Oceans of cash

To keep interest rates close to zero or negative, and thereby encourage more borrowing, central banks are buying up debt as fast as they can. They are doing all this buying on the market, not at the source of emission, and market prices for the more secure debts (Treasury, corporate, mortgage-backed) are much higher and often multiples of their face values. In mid-October 2018, US Treasury 10-year bonds were offering 3.2% interest. They are presently at 0.74%, which means their price has multiplied by four. 3.2% of 100 equals 0.74% of 432. Central banks are accumulating ever larger stocks of overvalued debts, and overpaying necessarily devalues the currency.

The massive acquisition of debt by central banks – mysteriously named quantitative easing (QE) – was a response to the liquidity crisis caused by exorbitant subprime mortgage lending. A decade ago, the idea was to re-float the banks with liquidity in exchange for their stocks of debt, and have them start lending again. And, once the crisis was over, the cash poured into the system would be drained out progressively by selling back the debts or by redeeming them at term. But the crisis never really ended. And, after the briefest of interruptions, central banks had again started buying debt, even before COVID-19 laid waste to all previous planning. Now it seems that the whole process is spiralling out of control, with $Trillions materialising on a weekly basis and no end in sight. Print and spend is the new normal on the path to nowhere. Beware the pending coronal inflation.