Headline:
The Real End Game
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Of All The External Commentary About Global Central Bankers…The Oddest = Many People Actually Believe What They Say.
So Often Central Bankers Are Incorrect + Plain Wrong.
But That’s All Right Because Forecasting The Economy = Tough Gig.
But Being Mislead…Nobody Likes That…And It Seems That Global Central Bankers Are Misleading Us…ONCE AGAIN [i.e. QE was advertised as a short term solution in 2008/09 & yet it is still being globally deployed…in some cases…more than ever.]
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What Are They Currently Misleading Us About?
That They Will Eventually Release Most Of Their QE’ed Sovereign Debt From Their Balance Sheets [as global inflation emerges] Into The Market…Mostly Via Non-Reinvestment At Maturity.
And There Is “A Ton” Of Central Bank Owned Sovereign Debt [+ other financial assets].
The Chart Below Spectacularly Illustrates…And This Does Not Even Include China [which some believe holds assets double the aggregated levels of The Federal Reserve, ECB + The Bank of Japan].
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And If Anybody Really Believes The Federal Reserve, ECB and The Bank Of Japan Are Serious About Quantitative Tightening…As Recently Suggested By The Mainstream Media….Then They Live In A Fantasy World…As Central Banker Actions, Rather Than Their Words, Suggest Otherwise.
Further…For Those That Claim The Federal Reserve Is Already “Tightening” Their Balance Sheet…I Challenge That Assertion As 99%+ Of Their Balance Sheet Is Still Being Reinvested At Maturity.
So The Glacial Pace Of Reduction, Although Technically “Tightening”, Is Almost Irrelevant. It Is Almost Akin To To Draining An Ocean One Tea-Spoon At A Time.
Plus…The Fed Can Halt This Slow Run-Off Of Assets…Whenever They Choose …For Whatever Reason They Want…As There Is No Practical Oversight Of Their Monetary Tactics.
In The Meantime The Bank of Japan [BoJ] and The European Central Bank [ECB] Continue To ADD To Their Balance Sheets.
The BoJ, It Seems, Will Never Stop As They Continue To Nationalize Their Sovereign Debt While The ECB Shows Little Sign Of Wavering.
Kuroda + Draghi Are “All-In”…And Judging By Their Public Statements…Seem Quite Proud Of It.
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So Then…How To Judiciously Shrink Central Bank Balance Sheets Without Elevating Interest Rates [via a dramatic increase in supply vis-a-vis demand]….Thus…Braking Economic Growth?
As Already Demonstrated, In Just 4 1/2 Months Of “Normalizing”, The Fed’s Minuscule Treasury Releases Have Already Had An Out-Sized Impact On Interest Rates. We All Know What Happens If/When Those Releases Are Dramatically Increased…As Previously Outlined By Yellen & Co..
A Little Bad Luck For The Fed Too…As Trump’s Deficit Spending Further Lifts Yields Skyward…Also Pressuring The Dollar…To Provide Even More Incremental Inflationary Fuel.
So The Fed Is Too Late To The Normalization Party…And They Know It. The Markets Smell Blood And Are Going In “For The Kill”.
Clearly…No Matter How Deliberately The Debt Assets Are Released To The Market…It Is A Virtually Impossible Task To Not Impact The Absolute Level Of Interest Rates Higher
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Thus…There Is Only One Real Way For The Central Banks To Rid Themselves Of These Debentures…That Is…To Simply Forgive Much, If Not All, Of The Sovereign Debt On Their Balance Sheets.
Voila…The Tough Task Could Be Easily Executed With Just One Decree From Each Central Bank. The Rationale = “For The Good Of The Global Economy.”
Naturally, The “Spin” From The Forgivers Would Be Brilliantly Positive…And Effected Nations Would Obviously Concur…As They Would Directly Benefit.
The IMF’s Lagarde & “Thought Leaders” Like Dalio + El Erian Would Also, Likely, Support The Move.
Ratings Agencies Would Also Have To Fortify The Decision …Which They Would…Due to Tremendous Political Pressure…Despite The Absurdity Of The Idea.
Moreover, They’ve Already Tacitly Endorsed QE By Not Directly Penalizing The Credit Ratings Of Those Countries Directly Engaged In QE.
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Think About It…It Is All So Economically Unethical:
1. Sovereigns Issue Debt.
2. Central Banks Buy Sovereign Debt [With Newly Minted Currency].
3. Central Banks Intentionally Over-Pay, For Debt, To Maximize Price Impact.
4. Sovereigns Pay Low Interest On Debt Thanks To Central Bank Policies = ZIRP + NIRP.
5. Central Banks Return Interest Income To Sovereigns.
6. Sovereigns Reduce Annual Deficits With Central Bank Remittances.
7. Sovereigns, Despite Remittances From Central Banks, Continue To Produce Annual Operating Deficits.
8. Annual Operating Deficits Continue To Grow National Debt.
9. Debt Continues To Grow Faster Than Tax Receipts…Imperiling Sovereign Credit Ratings.
10. CENTRAL BANKS FORGIVE SOVEREIGN DEBT…IN ORDER TO IMMEDIATELY OVERCOME A MOUNTAIN OF ECONOMIC OBSTACLES?
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Of Course…There Will Be Some Push-Back By The Markets…And It Could Be Brutal.
1. Sudden Destruction Of Central Bank “Credibility.”
2. Inflation Sharply Increases…As Sovereigns Suddenly Freed To Increase Fiscal Spending.
3. Sovereign Debt [held by private institutions/investors] Craters In Value Due To Both Central Bank “Credibility” Destruction + Increasing Inflation Expectations.
4. As Rates Suddenly Rise…Risk Asset [equities, real estate, etc] Values Adjust Downward.
5. Legacy Fiat Currency Values Tank As The Executing Mechanisms Of Central Bank Policy Also Lose “Credibility”.
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So…Despite The Clear Economic Dangers…Will Central Bankers Actually Forgive The Debt Obligations Of Their Sovereign Investment Portfolios?
It Seems Likely As They’ve Already Taken Huge Risks With The Global Economy [QE/ZIRP/NIRP/IOER/ + Debt Monetization] With Little Concern About Its Negative Impacts…As The Global Liquidity Hoses Continue To Shower The Major Economies Of The World.
Why Not Just Roll The Dice Again…As They Seem To Believe They Are “The Masters Of The Economic Universe” Anyway?
Furthermore…It Is Their Only Legitimate Medium Term Option…As Global Sovereign Debt Stacks Have Already Grown Beyond The Levels That Can Be Sustained By Even The Most Optimistically Forecasted Economic Growth.
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Japan…The Country With Debt/GDP > 200% And An Aging/Shrinking Population = Decreased Fiscal Cash Flow [due to increased healthcare/pension costs + decreasing tax revenues] Will Be The First Domino To Fall.
Other Central Banks Will Then Be Forced To Follow…As The “Debt Infused Sovereign Drunks Will Be Forced To Hold Each Other Up…Rather Than All Fall Down Together.“
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