There is a fascinating report on the Dow Jones newswire this AM detailing a paper presented by Harvard University historian, Niall Ferguson at the European Central Bank's inaugural forum in Sintra, Portugal.
The gist of the story :
The authors ( Ferguson, Moritz Schularick and Andreas Schaab) traced the history of central bank balance sheet expansion and contractions of "12 advanced economies since 1900".
"The size of central bank balance sheets has fluctuated between 10% and 20% of GDP most of the time except during WWII and the most recent crisis, which 'has eclipsed all other historical precedents.'"
The authors detail the finding that in the three decades prior to the credit crisis, central bank balance sheets had shrunk significantly when 'measured as a percentage of GDP'.
"By that yardstick, their (recent) expansion merely marks a return to earlier levels".
The authors state that central bank balance sheets had "become small relative to the financial sector".
Here is a key part of the study:
"Central banks rarely reduce their balance sheets by selling securities; instead they shrink as a share of GDP because the economy expands".
In their own words:
"We have not recorded a single incident in which a central bank has primarily sold long-term government ( or private market) securities to unwind a long expansion in nominal terms".
The authors also note:
"there is little historical evidence that large central bank balance sheets pose ' an imminent risk to price stability'.
Here is another key quote from the story:
"Over time, the size of central bank balance sheets closely tracks the size of the public debt. But there is an important caveat: the lesson of the 1950s is that once a central bank has been buying bonds to keep long-term interest rates low, it can confront political pressures when it tries to reverse course".
Here is a link to the story:
http://blogs.wsj.com/economics/
Wow, epic plunge in GLD and DBA now starting to accelerate.
ReplyDeleteJust imagine how fast these two would drop if some "words" were uttered by Janet about fighting inflation, lol.....
Central banks can instantly control inflation nowadays.
Never before has Central Banking been so easy.
And so, the cultist cries that "The Fed is trapped!" with their balance sheet that they can never unwind, turns out to be another load of bull. Surprise, surprise.
ReplyDeleteAnd this from Ferguson, who generally plays on that team anyway.
Central banks are now invincible...they will now always be correct in their economic forecasting, they will no longer create boom and busts, they will smooth out the business cycle and never debase the currency. All is well. Long live the stock bull market where growth is made possible by company buybacks by increasing company debt under ZIRP thanks to the FED. Long live the FED and John Maynard Keynes. Print baby print, buy buy buy.
DeleteAnd it's all super-reliable information, since it comes from the same people who called the dot com and housing bubbles.
DeleteI think the bigger issue is the total debt. Social Security, Medicare, and interest payments on debt will eat up every dollar of tax revenue in the US by 2025, based on current projections. Now that is scary!
ReplyDeleteDoes anyone have the answer to this problem? Some tough times ahead.
I you believe that congress and the president will fix our structural problems and cap spending then we should grow out of this problem. However the US is moving further to the left. Those that support limited government under the Constitution are being marginalized. The republicans may very well take the Senate, however they will consist of RINO's, so do not expect any significant change.
DeletePoliticians will always take the easy road. The debt will be inflated away. At some point all these worthless digits we call wealth will start bidding for real stuff. We will all experience the velocity of money that the Fed wants so badly.
DeleteMarket is laughing at all the debt. Look at the bonds going parabolic today.
ReplyDeleteNever before have we witnessed such smooth sailing financial markets, whereby "Infinite Fiat" is truly infinite, and central banks can dial up or taper its asset purchases and perfectly control the economy, interest rates, and commodity prices with utter ease.
We are now experiencing the "Golden Age" of modern finance in real time, whereby boom and bust economic cycles and inflation has been conquered.
Yes that usually happens just before a major crash and afterwards lots of experts say Oh yes we saw that coming etc etc!! Golden ages usually turn to the brown stuff after a while.
DeleteWhat goes up must come down and I remember Gordon Browns we have eradicated boom and bust speech. Yeah right!
Mark, you are either the ultimate true-believer, or a _brilliant_ satirist.
DeleteScreaming bull market in bonds right now. That's a fact. You can cry all you want about how that shouldn't be so, but it is. That's the reality.
ReplyDeleteI don't know how to post a chart here, but tell you what just go put up a one year chart of TLT vs GLD. Which one would you rather own? Be honest.
ReplyDeleteEric, upload a picture on such websites as tinypic.com and just post the link in your message here.
DeleteTLT, and I have no clue what that is.
DeleteCover up the tickers, put your politics aside, and which one of those sets of squiggly lines would you rather own?
ReplyDeleteHi Dan, thanks for the heads up regarding the CBBS presentation. For anyone who wants to look at the report minus the dow jones newswire spin here is the LINK.
ReplyDeleteDo not think for one minute that your mainstream financial media does not spin their narrative like some of the goldbug websites. Anyone interested just take a look.
Interesting that gold is in a bear market. I didn't know a couple of years defines a long term trend. Around $700 would kill this gold bull market. Until then it is just retracing or searching for a past launch point.
ReplyDeleteThere no inflation to speak of because they haven't created enough credit to cover the outstanding debts here at home and overseas.
Buybacks reduce cash available when the time comes that the cash is truly needed. Supports the share price in the short term, may even make stocks look inviting to investors in Euroland or Japan. RE in the US is the current preferred method to park funds, high end RE that is.
At this rate, capitulation is going to set in really quickly with spot gold and miners. The same mistakes will happen as miners begin selling forward again and lose their asses or the entire mine to shrewd investment or banking cartels in the near future. They should shutter the mine shafts and ride out the storm, maybe pass the time by reworking the tailings for rare minerals.
We are still stuck in stagflation where things you need rise in price and things you don't need are cheap while the debt pile grows larger and all that easy low credit has no economy to grow in.
You thought the last lies told to get elected were whoppers wait until the next few coming election cycles. S&P will do fine to great on a mid term outlook. Enjoy the next couple years, after that the defaults begin. That why banks don't worry so much, they just do resets and collect fees the entire time except salaries are diminished a bit.
Agree with your comments about the miners. Their management has not been prudent and their record on hedging is absymal. Think 90% of the farmers out there do a better job.
ReplyDeleteThen again the minersanagement gets paid bonus based on performance. Bet theyamage that part better than the shareholders value.