The extended period of Quantitative Easing (QE) and ZIRP have now left the major global central bankers in an untenable position because of the era of unlimited leverage which it has fostered. According to the Bank for International Settlements, central banks’ combined asset holdings in the major advanced economies (the US, the Eurozone, and Japan) expanded by $8.3 trillion over the past nine years, from $4.6 trillion in 2008 to $12.9 trillion in early 2017. Yet this massive balance-sheet expansion has had little to show for it. Over the same nine-year period, nominal GDP in these economies increased by only $2.1 trillion.
This implies a $6.2 trillion injection of excess liquidity – the difference between the growth in central bank assets and nominal GDP – that was not absorbed by the real economy and has instead, according to Stephen Roach of Yale University & Former Morgan Stanley Chairman, been ‘sloshing around’ in global financial markets, distorting asset prices across the entire risk spectrum.
As an unintentional consequence it has facilitated an explosion in financial leverage globally. This occurred because of low interest rates (forcing a push for financial gearing) and additionally due to low rates (ready availability of credit). This shift can temporarily work if the collateral underpinning the leverage maintains being sound. If however the collateral becomes impaired or asset values fall, the whole foundation of this ‘house of cards’ expansion potentially collapses.
When you consider a problematic $400 trillion global pension system is dependent upon bond and equity asset values, you can quickly imagine why policy planners know that the financial markets cannot be allowed to fall significantly or the financial, economic, social and political fabric of our entire system may be irreparably damaged.
THE NEW FORM OF “NATIONALIZATION”
The massive global debt problem and even greater financial leverage exposure is quickly and inevitably now reached the point of instability.The policy planners must find a way out of this quagmire. It is highly likely they already see this to be in the form of a new type of “Nationalization”.
