We have become inured to cycles of credit expansion, driven by fractional reserve banking at least since the Bank Charter Act of 1844, which
Our complacency extends to prices, especially regarding the exchange and valuation of capital assets. There are now about $13 trillion of bonds in issue with negative yields. We rarely think in any depth about this
Negative yields stand time-preference on its head. Time-preference refers to the fact that we prefer current possession to future possession, for obvious reasons. So, when we part with our
It gets even more bizarre. The French government has debts roughly equal to France’s GDP and by any analysis is not a very good credit risk, but it is now being paid by lenders to borrow. Only forty per cent of her economy is the productive tax base for a spendthrift, business-emasculating government. An independent observer evaluating French government debt would be hard put to classify it as investment grade in the proper meaning of the term. But not according to bond markets, and not according to the rating agencies which today’s investors
There are a number of explanations for this madness. Besides complacency and misplaced investor psychology, the most obvious distortion is regulation. Investors, particularly pension funds and insurance companies are forced by their regulators to invest nearly all their funds in
Additionally, with their highly-geared balance sheets state-
In Japan, the country’s government debt to GDP ratio is now over 250%. The Bank of Japan maintains a target rate of minus 0.1%, and the 10-year government bond yield is minus 0.16%, making the yield curve negative even in negative territory. It doesn’t stop there, with the Bank of Japan having bought 5.6 trillion yen ($52bn) of equity ETFs last year. This takes its total equity investment to 29 trillion yen ($271bn), representing 5% of the Tokyo Stock Exchange’s First Section. Last year’s purchases absorbed all foreign selling of Japanese equities, so they were clearly aimed at rigging the equity market, rather than some sort of monetary manoeuvre.
It’s not only the Bank of Japan, but the National Bank of Switzerland has been at it as well. According to its Annual Report and Accounts, at end-2018 it held CHF156bn in equities worldwide ($159bn), being 21% of its foreign reserves. We can see the direction central bank reserve policy is now heading and should not be surprised to see equity purchases become a wide-spread means of rigging stockmarkets and expanding base money.
Sovereign wealth funds, which are government funds that owe their origin to monetary inflation through the foreign exchanges, have invested a cumulative total of nearly $2 trillion dollars in listed equities.[iii] While this is only 2.5% of total market capitalisation of listed securities world-wide, they are a significant element in marginal pricing, more so in some markets than others.
Between them, central banks and sovereign wealth funds that are buying equities in increasing quantities further the scope of quantitative easing. The precedent is now there. Economists in the central banking community now have a basis for drafting erudite neo-Keynesian papers on the subject, giving cover for policy makers to take even more radical steps to pursue their interventions.
By all these methods, state control of regulated public and private sector funds coupled with the expansion of bank credit has cheapened government borrowing, and it would appear that governments are now enabled to issue limitless quantities of zero or negative-yielding debt. So long as enough money and credit is fed into one end of the sausage machine, it emerges as costless finance from the other. Never mind the destruction wreaked on key private sector investors, such as pension funds, whose actuarial deficits are already in crisis: that is a problem for later. Never mind the destruction of insurance fund finances, where premiums are normally supplemented by healthy bond portfolio returns. Just blame the insurance companies for charging higher premiums.
This is now the key question: are we entering a new phase of low-inflation managed capitalism, or are we tipping into a mega-crisis, possibly systemically destructive?
If the latter, there’s a lot to go horribly wrong. The Bank for International Settlements, the central banks’ central bank, is certainly worried. Only this week, it released its annual economic report, in which it said, “monetary policy can no longer be the main engine for economic growth.” Clearly whistling to keep our spirits up, it calls for structural reforms to boost government spending on infrastructure. Translated, the BIS is saying little more can be achieved by easing monetary policy, so Presidents and Prime Ministers, it’s over to you. You can create savings by making government more efficient and you can spend more on infrastructure.
While the BIS washes it hands of the problem, history and reason tell us increased state involvement in economic outcomes will only make things worse. It is in the nature of government bureaucracy to be economically wasteful, because its primary purpose is not the efficient use of capital resources. And while the outcome, be it a new high-speed railway or a bridge to nowhere may be a visible result, it fails to account for the true cost to the economy of diverting economic resources from what is actually demanded.
- Source, James Turks Goldmoney