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By Bill Holter
Zerohedge put out an interesting article yesterday Why "Nothing Matters": Central Banks Have Bought A
Record $1 Trillion In Assets In 2017 . Please note this is
$3.6 trillion annualized rate so far this year.
Of particular note is this chart:
What jumps out at you should be the quadrupling of the their
balance sheets since 2007 from $3.5 trillion to over $14 trillion.
So what exactly does this mean? Basically, to keep the system
from imploding upon itself the world's central banks had to
"create" over $10 trillion of liquidity by purchasing assets onto
their balance sheets. This is puts forth a "chicken or the
egg" question, or actually two as you will soon see.
First, central banks have been buying everything ...including
stocks, to prevent the markets from turning down. It is safe to say
they understand that with the leverage and derivatives outstanding they
cannot allow markets to correct (or God forbid actually enter bear
markets). They understand the "size" of the derivatives
markets is so large, NO ONE can withstand a downturn and actually be called
upon to perform their "insurance payments".
So the central banks have a problem here, they are now
"forced" to purchase assets to prevent market downturns but one
should ask the question "who will they eventually sell to"?
The answer of course is "no one" because there is no one large
enough to take these assets off their books. Chicken or the egg
question number one; did the central banks create the bubble going in to 2008
or did the bubble of 2008 create the current central bank balance sheet
bubble?
While you are pondering that question, let's look at another, much
more important chicken or the egg question. Central banks "create
money" via credit. They are now buying all sorts of assets from
"pristine" (sovereign debt) to "ugly" (junk debt to get
it off of bank balance sheets) to truly "stupid" (stocks).
Also, please keep in mind central banks for the most part are the issuers of
currencies, their balance sheets and what they are comprised of "backs"
the currency. They have put themselves in the position of buying assets
they know they can never sell. They can never sell because there are no
buyers large enough to buy, AND, they would then be creating the downturn in
markets they originally denied if they ever stopped buying let alone
selling assets.
With the above in mind, what does this mean for the currencies they
issue? Won't they be forced to continually purchase ever more assets to
prevent markets from collapsing? And doesn't an ever larger balance
sheet mean money supplies expanding and thus more currency units outstanding
versus basically static amounts of real goods available? Do you see
where this is going?
OK, chicken or the egg question number two; the central banks by
definition create inflation (via currency and credit), does the continual
creation of their "product" (fiat) in order to prevent the
destruction (deflation) of their product ...actually destroy their
product? Simplified, because "money" MUST be created at ever greater
amounts to avoid deflation, are the central banks forced to ultimately
destroy their currency? The answer of course is YES. Central
banks are forced in the exact same mathematical manner as any Ponzi
scheme ...to issue currency in an exponential manner.
What has actually happened was entirely predicable since
1913. At some point the U.S. (and thus the entire world as the dollar
is the reserve currency) would reach debt saturation by definition. We
did so in the 2006-2007 era. The only balance sheets left to
"reflate" at that point were the sovereign treasuries/central
banks themselves. They by result have destroyed their own
balance sheets over the last 10 years. It is only a matter of time
until this is fully recognized by the investing/consuming public and thus
lose confidence in the central banks themselves. At this point, central
banks will destroy their own currency by doing what they do ...creating
currency and credit. From here, the faster they run, the faster the
boogeyman catches them!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
Comments welcome bholter@hotmail.com
Bill Holter writes and is partnered with Jim Sinclair at the newly
formed Holter/Sinclair collaboration.
Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a
retail stockbroker for 23 years, including 12 as a branch manager at A.G.
Edwards. He left Wall Street in late 2006 to avoid potential liabilities
related to management of paper assets. In retirement he and his family moved
to Costa Rica where he lived until 2011 when he moved back to the United
States. Bill was a well-known contributor to the Gold Anti-Trust Action
Committee (GATA) commentaries from 2007-present.
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