Tag Archives: Debt monetization

Super Mario Draghi’s Day of Reckoning Has Arrived, by Tom Luongo

As SLL has been saying for at least a decade, a central bank exchanging its fiat debt for a government’s fiat debt is not an economic strategy, it’s a fingers-crossed wish and prayer that ultimately does more harm than good. From Tom Luongo at tomluongo.com:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”


No quote better defines Mario Draghi’s seven-plus years as the President of the European Central Bank than that quote. Draghi has thrown literally everything at the deflationary spiral the Euro-zone is in to no avail.

What has been enough has been nothing more than a holding pattern.

And after more than six years of the market believing Draghi’s words, after all of the alphabet soup programs — ESM, LTRO, TLTRO, OMB, ZOMG, BBQSAUCE — Draghi finally made chumps out of traders yesterday.

Draghi reversed himself after December’s overly hawkish statement in grand fashion but none dare call it capitulation. For years he has patched together a flawed euro papering over cracks with enough liquidity spackle to hide the deepest cracks.

The Ponzi scheme needs to be maintained just a little while longer.

Continue reading


Are Central Banks Nationalising the Economy? by Daniel Lacalle

If a central bank conjures enough fiat debt, it can buy every asset in the economy. From Daniel Lacalle at mises.org:

The FT recently ran an article that states that “leading central banks now own a fifth of their governments’ total debt.”

The figures are staggering.

  • Without any recession or crisis, major central banks are purchasing more than $200 billion a month in government and private debt, led by the ECB and the Bank of Japan.
  • The Federal Reserve owns more than 14% of the US total public debt.
  • The ECB and BOJ balance sheets exceed 35% and 70% of their GDP.
  • The Bank of Japan is now a top 10 shareholder in 90% of the Nikkei.
  • The ECB owns 9.2% of the European corporate bond market and more than 10% of the main European countries’ total sovereign debt.
  • The Bank of England owns between 25% and 30% of the UK’s sovereign debt.

A recent report by Nick Smith, an analyst at CLSA, warns of what he calls ”the nationalization of the secondary market.”

The Bank of Japan, with its ultra-expansionary policy, which only expands its balance sheet, is on course to become the largest shareholder of the Nikkei 225’s largest companies. In fact, the Japanese central bank already accounts for 60% of the ETFs market (Exchange traded funds) in Japan.

What can go wrong? Overall, the central bank not only generates greater imbalances and a poor result in a “zombified” economy as the extremely loose policies perpetuate imbalances, weaken money velocity, and incentivize debt and malinvestment.

Believing that this policy is harmless because “there is no inflation” and unemployment is low is dangerous. The government issues massive amounts of debt and cheap money promotes overcapacity and poor capital allocation. As such, productivity growth collapses, real wages fall and purchasing power of currencies fall, driving the real cost of living up and debt to grow more than real GDP. That is why, as we have shown in previous articles, total debt has soared to 325% of GDP while zombie companies reach crisis-high levels, according to the Bank of International Settlements.

To continue reading: Are Central Banks Nationalising the Economy?

Japan’s Debt Burden Is Quietly Falling the Most in the World, by Enda Curran and James Mayger

Here’s the solution to all the world’s economic problems. Have governments issue debt, have central banks buy it, and then have the governments repudiate it. What could go wrong? From Enda Curran and James Mayger at bloomberg.com:

Japan for years has been renowned for having the world’s largest government debt load. No longer.

That’s if you consider how the effective public borrowing burden is plunging — by one estimate as much as the equivalent of 15 percentage points of gross domestic product a year, putting it on track toward a more manageable level.
Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant, according to a number of analysts looking at the shift.

While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100 percent of GDP in two to three years, from 177 percent just before Prime Minister Shinzo Abe took power in late 2012, he estimates.

Sales Tax

It’s not like Japan is slowing down on borrowing. Abe’s administration is now laying the groundwork for another burst of fiscal stimulus, which could be funded by selling bonds. He also announced Wednesday a delay to a sales tax hike planned for April 2017, rebuffing fiscal hawks who argued it was vital to raise revenue. Finance Minister Taro Aso explained Tuesday that “the biggest problem is that private consumption hasn’t risen,” making now not a good time to raise the levy.

Helping improve household sentiment could be one reason for making it explicit that at least some of the government bonds in the BOJ’s holdings will be written off. If Japanese consumers understand they’re not on the hook for all the gross debt outstanding, their mood could potentially perk up.

‘Permanently Monetized’

“I do not believe that there is any credible scenario in which Japanese government debt can be repaid in the normal sense of the word repay,” said Adair Turner, chairman of the Institute for New Economic Thinking and a former head of Britain’s financial regulator. “It would therefore be useful to make clear to the Japanese people that the public debt does not all have to be repaid, since some of it can be permanently monetized by the Bank of Japan.”
Another option touted by some economists is to have the BOJ convert a portion of its holdings into perpetual zero-interest government bonds. Japanese authorities already have embraced other unorthodox moves, including negative interest rates, central bank purchases of stocks and real-estate investment trusts and a welter of programs to bolster lending.

For now, there’s no sign from policy makers that they are willing to take a step closer to full-bore debt monetization. As a veteran of the fiscal-discipline focused Ministry of Finance, BOJ Governor Haruhiko Kuroda would probably never endorse such a plan, according to Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. Kuroda has a little less than two years left in his current term.

To continue reading: Japan’s Debt Burden Is Quietly Falling the Most in the World

The Cult Of Central Banking Is Dead In The Water, by David Stockman

The world will be a much better place when David Stockman’s headline comes true. From Stockman at davidstockmanscontracorner.com:

The Fed has been sitting on the funds rate like some monetary mother hen since December 2008. Once it punts again at the June meeting owing to Brexit worries it will have effectively pegged money market rates at the zero bound for 90 straight months.

There has never been a time in financial history when anything close to this happened, including the 1930s. Nor was interest-free money for eight years running ever even imagined in the entire history of monetary thought.

So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression?

Alas, there is none. And that’s as in nichts, nada, nope, nothing!

There is a structural growth problem, of course. But it has absolutely nothing to do with monetary policy; and it can’t be fixed with cheap money and more debt, anyway.

By contrast, there is no inflation deficiency—–even by the Fed’s preferred measure. Indeed, the very idea of a central bank pumping furiously to generate more inflation comes straight from the archives of crank economics.

The following two graphs dramatize the cargo cult essence of today’s Keynesian central banking regime. Since the year 2000 when monetary repression began in earnest, the balance sheet of the Fed has risen by 800%, while the amount of labor hours used in the US economy has increased by 2%.

At a ratio of 400:1 you can’t even try to argue the counterfactual. That is, there is no amount of money printing that could have ameliorated the “no growth” economy symbolized by flat-lining labor hours.

Owing to the recency bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet depicted above goes unnoted and unremarked, as if it were always part of the financial landscape. In fact, however, it is something radically new under the sun; it’s the footprint of a monetary fraud breathtaking in its magnitude.

In essence, during the last 15 years the Fed has gifted the US economy with a $4 trillion free lunch. Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by extracting an equal amount of financing from taxes or tapping the private savings pool, and thereby “crowding out” other investments.

Instead, Uncle Sam “bridge financed” these expenditures on real goods and services by issuing US treasury bonds on a interim basis to clear his checking account. But these expenses were then permanently funded by fiat credits conjured from thin air by the Fed when it did the “takeout” financing. Central bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing” (QE), but it’s fraud all the same.

In essence, Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work of catalyzing, coaxing and stimulating more jobs and growth out of the US economy.

No it wasn’t!

To continue reading: The Cult Of Central Banking Is Dead In The Water