BOOM as at 5th July 2020

CAN CENTRAL BANKS BUY EVERYTHING?THE BOOM THESIS

The central banks of the advanced economies are now buying lots and lots of assets. This all started in Japan 25 years ago. The Bank of Japan now owns 80% of the Exchange Traded Funds (ETFs) in that nation. That means they own a lot of the available stocks listed on their stock market via those ETF Funds. And through that mechanism, they also own the real estate associated with those companies. But they have also been buying REITs  – Real Estate Investment Trusts – which means they are buying up yet more real estate. And they are also buying almost all of the fresh new bonds issued by their Federal Government. The  Japanese government is expected to issue about 200 Trillion Yen in Government Bonds in 2020.  That is equivalent to about US$ 1.86 Trillion in US Dollar terms. Pretty soon we will be talking real money.

So can central banks buy everything? They can certainly try. There is nothing to stop them except difficult-to-control CPI inflation and/or currency collapse. Neither of these possible consequences have occurred in Japan over the last 25 years while the Bank of Japan has continued buying more and more assets. In fact, the Japanese Yen has tended to be too strong rather than too weak. And CPI inflation has certainly not been a problem, quite the opposite.

THE FED CAN BUY AND BUY AND BUY

In the US, the central bank is called The Federal Reserve. The assets available for the Federal Reserve to purchase most easily are securitized assets which can be purchased with the click of a mouse. This includes the $ 40 Trillion of bonds on issue and $ 35  Trillion of stocks on issue.

$ 40 Trillion for the bonds issued include approximately $16 trillion in US Government Treasury debt, about $9 – 10 trillion in mortgage-related bonds, more than $9 trillion in corporate bonds and more than $3.8 trillion in municipal bonds.

After mopping up all of that plus all the stocks on the stock market, they could move on to buy all the real property in the United States (real estate) then all US based commodities held in private hands. After that haul, they could buy all the US based precious metals and collectibles.

The real estate component would include about $ 32 Trillion for US homes and $ 16 Trillion for all commercial property.

Total Bill for all stocks, bonds and real estate =  US $ 123 Trillion.   Easy —  as long as CPI inflation stays muted and the currency stays strong and stable against other currencies.

PROGRESS SO FAR

Currently the Federal Reserve Balance Sheet shows just $ 7 Trillion in assets purchased. So to get to US$ 123 Trillion, there is a long, long way to go. This game is far from over.

They will try to reduce their asset holdings from time to time in a bid to “return to normal”. There will be much talk of returning the assets to private ownership. However, as far as BOOM can see in our current circumstances, this process will inevitably stall and the balance sheet expansion will resume.

The vast majority of those assets currently held are in Federal Government Treasury Securities (Bills, Notes & Bonds) and Mortgage Backed Securities. But the Federal Reserve also already owns $ 6.8 Billion of corporate bond ETFs. They are the third largest investor in LQD (iShares investment grade corporate bonds) and the second largest holder in VCSH (Vanguard Short Term Corporate Bonds). And the fifth largest holder in JNK (Junk Bonds — Barclays High Yield Bonds).

And they are moving towards buying other assets and (possibly) equities through the “Special Purpose Vehicles” recently established (and owned) by the Treasury but funded exclusively by the central bank.

FAULTY ANALYSIS

As the US Federal Reserve becomes more and more an asset owner and portfolio manager over time rather than solely a lender of last resort and a guardian of monetary policy, the financial landscape will inevitably and progressively change. The future looks more and more like a slow but steady return to feudalism with the central bankers becoming self-appointed feudal lords, collecting rental income and dividends. They will be effectively living off the fat of the land — a club of great privilege.

There are some analysts predicting the collapse of the US corporate bond market. Being a simple soul, BOOM can’t understand such a view. Why would the Fed sell out in a panic? The Fed does not have any need for cash. And who would they sell to? Surely the Fed would just buy more?

Other analysts are predicting the collapse of the US Dollar. For that to happen, the US sovereign bond market would have to collapse (US Treasury Bills, Notes and Bonds). Why would the Fed sell out of its Government bond holdings in a panic?  Surely the Fed would just buy more?

Yet other analysts are predicting the collapse of the US stock market. That event would present the Fed with another great buying opportunity. It could happen but why would the Fed not start buying?

Others are predicting the collapse of the US real estate market. That would trigger the collapse of the US banking sector. Then the Fed could buy up all the failed banks and inherit all the collateral assets at bargain basement prices.

In the game of Monopoly, there is a thing called “Bank”. The Federal Reserve is the Bank in this game of monopoly called the US asset market, all powerful and always ready to “lend a hand”.

While all these asset price games are unfolding, the real economy will be effectively starved of sufficient funds to return to stable GDP growth and CPI inflation (that situation is called “normal” in the game of mainstream economics). At present, none of the fresh new money created by the Fed flows directly into the real economy without passing first through the asset economy. It looks like the people who are not central bankers or connected to central bankers in some way will eventually be reduced to a relative peasant status, bereft of assets and burdened with rents, taxes and costs.

THE BOOM THESIS

BOOM’s thesis is that high CPI inflation is not coming back in the foreseeable future because there are just too many dis-inflationary forces in abundance including cheap goods (from China,Vietnam, India, Cambodia, Africa), cheap energy, cheap labor, cheap robotics, increased efficiency from computerization of just-in-time supply chains, aging demographics (more old people than young people) and cheap commodities.

If that is true and we also have low (or even negative GDP growth), then the economic world which we all live in will be totally different to what we have experienced for the last 100 years.

Welcome to the world of endless asset price inflation, massive central bank ownership of all asset classes, low economic growth and low (or negative) CPI inflation. That world will slowly begin to resemble the ancient world of feudalism and peasantry. This appears to be a one way trip. There is no going back.

COVID 19 LOGIC

Meanwhile in Covid 19 land, let’s look at one nation’s dynamics. That nation is Australia where the death rate from road accidents exceeds the death rate from Covid-19 by a factor of FOUR. In other words, Australia’s total deaths from Covid since March amount to just 104 deaths (although that is an exaggeration as most have died with Covid-19 rather than from Covid-19).

In that time frame, about 400 people have died on the roads.

Using current Covid Logic, Australia should lock-down all vehicles immediately in a bid to save lives. 

In economics, things work until they don’t. Until next week …………  Make your own conclusions, do your own research.  BOOM does not offer investment advice.
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EMAIL: gerry {at} boomfinanceandeconomics.com

Return to the BOOM Main Website –  BOOM Finance and Economics at  http://boomfinanceandeconomics.com/

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HOW MOST MONEY IS CREATED

BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR (but they always need a Borrower to do so)

THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANSBANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work.
https://www.youtube.com/watch?v=EC0G7pY4wREhttp://

How is Most New Money Created ?

LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).

From the Bank of England Quarterly Bulletin Q1 2014    —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.

Youtube Video —  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

and

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Paper:  Money in the Modern Economy  PDF —  CLICK HERE

Quarterly Bulletins Indexhttp://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.

On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —

“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”Reference: https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.htmlThe Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.“…… the vast bulk of broad money consists of bank deposits”“Money can be created …….. when financial intermediaries make loans““In the first instance, the process of money creation requires a willing borrower.”“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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