We are in the midst of a giant, and unprecedented experiment in monetary policy. Central banks around the world have inflated asset prices in an effort to create a “wealth effect.” What they have created is a situation where those with assets, the rich, have done extremely well while the non-asseted have had to watch while life has gotten harder.
This asset inflation is not sound however and the “wealth” it has created is illusory. We saw the market overwhelm China’s central bank for a good bit last year. It is likely that we will see more of that in other places – plunge protection team or no.
But US officials did more than that. They also created the PWG or, “the President’s Working Group on Financial Markets,” or, as we know it, the “Plunge Protection Team.” The group was created by an executive order from the Reagan White House in the wake of Black Monday and officially serves as a kind of consortium of top officials who advise the White House on markets when something goes horribly awry. Unofficially, the group directs, facilitates, and otherwise engineers futures buying to support the market. Or so “conspiracy theorists” believe.
As Reuters concludes, “it is unclear if [the Fed’s help] played a role in shaping Beijing’s actions.” Right. But what is clear is that when it comes to central bank intervention, the PBoC thinks the Fed has plenty of experience from which to draw dating back specifically to the 1987 crash that precipitated the creation of the body which nowadays operates from 33 Liberty and directs its barely-arm’s-length trading division at Citadel when someone needs to step in and “provide” a bit of ES liquidity.
*There was a time when the “plunge protection team” was considered kind of a conspiratorial myth. Nowadays it’s talked about openly. Times have changed.