Executive Summary

• The dangerous unintended risks and consequences of central bank policies
• Returns diminish as you move along the expansion S-curve
• Why the current practice of moderating extremes will fail
• What comes next & how to prepare for it

If you have not yet read Part 1: The Inescapable Reason Why the Financial System Will Fail, available free to all readers, please click here to read it first.

In Part 1, we covered the financial system’s dependence on credit, and the central bank’s conundrum: they can’t raise rates without stifling the credit-binge-dependent “recovery” and asset bubbles, but they also can’t keep pushing asset bubbles higher without increasing systemic risks, as valuations are already stretched to historic extremes.

So what happens next?  Can central banks raise rates without popping the bubbles the system needs to remain solvent? Or can they keep yields near zero and keep pushing asset valuations higher for years or decades to come?

I hate to spoil the ending, but the short answer is: these are incompatible goals.  The central banks cannot raise yields (i.e. normalize rates to historically average levels) and push asset valuations higher, nor can they eliminate the systemic risk generated by extreme valuations and leverage.

Unintended Risks and Consequences

Extreme financial policies generate unintended consequences as a result of being extreme: a moderate policy wouldn’t have the “whatever it takes” impact, but it also wouldn’t jam all the levers to maximum.