Dr. Pippa Malmgren, former special assistant to President Barrack Obama on economic policy and former member of the Working Group on Financial Markets (the so called ‘Plunge Protection Team’), recently did an interview with Erik Townsend of Macro Voices to discuss a wide range of topic including the Europe’s geopolitical and economic outlook, crypto-currencies, the global economy, and her expectations for the inflation and stocks.
The interview is too long to fully summarize here, but Dr. Malmgren’s discussion of the so called ‘plunge protection team’ and her expectations for markets are particularly noteworthy.
Dr. Malmgren is one of the few people calling for dramatically higher levels in stocks, noting:
“You have had all this cash sitting on the sidelines worried about the future and finally, actually, the future is maybe looking okay. Growth is okay. The world seems to be recovering and so what they (central banks) are really worried about is that all the money the put in the system is fine as long as it sat on the sidelines but now it is starting to deploy and so it’s a bit like saying ‘lets throw around all this liquidity because it’s like petrol, it’s like gasoline, it’s an accelerant. It’ll make the economy burn faster, but don’t worry about inflation because there’s no spark. It’ll never actually start and then suddenly there is a spark because somebody says ‘you know what, the stock market keeps going up and I can’t be left behind. I’ve missed it the whole way up here. Let’s get in.’ Now it really starts to roar.”
This echos the concerns we expressed most recently in ‘The Excess Reserve Overhang – More Important than Ever’ that trillions of dollars of excess reserves held by banks risks spilling back into the economy and acting like another, but more powerful, round of quantitative easing. However, the real question is what what will have a more powerful impact: banks deploying their excess reserves into the economy or central banks reducing their balance sheets? For now, it seems that banks deploying excess reserves is the more likely threat because central banks are only talking about reducing their balances sheets, not acting, but if they act, the dynamic could complicate dramatically.
Check out the full interview below: