Central Banks as Speculators

The longer the world lives with its funny money, the funnier things get. Here’s a headline from yesterday’s Financial Times: “Central banks pour money into equities.”

We paused. We collected our thoughts. And we wondered: What the hell? From the FT: “A cluster of central banking investors has become major players on world equity markets.”

That was the conclusion of a central bank research and advisory group called the Official Monetary and Financial Institutions Forum (OMFIF), which goes on to warn that this trend “could potentially contribute to overheated asset prices.”

The OMFIF says “global public investors” have increased investments in equities “by at least $1 trillion in recent years.” Although it doesn’t say how that figure is split between central banks and other public sector investors, such as sovereign wealth funds and pension funds.

The number could go much, much higher. The OMFIF says “central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues.”

Ironically, the shift by central banks into stocks is been driven by the ultra low bond-yield environment central banks have created. The OMFIF calculates that central banks around the world have lost out on $200 billion to $250 billion in interest income on their bond portfolios, via BigCharts, click to enlarge..

The world's best investors – a bunch of otherwise utterly clueless bureaucrats – decides to invest in stocks. Their timing will probably prove as impeccable as ever.

A Tangled Web

We’ve devoted a good deal of the Diary to chronicling the tangled web of finance woven by central planners. We see curiosities aplenty – the sort people get up to when they have access to free money.

It is against the law to manipulate stocks. But the Fed does it in broad daylight, lowering interest rates on bonds to increase the relative value of future earnings streams for the stock market (no matter how trickly and unreliable).

And it seems to be working. The US stock market has hit all-time highs even as the source of its profits – the economy beneath it – struggles to find its footing. The intention – ostensibly – is to light a fire under the economy by pumping up the paper value of Americans’ stock market portfolios… encouraging them to go out and spend on flat screen TVs, steak dinners and bigger, more expensive houses.

Why the authorities think they know what other people should do with their money has never been fully revealed. Nor is it at all clear that the world would be a better place if people made riskier investments.

Still, in today’s world nothing succeeds like failure. The Pentagon has not won a war in 60 years… but it keeps getting the go-ahead to enter another one. Central bankers’ record of failure is equally impressive. They never anticipate the trouble they cause… and can be fully relied upon to react in inappropriate and ineffective ways when the trouble starts.

Buried in money ex nihilo

Now, central banks have been hoisted on their own petard. Thanks to their meddling with bond yields, they are now being forced to make up for shortfalls in income by investing in overpriced equities.

With money they create out of nowhere they buy equity stakes in companies. Otherwise, the companies might have been owned by real people… who earned real money providing real goods and services.

And so, dear reader, more and more of the world’s real wealth shifts from the people who make it… to the people who take it.

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Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.