If you follow my work, I have outlined since the beginning of the year how central banks are out of tools. They will revert back to cutting interest rates back to 0 (deeper into the negative for Europe and Japan…Britain may follow since they are at 0.5% currently).
Central banks will also revert back to balance sheet expansion to keep things propped up. I mentioned how this is when a confidence crisis in governments, banks and the fiat money may begin to show its head.
The irony is that instead of being lenders of last resort, which was central banks sole mandate when they came to existence (morphed into maximizing employment and handling inflation due to keynesian/mercantile economics), central banks will become the BUYER of last resort.
They will become the most powerful institution in human history, even more powerful than the Catholic Church during Medieval times.
This is required to keep the system and assets propped up. If real estate fall, if stocks fall, then there will be a lot of issues. Issues with the middle class, but also to pension funds and retirement accounts.
Central banks depressed interest rates artificially and this forced money to go into assets for yield. A decade ago, if you retired with 1,000,000, you could buy government bonds (long term) and the yield would be 6-8%…that is $60,000-$80,000 a year which is sufficient when you retire.
Now that would get you $20,000-$30,000. Even less because the higher yield is on the short term bonds (notes and bills) and traders have been buying them expecting rates to be cut thereby lowering the yield on bonds.
So this money went into real estate. Real Estate is seen as the safest investment and it never goes down right? Now we are in an environment where $1,000,000 might not even buy you property in some cities. Not to mention the property taxes.
Stocks are the only place to go for yield. They are much more liquid than real estate, being able to sell in and out quickly, while real estate takes some time to lock in the gains for capital appreciation.
Pension funds and other retirement accounts have primarily been in bonds. Can’t take crazy risks with valuable retirement money. Social security in the US is 100% bonds. They definitely have a pension crisis. Here in Canada, our pension fund (CPP) began diversifying out of bonds and into real estate and stocks.
So if stocks and real estate fall…big issues.
This is why I have said that central banks will keep this propped up. No more free market. We are already in a socialist system. Nothing can be allowed to fail.
You could imagine my surprise when this article came out today:
Headline reads: The Fed will need to grow its balance sheet ‘permanently’ Morgan Stanley says.
The Fed and other central banks will become buyers of last resort. This is coming, and already happening.
I spoke about the big repo event, and this is very important. $30-75 BILLION dollars a day is being printed to keep interest rates low (spiked to 10%) until October 10th…but you can just imagine what the Fed will have to do after that date.
This is QE in a way since the banks and other entities have to give up some collateral…could be bad/toxic stuff a la 2008.
Remember, this is all about the confidence crisis. When people realize this game, that central bank monetary policy never worked and we are stuck in controlled markets forever with central banks having to balloon their balance sheets to insane levels…people will lose confidence in the system. This is all about maintaining confidence.
Central banks are finding excuses. Oh it was a mid term cycle, or the China trade deal which has caused these issues. Our policies work, we just did not print enough money nor did we cut rate deep into the negative enough.
QE will not be called QE because it evokes memories of 2008. People will realize that this one time desperate policy to prevent another great depression, is now the norm. It was not a one time event. We are stuck with it forever. The economy did not really recover. It was the weakest recovery.
This new QE is now being called POMO, or ‘Permanent Open Market Operations”. Same thing just with new clothes.
Bankers and Wall Street know the game. They are happy to go along because they know the party is not over. Central banks will have their backs and the wealthy will get more wealthier.
Inflation will affect main street who will keep losing out and will have to take more debt just to sustain themselves. Living costs will keep rising as governments want inflation to deal with debt and also increases taxation revenues.
In the end, when the party is over, it will be the middle class left holding the bag. Their investment/pension accounts cannot make money while the market drops, only when the market goes up.
So buckle up everyone. Everything right now is a distraction (impeachment charges) from what is happening in the economy and the economic system. The Fed is losing control but they cannot admit it. More rate cuts to zero and then into the negative are coming. Balance sheet indefinite expansion is coming (already here).
Prepare yourself accordingly.