Over at Bloomberg Jack Black points out how “fat” central bank balance sheets have become:
Picture for a moment the concept of a lean central bank.
No, not Janet Yellen or Mario Draghi out doing Pilates, but rather the thought that almost a decade after the Great Recession, central banks ought to be slimming down on the amount of financial assets that they hold.
And yet even as the U.S. Federal Reserve holds the level of its total assets roughly steady, in Japan and Europe balance sheets just keep growing.
At the Fed’s annual policy gathering at Jackson Hole, Wyoming through Saturday, questions are being asked about how long this can go on.
Take for example the European Central Bank. The Frankfurt-based ECB is engaged in an asset-purchase scheme worth around 1.7 trillion euros ($1.9 trillion), due to run until at least March next year, in an effort to boost demand and drive inflation in the 19-nation currency bloc away from the deflationary danger zone.
Consider, for example, the chart of Federal Reserve holdings above. Something has obviously changed since 2007. To give you a better idea of how that varies from the historic norm over a longer horizon consider this:
Equally obviously the financial markets are now addicted to central banks’ binge-consumption. The biggest question in macroeconomics is whether at some points central banks will need to purge. In the United States there has been tremendous resistance to the Fed’s taking any action at all, let alone selling off its holdings of financial assets.
As a reminder, Lord Keynes, quoted in the title of this post, believed that government spending to boost aggregate demand during economic contractions needed to be reversed during expansions. We have reached the point at which doing either has become politically impossible.
I think little understood, and probably very narrowly looked upon as harmful, are the real effects of this debt orgy.
Market economies need to go through cleansing. Mistakes punished. Healing to occur. Lessons to be learned from misallocation of capital. Better choices made in the future. Its the essence of capitalism. But we are in an age where that is of little importance. Speculation and wild eyed liability assumption of all manner – financed by debt and, to a lesser degree equity, is protected. Subsidized through amortization of losses over the entire population. Banks (can you say mortgages?), connected investor (heh, speculator) groups, certain production companies (General Motors, the education industry), and common individuals (morgagees, Medicare recipients) or “special” individuals (Elon Musk or public employees). And of course the most profligate spender, and now deadbeat debtor, is the US government. Convenient for politicians to cover themselves, eh?
If it was so simple you just printed bags of money and handed them out, or just credited their bank account, then hell, make everyone a millionaire. Nirvana. But these policies come with costs, and believe it or not, sovereign governments have debt capacities.
“We are all dead in the long run” is just an excuse for the position “I’m getting mine, and screw all of you coming up behind.” Pretty immoral if you ask me.