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Causes And EffectsOne of the biggest mysteries behind the behaviour of markets, finances and the economy in general are the reasons why bad things occur. If you have ever attempted to trade through market timing (i.e. technical analysis), you may have noticed that attempting to forecast the main, secondary and tertiary trends using purely mathematical algorithms is well… pointless. Although it is true that about 4% of all traders are successful, almost all of them include human judgement in their decisions. There are very few (if any) purely quantitative traders (i.e. algorithmic traders) that are successful and all of them work for companies with very deep pockets that have the means to move markets and then benefit from such movements.


This inability to accurately forecast anything in economic terms is clearly emphasized in the myriad of economic opinions that plague every country and every government on earth. Particularly puzzling are the commentaries from top officials from Central Banks, who typically exhibit the wisdom of mushrooms and the foresight amoebas, with all due respect to mushrooms and amoebas.

Ask yourself this question: how is it possible that after 200+ years of mainstream economic theory most economists are, on average, pathetically wrong? Well, the explanation comes in two parts. The first one is simplicity itself: their theories are not worth the paper they are written on. The second one, not so. As we have previously commented in various articles, the entire world is, for all intents and purposes, socialist (see Socialism Indices). This is relevant because the main tenet of socialism is that "good" is defined as what is best for society and not for each person. As such, society (i.e. Central Banks) must manage the economy through the manipulation of currencies. They must do so "for the greater good". Therefore every single Central Bank will attempt to manipulate the economy of their country and so the world economy is dictated by what 200 or so Central Bank committees dictate. This means that the world economy is decided by 1000 or so people throughout the world instead of 7.21 billion. This translates into the ridiculous current affairs where 1000 or so people knows what is best for 7.21 billion and their wisdom is superior than the one of the entire world population. Right. What are the chances of this being true?

One more observation. Most Central Banks do not act in a coordinated fashion. This means that while Central Bank A might be rising interest rates, Central Bank B may be lowering them. This means that the behaviour of Central Banks is quite random (but not always - the 2008 debacle is an exception).

Recapping. The World Economy is manipulated by 1000 or so people who know better than 7.21 billion and they act randomly. Is then surprising that the entire economy of the world is random, unpredictable and unstable? Hell no!

Think about it. Free markets are like earnings in Casinos, they are predictable and stable. As a matter of fact, Casinos know that something unusual and out of the ordinary is going on when earnings fluctuate. This seems contradictory but it is not. Casinos operate by what statistics calls "The Law of Big Numbers". What this means is simply that when a great deal of people act, there generate a smooth tendency towards a result. There are no big fluctuations. This makes sense because in free markets everybody is trying to satisfy a want either by purchasing or selling a good or service. Short of extraordinary circumstances, there should be no booms or boosts simply because in general everybody behaves in the same manner. Minor booms and boosts may still occur as isolated incidents but not at large scales.

Yet, this is not what the last 200+ years of economic history shows us. Over these years there have been constant cycles of exorbitant spending followed by the deepest collapses. Why? In a word? Governments. There are causes and effects for these cycles and they cannot be forecasted precisely because of independent actions of governments, primarily through the manipulation of Central Banks.

Today we are going to explore the relationship between Central Bank actions and artificial economic booms and boosts.



The first parameter we are going to explore is world liquidity which is defined as the availability of liquid assets to a market or company. In other words, liquidity is simply the amount of credit or cash available for borrowing. We are going to be looking at this parameter assuming that the entire world is a giant free market, which for liquidity purposes is more or less correct since most of the time companies are able to borrow in any market while operating in a different one. Whether or not this is convenient for them is a different story, but on average money moves freely between borders.

Liquidity (or credit) is of critical importance because almost all commercial operations now days depend on it. All credit card transactions depend on liquidity. All purchases of raw materials and wholesale goods or services depend on liquidity. Companies that operate on a daily cash basis are almost non-existent. Everybody in the world buys now and pays later. Credit (liquidity) is what allows the modern markets to operate successfully. Credit is what dried out in the 2008 debacle and almost single-handedly sunk the entire world in the worse depression in history. Therefore, if we are to look at one economic parameter this would be liquidity. Fortunately enough, the Bank for International Settlements (or BIS) does carry some statistics to this regard.


Liquidity has several characteristics. The first one is that liquidity is typically reactive and not proactive. People look at the immediate past and they make the obvious forecast: tomorrow will be as yesterday and today. As such, liquidity represents yesterday economic conditions assumed to continue tomorrow. This is precisely the conclusion arrived by the Random Walk theory of the markets (yes, that one, the obsolete one). According to this theory the best predictor of tomorrow prices are today's prices.

Liquidity depends upon a large number of factors, but the most basic of them is monetary policy. This is, interest rates and money printing. This is so because the amount of money circulating in a given time defines its price (i.e. lending interest). If money is in short supply (high interest rates and no printing), liquidity will drop. If money is in large supply (low interest rates and plenty of printing), liquidity will be high.

As monetary policy is defined by Central Banks, liquidity is highly dependent (but not entirely) upon Central Banks. Furthermore, the largest Central Banks (EU, US and Japan) have massive influence on liquidity because of the size of their credit markets.

As Central Banks purport to manage the economy in advance, they are the ones changing the conditions of liquidity hence causing many economic events to happen.

Note: please see the Glossary if you are unfamiliar with certain words.

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