We are still reeling.
Yesterday, we reported that central banks are becoming major buyers of stocks. Their own policies have pushed them to stretch for higher returns. That is, they are victims of their own repressed interest rates. Feeling the pinch, they move more and more of their money into equities.
At least, that was the view in the Financial Times. Already, central banks have pumped more than $1trn into the stock market. And we could still be in the early innings of the game. Private investors, deprived of a decent return on their savings, buy stocks. Corporations borrow from the banks to buy back their own shares. Central banks also buy their shares. Shares go up. Seeing what a success they have made, they all buy more! Has any finer system ever been developed to manipulate stock prices higher? Or has any dumber plan, more doomed to disaster, ever been devised?
We hardly know where to begin. Outraged, we sputter and spit, we search for words; we look for metaphors and narratives – anything that will put this extraordinary situation in the right light.
Let’s begin with a question: whence cometh the money used by the banks to acquire valuable businesses? If they got it by honest toil in the vineyards and coalmines of the banking industry, we could have no objection. It is theirs to do what they want with.
You have already gotten ahead of us, haven’t you, dear reader? The banks didn’t earn it honestly at all. They simply printed it. And what gives them the right to create money, like counterfeiters?
When did you get out of solitary confinement, dear reader? Don’t you know? The banks have a government-granted monopoly on money issuance. It’s the plummiest protected franchise ever granted. And now, they put out cash and credit far in excess of GDP growth. They create money, ex nihilo, out of nothing. Not a drop of sweat fell from their brows. No muscle ached the next day. No sale was made; no profit registered. And on this miracle of something-for-nothing rests the whole financial world. Without it, the stock market and the economy would collapse in a heap.
Not that we’re worried about it. In the first place, we see no sign that policies are about to change. On the contrary, there are more and more signs that they will remain with us, to the end of time, or until the whole system blows up, whichever comes first. And in the second place, a change would do us all good. The longer this game goes on, the drunker and rowdier the fans become. Debt, misallocation of capital, waste, dishonesty, it all gets worse by the day.
But we suspect that there’s a lot more to come. America’s Fed has total holdings of $4.5trn. Federal deficits are just now bottoming out – at about half a trillion dollars. From here, it’s up, up and away. Whee!
China’s State Administration of Foreign Exchange, SAFE, is part of the Bank of China. It has $3.9trn to invest. Where did it get the money? It too was created out of thin air. China’s businessmen and merchants make a profit by selling things overseas. The profit goes to the Bank of China, which takes the foreign currency, and gives domestic currency – which it creates for that purpose – in exchange.
In short, there’s a lot of money out there, and there will probably be a lot more coming. Japan faces “twin deficits” – on its current account as well as its government budget. These, too, must be financed by central bank money printing. The government issues bonds. The Bank of Japan issues cash to buy them. Then, the following year, the government needs more money. It issues more bonds. The central bank issues more cash. Some of the cash is used by the government to pay interest (to the BOJ) and redeem the bonds (from the BOJ) as they mature.
What’s a poor central banker to do? He has cash. He has to do something with it. Why not invest in equities?
And who’s going to complain if he buys stock? No one. Instead, he will get thanks from the feds – who are grateful to him for financing their deficits. He will get applause from investors, who will be pleased as punch to see their own investments go up. Managers in the corporate sector will be delighted; their bonuses depend on higher asset prices. The 1% will get richer. And the other 99% will not know what the hell is going on.
One of the elegant features of this latest hustle is that it does not benefit the hoi polloi. Ah yes, central banks create money, it gets passed around the financial community in many ways, and ultimately ends up in the equity markets. Most people never see it, much less spend it. Not even the odour of it reaches their nostrils. Their hands never touch it. And consumer prices never rise. Result? No fussing from the lumpenelectorat. No kvetching by the commentariat. And no whining from the investoriat.
In short, a grand slam of deceit. The world series of financial catastrophe will follow. But that could be a long way off.