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One of the crucial things to understand about today’s world is that
money is fungible. Whether it’s created in Japan, Europe, China or the
US, once it’s tossed by a central bank into one or another part of the
global economy, it eventually finds its way to a common pool of
liquidity.
So the modest US tightening of the past year (100 basis point
increase in the Fed Funds rate, slight decrease in Fed balance sheet)
has to be seen in a global context. And that context is still insanely
easy. Here, for instance, is China’s “social financing” – their term for
total new debt:
 
This chart is in Chinese yuan, so it’s not immediately clear just how
much borrowing is taking place. But converting to dollars yields a
monthly average of about $250 billion, or $3 trillion per year. That’s a
ton of new debt, much of which generates demand for raw materials from
other countries, thus exporting Chinese inflation to the rest of the
world.
The European Central Bank is, if anything, even easier. Here’s a brief excerpt from Doug Noland’s latest Credit Bubble Bulletin – which as usual should be read in its entirety by anyone who wants to understand today’s monetary insanity.
ECB chair Mario Draghi: “Inflation is not where we
want it to be, and where it should be. We are still confident that it
will gradually get there, but it isn’t there yet, and that’s why the
Governing Council reiterated that the present very substantial monetary
accommodation is still necessary…Now, the last thing that the Governing
Council may want is actually an unwanted tightening of the financing
conditions that either slows down this process or may even jeopardise
it; and that’s why we retain the second bias, or let’s call it, reaction
function. ‘If the outlook becomes less favourable or if financial
conditions become inconsistent with further progress towards a sustained
adjustment in the path of inflation, we stand ready to increase our
asset purchase programme in terms of size and/or duration.’ And I think
the Governing Council has given enough evidence that when flexibility is
needed to achieve its objectives, it has been very able to find all
that was needed. So that’s why we keep this bias.”
If central banks have become so keen to protect markets from risk
aversion, why shouldn’t the cost of market “insurance” remain
extraordinarily low. Why wouldn’t speculators gravitate to products
fashioned to profit from providing myriad forms of market risk
mitigation (hawking flood insurance during a drought)? And, importantly,
as Bubble risks escalate, why would sovereign yields around the globe
not discount the high probability that central banks will at some point
be called upon to make good on their New Mandate – i.e. respond to
faltering Bubbles with aggressive new QE programs with enormous
quantities of bonds/securities to purchase?
Meanwhile, in Japan, a couple of central bank governors who are
reportedly skeptical of hyper-easy money resigned and were replaced by
people who were the opposite of skeptical:
(Globe and Mail) – The two new members of the Bank of Japan’s policy
board said on Tuesday that the central bank should continue efforts to
achieve its 2 per cent inflation goal and it was premature to debate an
exit from its massive monetary stimulus.
Goushi Kataoka, a 44-year-old former economist at Mitsubishi UFJ
Research and Consulting and an advocate of massive money printing, said
he wants to see the price goal achieved quickly although he cannot say
when that can be.
The other new board member, Hitoshi Suzuki, a 63-year-old former
deputy president of Bank of Tokyo-Mitsubishi UFJ, who is well-versed
with financial markets, said it was “dangerous” to markets to debate an
exit from the stimulus now.
“There’s a considerable distance from the 2 per cent target. From my
own experience of dealing with markets for 20 years, starting a debate
on exit now would be dangerous to markets,” Suzuki told a joint news
conference.
He added that the price target was a high goal but he wants to achieve it by any means.
Here’s the recent increase in the BoJ’s balance sheet – which is
another way of saying the amount of money the bank has created and
released. Note that it has more than doubled in three years:
So what does all this mean? Here’s Noland’s conclusion:
There is no doubt that central bank liquidity backstops
have promoted speculation, securities leveraging and derivatives market
excess/distortions. I also believe they have been instrumental in
bolstering passive/index investing at the expense of active managers.
Who needs a manager when being attentive to risk only hurts relative
performance? And the greater the risk associated with these Bubbles – in
leveraged speculation, derivatives and passive trend-following – the
more central bankers are compelled to stick with ultra-loose policies
and liquidity backstops.
After all, who will be on the other side of the trade when all this
unwinds? Who will buy when The Crowd moves to hedge/short bursting
Bubbles? This is a huge problem. Central bankers have become trapped in
policies that promote risk-taking, leveraging and hedging at this
precarious late-stage of an historic Global Bubble. These days, central
bankers cannot tolerate a “tightening of financial conditions,” and they
will have a difficult time convincing speculative markets otherwise.
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John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
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