The $12 trillion global central bank balance sheet is PERMANENT
A $12 trillion global central bank balance sheet is PERMANENT, says Bill Gross in his investment outlook for February 2017. Gross, who sees the global central balance sheet growing at over $1 trillion a year, thanks to the European Central Bank (VGK) and the Bank of Japan (EWJ); doesn’t see this debt going for sale in the market ever.
Especially now, with US Fed having terminated their economic stimulus program, the ECB and the BoJ may just have to fill the void with asset purchases (bonds (IGOV) (TLT) and stocks (SPY)). Bill Gross thinks this would become essential to keep the global system functioning. And that is exactly what’s happening right now. The ECB and BOJ are buying $150 billion a month of their own bonds. “Without that financial methadone, both bond and stock markets worldwide would sink and produce a tantrum of massive proportions. I would venture a guess that without QE from the ECB and BOJ that 10-year U.S. Treasuries would rather quickly rise to 3.5% and the U.S. economy would sink into recession,” says Gross.
Central bankers are postponing, not overcoming, a Financial Armageddon
Bill Gross also sees the government financing its own spending. The interest earned on the $12 trillion global central bank debt is already being flushed from central banks back to government fiscal authorities. “One hand is paying the other,” says Gross which “in essence means that monetary and fiscal policies have joined hands.” Such an economic relationship often fails to discriminate between risk and reward.
Further on, this will lead the private sector to finance its own spending. Currently, $600 billion in the U.S. for instance, goes into the share buybacks, whereas earlier, business investments were preferred as the more profitable choice. In addition, the capitalism function (of saving for future returns) is already on the brink of being destroyed in light of low-interest rates. Individual savers, pension funds, and insurance companies are losing their ability to earn rates of return necessary to maintain long-term solvency.
Consumption is being boosted at the cost of savings, which are either being suppressed or deferred. How long will it take central bankers to admit that they’ve only managed to postpone a financial armageddon?