Every day, we think we see more clearly where this is going. And every day, we are staggered by it.
Our mind boggles. Our knees buckle. We hold our breath and reach for a caipirinha: For the first time ever, central banks are printing more money than governments can use.
That’s right. After central bank buying, net government debt sales will be NEGATIVE.
Yes, governments will still run deficits. Yes, they still will borrow trillions of dollars. But after central banks finish buying their debt this year, there will be less government debt on the open market at the end of the year than there was at the beginning.
Government debt will vanish… as miraculously as the central bank funds that appeared to buy it.
Is this a wonderful system or what?
Last night, we had dinner at a sidewalk café. The scene resembled Delray Beach, Florida, without the old people.
A corner bar spilled its patrons out onto the street. Men and women, in groups of two… three… four… walked down the streets, well dressed, but casual. Occasionally, an automobile revved its engine as it rolled by the restaurant.
As in South Florida, young men and women are very aware of their bodies. Men work out at gyms and wear shirts that reveal their bulging biceps. Women wear tight, formfitting pants to show off their toned legs and sculpted derrieres.
Chic. Confident. Young. That is the Itaim Bibi neighborhood of São Paolo.
“Don’t mistake Itaim Bibi for Brazil,” cautioned a colleague. “This area may be like Los Angeles or London. Most of Brazil is much poorer.”
The average income nationwide is about $10,000. That puts it at about one-third to one-quarter of the average US income. (We are suspicious of facts with crisp numbers in them. Once you’ve adjusted for purchasing power, employment levels, inflation, taxes and social charges – the numbers melt.)
Brazil is young. And compared to the US, it is poor. That gives it two advantages: It can grow up. And it can catch up.
It is the “country of the future,” wrote Austrian novelist Stefan Zweig in 1941, before overdosing on barbiturates.
Back in the Land of the Past, old people, central banks, governments, the financial industry, zombies and crony capitalists all struggle to hold on to what they’ve got.
They are all desperate to keep the status quo. And the status quo now depends on more and more credit.
Naturally, they want to keep the credit bubble expanding in the worst possible way.
What’s the worst possible way to keep a credit bubble expanding?
You guessed it – print money!
You should sit down for this, dear reader. Comes word last week that central banks are now printing enough money to cover more than 100% of governments’ borrowing needs.
What we think we see now is the beginning of the end. When central banks print enough money to cover MORE than 100% of government borrowing needs, the end begins to come into focus.
You remember the bond vigilantes? You don’t? Well, why should you?
That was a long time ago when Bill Clinton was president. His campaign manager, James Carville, remarked:
I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.
Bond traders intimidated politicians because they could “just say no” to government bonds. If inflation increased, the bond vigilantes would ride to the rescue, forcing the feds to raise interest rates to bring inflation under control.
But the vigilantes haven’t been spotted in many years. They probably died and have come back as President Obama’s advisers.
And now the feds no longer have anything to fear. They don’t need the bond market. They can borrow all they need from the central bank.
The bonds go onto central bank balance sheets. There they stay. No need to worry about “retiring” the debt. No need to think about “unwinding” QE.
And no need to concern yourself with mounting government debt. In fact, the more money the central bank prints to finance government deficits, the less the government (effectively) owes.
Now debt really doesn’t matter!
Almost too good to be true, isn’t it?
|by Chris Hunter, Editor-in-Chief, Bonner & Partners|
Bill’s deep dive into the murky waters of debt monetization has gotten Diary readers thinking…
And we’ve been getting a lot of feedback on the subject. (To write in with your thoughts and comments, just hit “reply” to this email.)
So, we’re going to take a break from our regular Market Insights to answer your questions…
From Diary reader Joseph V.:
Please forgive the stupid question: Why do central banks pay back the interest they earn on government bonds?
First, let’s look at how it works. And let’s look at the case of the US.
The Fed is required by law to turn over its profits to the Treasury Department. These profits are generated by the income the Treasury pays on the bonds on its balance sheet.
Or in “Fed speak”:
Under the Board’s policy, the residual earnings of each Federal Reserve Bank are distributed to the US Treasury, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid in.
n 2014, for instance, the regional Fed banks sent about $99 billion back to the Treasury Department. In 2013, they sent back about $77 billion. And in 2012, they sent back about $88 billion.
Here’s how it works…
The Fed creates bank reserves out of thin air… it uses these reserves to fund purchases of government bonds from banks and other financial institutions… the Treasury Department pays the Fed interest on those bonds… then at the end of the year, the Fed pays back that interest to the Treasury Department.
Why does this happen?
Because it can…
If you were paying interest on a loan… and you had the option to get that interest paid back at the end of the year… what would you do?
As former Fed chairman Ben Bernanke quipped before Congress in 2011, “It’s interest that the Treasury didn’t have to pay to the Chinese.”