved peripherally with compliance and regulation.

exactly

this is a priesthood now

the central bankers are a laughing stock

I feel bad for Millennial's who drink this kool-aid

only because they are too young to remember the last time the central bankers blew the economy up

yet the Millennial's are going to pay, they are going to pay dearly

they will be the ones living in the tent cities when the depression comes

so no need for me to punish them

God will punish the Millennial's for their atheist false idolatry

pray for them and their innocent children : they know not what they dp

Edited November 24, 2022 by Dougie93