"Financing A War" With Whom? Balance Sheet Expansion Reaches Uncharted Territory

How difficult will it be for central banks to normalize monetary policy in practice, and what will be the consequences of such policies for investors assuming that the central banks’ commitment to balance sheet reduction is maintained?

The answer, according to Chris Wood's new Grizzle.com blog, is ominous:

This is uncharted territory.

The only precedent for the scale of the central bank balance sheet expansion of the past nearly 10 years was during World War II, with government debt and government guaranteed assets now accounting for at least as large a share of central bank balance sheets as during World War II.

Clearly, Wood explains, the purpose of such central bank balance sheet expansion in the 1940s was to assist the fiscal authorities in financing a war.

Which made us wonder, what 'war' are authorities financing this time?

The answer is simple - a war against reality!

The real aim, so far as Wood is concerned, has been to stop debt liquidation and thereby prevent the creditor classes, be they bankers or bond owners, from losing money.

...

As Wood notes, the biggest risk to world stock markets, and asset prices in general, in 2018 is that G7 central banks (led by the Federal Reserve) are finally attempting to normalise monetary policy nine years after the American central bank commenced quantitative easing in December 2008, in the midst of the so-called “global financial crisis”.

...

This raises the critical issue of central bank credibility. For the risk raised by the Fed’s attempt to normalize is that a stock market downtown may force it to reverse course; and with such a reversal there is a much greater risk of a resulting loss of central bank credibility.

This is because markets may conclude that central banks will never be able to exit so-called unorthodox monetary policy.

Read the full article here...

Comments

philipat skbull44 Mon, 01/29/2018 - 20:49 Permalink

The reality is that the CB's are not walking the talk. The ECB "tapered" the amount but extended the duration of its QE for a net INCREASE. The Fed has NOT reduced its Balance Sheet in line with its "policy" and in fact has increased purchases of MBS.

So in reality it's all just more jawboning. The fact is the CB's are stuck between a rock and hard place of their own creation.

In reply to by skbull44

MEFOBILLS skbull44 Mon, 01/29/2018 - 21:08 Permalink

It's not different. It is the same stuff over and over.

In 20's private debts built up based on leverage (borrowing new credit from private banks).  This then went into stock market, buying paper.  These stock paper assets were pushed in price.  When prices collapsed, private debts remained.

Private debts then sucked up  and extinguished existing money supply, and hence country went into debt depression.

Housing bubble in Japan, then later in U.S. had same factors.  Bank credit was given to anybody who had a pulse, which included liar loans, NINJA loans, etc., because there was "low risk."  A flood of new private debts were formed, bank credit then pushing housing prices.  Eventually bubble collapses, but private debts remain, and money supply begins to be extinguished, accelerating into depression.

Expanding public balance sheet is a way of swapping private debts for public debts.  If a country owes public debts to itself, it is like your left pocket owing your right pocket.  Or your wife owing you some money, even though you have a joint checking account.  The FED rebates interest on public debts ever since Wright Pattman caught wind of their game.

I didn't invent the diabolical debt money system, but it does have "rules" that must be followed.  But, since there is so much obfuscation and hypnosis regarding operations of debt money systems, then finance criminals (and government) abuse it to detriment of host productive classes.  Also, count on neo-liberal false economic orthodoxy emitting from economic departments (like that of Chicago School) to confuse and obfuscate.  In ((neo-liberal world,)) money is just a neutral veil, and has no impact on prices.

 

 

In reply to by skbull44

LetThemEatRand Mon, 01/29/2018 - 20:34 Permalink

"Which made us wonder, what 'war' are authorities financing this time?  The answer is simple - a war against reality!"

Or maybe an actual war.  Most here on ZH have been saying it for years.  The US needs a war to cover the coming collapse.  Seems that we have one brewing in Syria, North Korea, Iran, and maybe some other places that are on the wheel of misfortune that TPTB are spinning. 

J J Pettigrew Mon, 01/29/2018 - 20:41 Permalink

Balance sheet reduction at the rate of 120 billion a year, as advertised, will take 32 years....(4 Trillion/ 120 billion) (lots of zeroes huh?)

This IS IMPORTANT TO NOTE....

The MAGNITUDE of the Central banker actions is beyond comprehension.

Disguised as clever economic theory and monetary genius, it was nothing more than an IRRECOVERABLE MONEY DUMP to who knows who because it was all unaudited.

The unwinding will be IMPOSSIBLE.  IF the great theories, IF they actually were sound, would allow a retreat, a decoupling....

but it CANT HAPPEN.  The "patient" will die if the tubes are taken out. It was all bullshit. Mirrors smoke and your money.

Taras Bulba Mon, 01/29/2018 - 21:11 Permalink

Not to worry, I'm sure the Chinese will step up to provide financing, particularly if the war is with North Korea or Russia via Ukraine. (sarc)

 

Serious comment:  I believe that the only limiting factor on the neo con/MIC insanity is if the establishment runs out of money, and no one is willing to step up to finance the insanity.