by Martin Armstrong,
5/15/17
I have warned that
whenever a government creates a solution to any crisis, that solution becomes
the next crisis. This is what I have called the Paradox of Solution.
The unfolding of the exit
of the central banks from the Quantitative Easing monetary policy will become a
much more serious threat to the financial markets than anyone suspects.
The Federal Reserve has already exited and begun to raise rates while also
announcing it will NOT be reinvesting the money when the government debt they
bought expires.
The Federal Reserve is
already shortening their balance sheet. Bills of $426 billion will be due
at the Fed in 2018, and again about $357 billion a year later. So the Fed will
not repurchase that debt. The US economy is absorbing this because US dollars are
effectively the only real reserve currency in the world right now.
The real problem lies with
the European Central Bank (ECB) and the Japanese central bank and when they
exit their Quantitative Easing programs, their economies are not the reserve
currency and lack a solid bid from international capital.
The end of QE will lead to
a sharp increase in yields on the bond markets, and thus the financing costs
for the states will explode far more rapidly today than at any time in past
history. It is also possible that other sectors of the financial system, such
as the stock markets and the foreign exchange markets in peripheral economies
to the USA, will be cast into turmoil experiencing great difficulties without
the financial support of the central banks.
Since 2008, the Bank of
Japan recorded an increase of 107 trillion yen. The ECB has more than doubled
its balance sheet from EUR 2 trillion to EUR 4.1 trillion and holds 40% of
member state debt while tensions rise against the EU.
The crisis emerges when
governments, who are the ones who have been subsidized since 2008, find no bid
for their paper. This will really send rates upward at a rapid pace.
As central banks appeared
as omnipotent purchasers of government bonds to the un-savvy trader, the yields
of the debt by no means reflect the risk of a default in the country’s
payments. The decline in yields masked the rising risks from fiscal
mismanagement that has been widespread.
While the Federal Reserve
had recently announced that it would no longer reinvest its gains on government
bonds that had matured into new US securities, the US bond market will need to
find new buyers to absorb the additional supply. That may not be a problem
right now, but as other government debt moves into crisis, we will see the capital
flight from bonds to equities unfold.
The balance sheets of both
the Japanese central bank and the ECB are unlikely to follow the Fed just yet.
A withdrawal of the ECB’s purchases of securities could produced the most
widespread damage in Europe since the Dark Ages.
No comments:
Post a Comment