A brand new central bank wheeze

The longer the world lives with its funny money, the funnier things get.

Here’s a headline from yesterday’s Financial Times: “Central banks pour money into equities.”

We paused. We collected our thoughts. And we wondered:

What the hell…?

“A cluster of central banking investors has become major players on world equity markets”, reads a report.

That was the conclusion of a group called the Official Monetary and Financial Institutions Forum, which goes on to warn that this trend “could potentially contribute to overheated asset prices”.

The Omfif says these public sector investors have already invested more than $1trn into the stock market. The number could go much, much higher, inasmuch as “central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues”.

We’ve devoted a good deal of The Daily Reckoning to chronicling the tangled web of finance woven by central planners. We see curiosities aplenty, the sort people get up to when they have access to free money.

It is against the law to manipulate stocks. But the Fed does it in broad daylight, lowering interest rates so as to increase the value of streams of income, no matter how tricky and unreliable. Companies earn money. Now, the money they earn is more valuable than ever.


Bill Bonner on markets, economics & the madness of crowds

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The stock market has hit all-time highs even as the source of its profits – the economy beneath it – struggles to find its footing.

The intention – ostensibly – is to light a fire under the economy by encouraging people to put their money in higher risk, and presumably higher reward, investments.

Why the authorities think they know what other people should do with their money has never been fully revealed. Nor it is at all clear that the world would be a better place if people made riskier investments.

Still, in today’s world nothing succeeds like failure. The Pentagon has not won a war in 60 years, but it keeps getting the go-ahead to enter another one. As near as we can tell, central bankers’ record of failures is just as strong. It never anticipates the trouble it causes, and then reacts in an inappropriate and ineffective way when the trouble starts.

In the present case, the FT appears to think that the central banks have been hoist on their own petard. Rather than manipulate stock prices through the back door of quantitative easing, the banks are being forced to go at it directly.

Now, with money they create out of nowhere, they buy real companies. Otherwise, the companies might have been owned by real people, who earned real money providing real goods and services.

And so, dear reader, more and more of the world’s real wealth shifts from the people who make it, to the people who take it.

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