The Great Misconception of a Return to “Normal”, by Chris Hamilton

If governments and central banks go deep enough into debt, they can make things look “normal,” at least for a while. But it’s not normal. From Chris Hamilton at

Since 2009, there has been ongoing discussion of the size & composition of major central bank balance sheets (I’m focusing on the Federal Reserve Bank, European Central Bank, and the Bank of Japan) but little discussion of why these institutions felt (and continue to feel) compelled to “buy” assets.  The chart below highlights the ongoing collective explosion of these bank “assets” since 2009 after a previous period of relative stability.
These institutions clearly have the capability and willingness to digitally conjure “money” from nothing and have felt compelled to remove over $10 trillion worth of assets from the markets since 2009.  This swap of illiquid assets for liquid cash had (and continues to have) the effect of squeezing the prices of the remaining assets higher (more money chasing fewer assets=price appreciation). 

A prime example of that squeeze, the US stock market total valuation (represented by the Wilshire 5000, below) is $10 trillion higher than the “bubble” peak of 2008…and $11 trillion higher than the 2001 “bubble” peak.  Likewise, US federal debt since 2008 has increased by…you guessed it, $10 trillion.

The narrative seems to be that 2009 was a one off event and that the central banks role was and still is to “stabilize” the situation until things “normalize”.

But right there…that idea that 2009 was a “one-off” or “abnormal” couldn’t be more wrong.  So what is “normal” growth, at least from a consumption standpoint?  Normal is never the same twice…it is ever changing and must be constantly rediscovered.  To determine “normal” growth in consumption, all we need do is figure the change in the quantity of consumers (annual population growth) and the quality of those consumers (their earnings, savings, and utilization of credit).  The chart below details the ever changing “normal” that is the annual change in the under 65yr/old global population broken down by wealthy consuming nations (blue line) and the rest of the (generally poor) world (red line).  The natural rate of growth in consumption has been declining ever since 1988 (persistently less growth in the population on a year over year basis)…but central banks and central governments have substituted interest rate cuts and un-repayable debt to maintain an unnaturally high consumption growth rate.

To continue reading: The Great Misconception of a Return to “Normal”


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