Central banks are starting to lose control of the bond markets, according to some commentators. Government bond yields keep rising, despite the monumental efforts of these powerful institutions. And if the markets continue on this course, there’ll be very serious implications for all of us. And potentially a very destructive stock-market crash.
But I don’t think it’ll come to that just yet. The bond markets are simply too important to the politicians. So today, I want to explain exactly how the politicians are neatly stepping into the role of central banker to delay Armageddon.
Put simply, governments will do everything in their power to stop a bond-market rout. And if that means destroying any remaining illusions about central banks being independent, then so be it!
Obama moves in on the Fed
In these days of governmental interference with central banking, it’s easy to forget the precise role of the central bank.
And that is to be an independent source of stability for both the banking community and the monetary system. That means ensuring banks don’t go bust (by policing them as well as providing liquidity in extreme circumstances). And it means ensuring the amount of money in circulation, and the price at which it trades (interest rates) is conducive to stable economic growth.
It was because politicians and free markets couldn’t be trusted that the central banks were established to take on this role. So isn’t it rather strange that the politicians are moving in on the central banks again?
The other week saw the G20 meet in St Petersburg. And the timing of the meeting couldn’t have been any more auspicious – what with the Syrian induced stand-off between Russia and the US – as well as turmoil in emerging markets caused by the US Fed’s taper talk.
But don’t worry, Barack Obama had some reassuring words for everyone. The Associated Press reported that, according to the Russian finance minister, “President Barack Obama assured G20 leaders that the United States will be scaling back its stimulus policy gradually”.
But hang on a second. The Fed committee is only just starting its meeting to decide taper strategy today. And we wait with bated breath until the verdict is released on Wednesday.
And another thing: isn’t the Fed supposed to be independent? Who is Barack Obama to dole out promises about how and when (and if at all) the US Fed starts scaling back its quantitative easing (QE) programme?
I guess he took his cue from an old hand.
Japan’s politicians are already there
Of course in Japan, nobody’s pretending ‘Abenomics’ is anything other than a political takeover of the central bank. After 20 years of stagnation, just about everyone was agreed on drastic action.
So, Prime Minister Shinzo Abe told the central bank in no uncertain terms, hit the printing press! Failure to do so will lead to a complete government takeover. Job done.
Closer to home, it’s been fascinating to watch Mark Carney settle into his role as the most powerful man in Britain. There was little doubt that George Osborne had set his sights on a man with a shared vision on how to get out of this economic mess. But after a few months in the job, one has to wonder whether Osborne is still as chuffed with his selection as he first seemed to be.
I mean, at his first monetary policy committee meeting in charge, Carney turned out to be rather more hawkish than many had thought. His vote to not increase QE was unexpected by many.
And in last week’s address to MPs there was similar confusion. In the light of a developing housing bubble, Carney said that he’d consider a cap on loan to value ratios and “more intense supervision on the banks”. Hmm… that doesn’t sound exactly like what Osborne had in mind.
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And just to rub salt in the wound, Carney told MPs that he was rather more cautious than Osborne on the whole notion of economic recovery. Well, although a little contradictory, I suspect Osborne was kind of happy about that; at least Carney leaves the door open to more QE. And as regular readers know, that’s exactly what I’m expecting to come next year.
Carney is boxing clever and biding his time. Always remember, a central banker should be judged by what he does, not what he says. I believe Carney will toe the government line.
Right now, he’s building credibility. But believe me, when push comes to shove, he’s in the government’s pocket. And if things play out as many commentators suspect, it won’t be long until we see this in action.
Is the bubble about to burst?
As I said at the start, government bond yields are rising across the board. And many fear that what has started as a trickle may turn into a rout.
Here’s a chart that could be worth considering:
Two stock-market crashes, and one to come?
Source: Digital look. Comments my own
The chart speaks pretty much for itself. And the point is twofold.
First, bubbles in one sector can take down the stock market at large. The bursting of the technology bubble in 2000 took down not only technology stocks, but all stocks. Obviously tech fared worst, but the carnage smashed the lot.
Similarly, the bursting of US subprime took down not only the US banks and industries directly involved, but everything – across the globe! The concern today is clear. If we have seen a bubble in the bond market, and if it’s about to burst, could it be about to take down the stock market with it?
Good question, and who knows? But there’s one thing I am sure of: politicians are going to do everything they can to prevent any such collapse.
The politicians undoubtedly didn’t want to see either of the last two stock-market busts. But they weren’t about to meddle with central banking and risk a currency breakdown to keep us from them.
But this time, we’re talking about the government’s very own bond market. The bursting of this market will likely bust governments and banks alike. Put simply, it cannot happen.
Of course, they can’t control everything. You know where I stand on the massive private debt problem and the impact the bursting of that bubble could have on your long terms savings. Nevertheless I suspect we’re about to see politicians get more involved in central banking. After all, this is too important to be left to a few individuals at the top of the banking tree.
You can call it the lunatics taking over the asylum if you wish. Exciting times indeed.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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