Although we may not entirely agree with some of his convictions, there is no doubt that Daniel Lacalle is one of the people who knows the most about macroeconomics. Not only because of his PhD in Economics but especially because of his approach to the abuse of central banks that we have been suffering for more than a decade.
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Here is the article that lacalle wrote about this abuse and the end of the party a year ago in the website of the Mises Institute. As you will see, we agree very much with Lacalle in the analysis we made two years ago in our article «...".«Negative interests and Darwin«. And you might also be interested in re-reading «What to expect when you are waiting for... QE blackout»
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It is now 2018 and the Fed is raising rates decisively. And the ECB is finally facing its reality. We hope you enjoy Lacalle's hard-hitting and realistic article:
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The FT published an article stating that “major central banks now hold a fifth of total government debt”.
The figures are shocking.
1) Without any recession or crisis, major central banks are buying more than $200 billion of public and private debt, led by the ECB and the Bank of Japan.
2) The Federal Reserve holds more than 14% of the total US public debt.
3) The balance sheets of the ECB and BoJ exceed their respective GDPs by 351Tbp3T and 701Tbp3T.
4) The Bank of Japan is currently one of the 10 largest investors in the 90% in the world, and the Bank of Japan is one of the 10 largest investors in the 90% in the world. Nikkei.
5) The ECB holds 9.2% of the European corporate bond market and more than 10% of the total sovereign debt of major European countries.
6 The Bank of England owns between 25% and 30% of the UK sovereign debt.
A report Nick Smith, an analyst at CLSA, warns of what he calls “the nationalisation of the secondary market”.
The Bank of Japan, with its ultra-expansionary policy that only expands its balance sheet, is on its way to becoming the largest investor in the Nikkei 225 majors. In fact, the Japanese central bank already accounts for 60% of the ETF (Exchange Traded Fund) market in Japan.
What can go wrong? In general, central banking not only generates greater imbalances and a bad outcome in a “zombified” economy, as extremely lax policies perpetuate imbalances, but also weakens the velocity of money and encourages debt and malinvestment.
Believing that this policy is innocuous because “there is no inflation” and unemployment is low is dangerous. The government issues massive amounts of debt and cheap money promotes overcapacity and misallocation of capital. Thus, productivity growth collapses, real wages fall and the purchasing power of foreign exchange also falls, driving up the real cost of living and debt to grow more than real GDP. Thus, as we have shown in previous articles, total debt has risen to 325% of GDP while zombie companies reach crisis levels, according to the Bank for International Settlements.
Government securities monetised by the central bank are not high quality assets, they are a promissory note that is transferred to the next generations and will be paid off in three ways: with massive inflation, with a series of financial crises or with high unemployment. Destroying the purchasing power of the currency is not a growth policy, it is stealing from future generations. The “placebo” effect of spending the Net Present Value of those IOUs today means that, as GDP, productivity and real disposable income do not improve, at least not as much as the debt issued. We are creating a time bomb of economic imbalances that is only growing and will explode at some point in the future. The fact that the obvious ball of risk is delayed for another year does not mean that it does not exist.
The state is not issuing “productive money”, but only a promise of more revenue through higher taxes, higher prices or confiscation of wealth in the future. The growth of the money supply is a loan the state gets but we, the citizens, pay for it. Repayment comes with the destruction of purchasing power and confiscation of wealth through devaluation and inflation. The “wealth effect” of rising stocks and bonds is non-existent for the vast majority of citizens, as more than 90% of average household wealth is in deposits.
In fact, a massive monetisation of debt is only a way to perpetuate and strengthen the crowding out effect of the public sector on the private sector. It is a de facto nationalisation. Because the central bank does not “go bankrupt”, it only transfers its financial imbalances to private banks, companies and households.
The central bank can “print” as much money as it wants and the government benefits from it, but it is the rest who suffer from financial repression. By generating the ensuing financial crises through loose monetary policies and always being the main beneficiary of boom and bust, the public sector emerges from these crises more powerful and more indebted, while the private sector suffers the crowding out effect in times of crisis and the effect of taxation and wealth confiscation in times of expansion.
It is not surprising that public spending relative to GDP is now almost at 40% in the OECD and rising, the tax burden is at record highs and public debt is rising.
Monetisation is a perfect system for nationalising the economy by passing on all the risks of overspending and imbalances to taxpayers. And it always ends badly. Because two plus two does not equal twenty-two. By taxing the productive to perpetuate and subsidise the unproductive, the impact on purchasing power and wealth destruction is exponential.
To believe that this time it will be different and that the states will spend all this huge “very expensive free money” wisely is simply an illusion. The government has every incentive to overspend, since its goal is to maximise the budget and increase the bureaucracy as a means of power. It also has every incentive to blame its mistakes on an external enemy. Governments always blame someone else for their mistakes. Who cuts rates on 10% or 1%? Governments and central banks. Who gets blamed for taking “excessive risks” when things go wrong? You and I. Who increases the money supply, calls for “credit to flow” and imposes financial repression because “there is too much saving”? Governments and central banks. Who gets blamed when things go wrong? The banks for “reckless lending” and “deregulation”.
Of course, governments can print as much money as they want, what they cannot do is convince us that it has value, that the price and quantity of money they impose is real just because the government says so. Hence the lower real investment and lower productivity. Citizens and businesses are not mad not to fall into the trap of low rates and high asset inflation. They are not amnesiacs.
It is called financial repression for a reason and citizens always try to escape the theft.
What is the trick to make us believe it? Stocks go up, bonds go down and we are led to believe that asset inflation reflects economic strength.
Then, when central bank policy stops working (either because of lack of confidence or because it is simply part of the sell-off) and markets are given the valuations they deserve, many will say it was the fault of the “speculators”, not the central speculator.
When it erupts, you can bet your bottom dollar that the consensus will blame markets, investment funds, lack of regulation and insufficient intervention. The mistakes of perennial intervention are “solved” with more intervention. The government wins either way. As in a casino, the house always wins.
In the meantime, the famous structural reforms that had been promised are disappearing like bad memories.
It is a clever Machiavellian scheme to kill free markets and disproportionately benefit states through the most unfair of powers: having unlimited access to money and credit and none of the risks. And pass the bill on to everyone else.
If you think it doesn't work because the government doesn't do much else, you are simply dreaming.
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