2014 November 02 Sunday
Central Banks Spend $200 Billion Per Quarter To Keep Markets Up
So say some credit analysts at Citibank.
By estimating that zero stimulus would be consistent with a 10 percent quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.
What's curious about this: the central banks can do this without setting off 1970s style inflation in Western economies. What if they stopped? Would the world go into recession? Are their injections preventing a world depression? Is the world economy getting more distorted as a result of these injections?
The argument made in the article is that other central banks are stepping up to boost the capital markets as the US Federal Reserve slows up on "quantitative easing".
Will the world economy really go seriously bad if central banks do not keep boosting prices in stock markets?
Does this portend bad things for the world economy in some future year? Are the central banks causing large misallocations of capital? Should we be worried?
By Randall Parker at 2014 November 02 08:44 PM
The real function of the quantitative easing was to facilitate the massive government deficit spending that subsidized the unemployed millions of people during the worst phases of the economic depression that we are trying to survive.
In most civilized countries, the governments cannot simply print money, they can only borrow from the rich by issuing treasury bonds of various time frames and then spend this newly borrowed money as government deficit. At least half the government deficit goes to the poor to keep them alive.
While you can rightfully agree that the poorer classes lose 100 % of the money that the government gives to them and that the richer classes get richer when the poor spend and lose that money (by buying form the rich) that the government borrows from the rich (and pays back to the rich later anyway), but without this process, the unemployed and underemployed masses will starve.
But even with the currently reduced QE (in fact the EU is starting a massive QE when the US is stopping it), the Fed has no intention of selling the accumulated debt for many years, which continues the effect of keeping the interest rates low. In fact, even with the end of the current American QE, the 10 year treasury bonds have an interest rate about 2 %, and the shorter term government debt papers have interest rates well below the rate of inflation. Thus, at these below-inflation interest rates, the government can easily afford to continue the deficit spending without suffering any additional interest burden. In fact, at below-inflation inflation rates, the government actually profits from borrowing and deficit spending.
But now you can rightfully ask met he following question: how can both the upper class and the government simultaneously profit from the government deficit spending while still keeping the interest rates below inflation? The answer is that under the surface, the many technological improvements are increasing productivity. As long as productivity increases, it's OK to let the upper class get the lion's share of the profits because even the breadcrumbs are becoming big enough to feed the poor. One example was the new fracking methods of extracting natural gas, and this cheap energy is helping the US economy dramatically. The main danger is another financial bubble like the real estate bubble that caused the economic collapse. Otherwise, there are many hidden positive factors that can save the world.
The future stock market decline that can happen, would be due to declining profits of the corporations. Certainly, if the government deficit spending stops, then the corporate profits will decline to zero and possibly below zero. This is because the government deficit spending approximately equals the total corporate profits (minus foreign trade deficit, but if we see the world as a global entity and combine all governments and nations together, then the total government deficit approximately equals total corporate profits.)
So the right question to ask is not so much the QE, but how much government deficit spending is done at any given time to subsidize the poor so that consumption continues. Without government deficit spending, consumption stops because the masses always lose their money to the upper class, and therefore the government must continually subsidize the lower 50 % of the population. The purpose of the QE was primarily to allow the government to borrow from the rich and spend massively by giving that money to the poorer masses to survive the depression. The rich have already recovered all the money that the government borrowed from them before even the government pays them its debt, because the poor who spend the government subsidy have already given it to the rich by purchasing goods and services like rent, food, etc.
In most civilized countries, the governments cannot simply print money, they can only borrow from the rich by issuing treasury bonds
Sadly, it isn't just the rich. US pension funds are deeply invested in T-bills. If T-bills go kaput, so do the pension plans.