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When The New Normal Fails: The "Problem With Traditional Economics" In A Bizarro, Centrally-Planned World

They call it the New Normal(sic) for a reason: that reason is that as a result of 6+ years of central-planning interventions in the global economy, an experiment that has grown far more monstrous than anything the USSR ever tried to do, everything is now broken: all conventional economic linkages, relationships and  correlations you learned about in university are no longer applicable or practical in a world that has taken both Keynesian and monetary theory beyond their wildest extremes.

The result is a ghoulish, macabre collage of mishmash theories applied haphazardly in hopes that something will finally stick, and if not, at least kick of the day of reckoning a little longer.

All of that will fail, and, just as the Austrian economists predicted from day one, the entire house of cards will come crashing down in a heap of record credit. Yes, it could have been different, had the people in charge taken the correct, but difficult decision when Lehman failed, and purged the system of its credit excesses. But they didn't, as that would have wiped out trillions in equity value where the bulk of the "wealth" and net worth of the legacy status quo is located.

So they kicked the can.

For all those sick and tired of watching the grotesque pantomime in which only the rich get richer, while everyone else is ever more impoverished, we have good news - the experiment is coming to an end. Only it is not us postulating that the entire "modern" economic system is on its last breath - here are seven slides from Citi explaining the very much intractable "problems with traditional economics", and why the economic Titanic, floating on an ocean of central bank liquidity, is approaching the proverbial iceberg.

So, without further ado, here is everything that is broken with the traditional economic system as applied in today's bizarro world.

* * *

At the top level, the problem reduces to some quite simple axioms: savings, assets = liabilities, credit creation, and the inability to do so when there is simply too much debt already.

When the disconnect between theory and reality detailed above manifests itself in the real world, people finally start asking questions, such as "who really creates money." They are stunned when they learn the answer, an answer which also explains why the created credit flows into assets and not into the broader economy.

Because where in theory monetary injection should lead to benign economic inflation and GDP growth...

... Instead the $5 trillion+ in excess reserves promptly found their way into the "other" inflation: asset prices, such as bonds and stocks, such as a 10 Year at 2.5%, such as the S&P at 2,000.

But why is inflation rushing into assets and not labor, wages, and broad prices levels? Simple: as Citi says, "credit will be created wherever it sees the most attractive return", or in the case of the New Normal, stock buybacks for example, if only for equity holders.

So since credit won't go where it should, the Fed thinks it can nudge it, and yet it fails as iteration after iteration of the "same old" is tried (QE1, QE2, QE3, soon QE4, etc) and assets rise to ever higher levels, the economy remains worse than ever, and the central planners are increasingly without options if and when a true shock to the system occurs. As Citi warns "wearing lifejackets doesn't stop the bath overflowing"

End result: more of the same in a closed loop, as the Keynesians and the monetarists say the only thing they can say when all their efforts fail: let's do it again, but this time MORE!... or, in the words of Citi's Matt King, "You can't unblock the plughole by pouring in more water." But the Fed sure can and will try.

And, as Citi concludes, if you leave the taps on even more, nothing happens to the economy, "but it does make financial assets float."

Translation: whereas in 2007 the mantra was "as long as the music is playing, you've got to get up and dance", the maxim of the New (ab)normal should probably be: "as long as the water is flowing, one has to get down and swim."

Just hope you have a lifejacket on when, to paraphrase T.S. Eliot, rational voices finally wake us, and we drown.