Central Banks Are Out of Control

I does seem that governments living on credit or on the printing press   will come to a bad end. Europe, as a whole, is in recession and southern Europe is in depression. And now we have Japan trying to out do our Federal Reserve on quantitative easing (money printing). Japan has put their printing presses on overdrive in an attempt to drive the Yen down and create a goal of 2% inflation. Things went a little haywire yesterday. Japan’s stocks took off like a rocket, but their bonds fell like a rock and the market was forced to atop trading in Japanese Government Bonds (JGB).  Zero  Hedge has a couple of  dramatic graphs that tell the story:

Meanwhile back at the ranch, our government keeps racking Trillion dollar deficits each year; much of which is borrowed from the Fed. i.e. printed money. How is that working out for us? Not so good according to Of Two Minds author , Charles Hugh Smith. You see, he doesn’t care how many times Mr. Obama calls government spending “investments”, he knows government spending is not the same as investments from the private sector. Mr. Smith knows something about the Law of Deminishing Returns and he has a graph the illustrate how America’s continued borrowing has less and less benefits for our economy:

 Borrowing money (debt) yields diminishing return. There’s this funny little thing called interest that piles up in a borrowing spree that eventually siphons off much of the debtor’s income stream, effectively impoverishing the borrower.

The above graph is the ratio of GDP to Debt over time. You see that back in the sixties, when the government was borrowing much less money, the GDP grew by $1.70 for each dollar borrowed. But now there is almost no gain in GDP from borrowing at much higher levels.

If this trend is allowed to continue, additional borrowing will have an immediate negative effect on GDP. That is when, I assume, the printing presses will have to be stopped. And when that happens, the stock market ands the bond market will crash

Well, that’s what I’m thinking. What are your thoughts?

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12 thoughts on “Central Banks Are Out of Control

  1. Meanwhile, there are few in Washington who apparently care. Obama out on the stump, and as for me? I am working on getting the state of Pennsylvania out of the liquor business with their state stores. See, I have my priorities straight! 🙂

  2. It’s not the politician’s fault. The people put them there. People want their “free stuff” and the goodies of “compassionate government spending.”

    The day politicians realized that they could be elected by promising the people “free” goodies, and the day that the people started demanding it from their elected representatives was the day that our Republic started it’s long, slow, piteous death march into bankruptcy and fascism.

  3. We are in the threshold of a neo-mercantilist and neo-beggar-thy-neighbor era introduced by the United States through the Fed.

    Now that Japan has joined in, it only remains for Europe to ramp it up as soon as it convinces Germany to join the fight. Germany will have to give up and try to protect themselves by joining in.
    Beggar-thy-neighbor policies are effective if other nations do nothing about it, but that is rarely the case. It was this mercantilist mentality during the great depression of the thirties the reason of why it lasted so long.

    However, we are in uncharted territory because never in the history of the world have beggar-thy-neighbor policies been used through the application of monetary policies in such an open and official way.
    We are in great need of a serious reminder of why the printing of money did not work for the Weimar Republic of Germany.

  4. Wow! The ZeroHedge graphics are exceptionally scary.

    Yields doubled and futures dropped. With its already ginormous 230% debt-to-GDP ration Japan could be in real trouble.

    Japan is trying to pull the ol’ film-flam of inflating away their massive government debt. Looks like it might backfire on them with the reception their plan has got so far.

    That is EXACTLY the kind of danger U.S. Treasuries could face on our current path.

    There is an additional problem for the U.S…
    Japan is our 2nd largest debt holder. They are just a tad below China. If Japan is forced to divest its U.S. Treasury holdings to pay its own bills then it it could drive up our yields and cause massive debt growth just because of interest payments.

    Low U.S.Treasury yields are the only thing keeping U.S. debt growth from spiraling out of control.

    Now you got me REALLY depressed. i

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