The True Costs of Zombie Companies and Easy Money
Recent data published by Yardeni Research Inc., Bank for International Settlements (BIS), the Institute of International Finance (IIF), and in the Federal Reserve Bank of St. Louis Economic Data (FRED) database offers an insight into the true extent of central banking practices before and during the covid-19 pandemic.
The wide-ranging implications of this can be seen through several critical dimensions. But first we must understand the destructive nature of central banking.
If we accept the main premise of central banking, that the central bank is the lender of last resort, it follows that in this last resort event the central bank must have a pool of wealth to lend from. After all, in order to lend to someone, you have to own something of value. In this situation, the central bank prints money, which, to that extent, is where it derives its pool of assets for lending from, taking from people via inflation. Paradoxically, the central bank therefore lends to banks by stealing from the people, whereas the banks are then expected to loan that money back to people. This theft is, however, subtle, not seen as a direct tax or immediate confiscation, but through the destruction of real savings and purchasing power.
From the beginning of this year to June, the total assets of major central banks (the Fed, ECB, BOJ, PBOC) have jumped by a near $6 trillion. This rapid ascent is likely going to continue as the year progresses. Similarly, in Q1 of this year, global debt rose to $258 trillion, representing an all-time high of 392 percent of GDP. Households, businesses, and governments are taking on more debt in hopes of offsetting the acute economic pains of the crisis. But the false sedative of debt will soon dissipate, revealing the true pain behind all these distractions. Make no mistake, what is being done by governments and enabled by central banks is akin to paying credit card debt with more credit cards.
This data should alarm you and the immediate question should be, Who’s going to pay for it, and who benefits? In the bizarre world of negative interest rates, however, that question becomes all the more complicated.
Artificially low interest rates have enabled the longest bull run in US history (2009–20). Cheap borrowing has propped up unprofitable zombie corporations which rely on loans to pay back loans. In conjunction with quantitative easing efforts, the S&P 500 has not only recovered since the covid March meltdown but surpassed its all-time high.
Low interest rates have historically made it cheaper to mortgage a house, finance a car, and pay for student debt—in the long term, however, it has made all of these more expensive. By enabling cheap borrowing to finance spending, particularly on assets such as housing and in the equities market, central banks have infused those markets with artificial demand which in turn causes prices to skyrocket.
By indirectly monetizing and devaluing the real value of debt, central banks have cut the brake wires off government spending.
Source: Edward Yardeni and Mali Quintana, Central Banks: Monthly Balance Sheets (Yardeni Research Inc., Aug. 27, 2020), figure 6.
Its no coincidence that the moment the Fed started to unwind its balance sheet in 2018 markets went berserk. When the Fed shrank its assets by just around 6 percent between early 2018 and February 2019, the market plummeted by twice that.
The most recent market faltering in March was a very real indicator of upcoming economic trouble. It was all covered up by the Fed, however, which bought $500 billion in Treasury securities and $200 billion in mortgage-backed secur
Article from Mises Wire