This question might sound preposterous, but this movement is very real and growing in importance: central banks are progressively buying private assets with their unmatched firepower. The mainstream media is silent about it and the economic press almost as mute, even though this constitutes a major evolution. Although “classic” monetary policies, such as ‘quantitative easing’ and interest rates at zero, have failed, central banks – instead of reassessing their actions – are persisting and increasing their stranglehold on the economy.
The Bank of Japan (BoJ) will become, before the end of 2017, the largest shareholder in Japan’s main companies on the stock market, according to Bloomberg. Now, isn’t this rampant nationalization? The BoJ buys stock massively, using ETFs, and it is set to double this amount, from 28 to 56 billion dollars a year. Its governor, Haruhiko Kuroda, argued that these stock purchases would contribute in stimulating economic activity and inflation. However, no progress has been noted in either economic activity or inflation since the central bank has been active on the Tokyo stock market. The bank had stated the same goals for its policy of zero rates and State bonds purchases... well, if it doesn’t work, let’s try it again! However, there are some adverse effects, such as artificially inflating stock prices, diminishing the float (shares permanently traded, in contrast to shares held by long-term investors) and, thus, increasing volatility.
Thus, the economy is becoming more and more controlled by public institutions: “The Bank of Japan is set to become the largest buyer and holder of stocks in Japan. The market has become, regrettably, managed,” said Romain Boscher, head of management with Amundi, on BFM Business, August 18.
The European Central Bank (ECB) does the same thing, albeit with a small twist: it does not buy shares in large corporations, but it purchases their bonds. On top of its purchasing of public debt from Eurozone countries (75 billion euro per month), the ECB buys private debt from large European conglomerates to the tune of 5 billion euro per month. The stated goal consists in lowering the cost of borrowing for businesses (in order for them to invest more and jumpstart the recovery). But however, these large corporations have no trouble financing themselves already. No, the problem resides with small and medium businesses. Thus, the move from the ECB will be inefficient but, hey, if it doesn’t work, just like with the BoJ, let’s try again!
Money printing and interest rates manipulation undo the markets’ structures. Price discovery is more or less “managed”, several bubbles appear, but central banks want to go further and directly influence large businesses. Will it have the same consequences? By purchasing their stocks and bonds, central banks effectively disconnect these companies from the market, since even the badly managed ones will see their share prices increase and their bonds purchased. The discriminating role of the market is fading, and the whole efficiency of the economy with it, with no growth in sight. Behind virtuous intentions, the central banks’ intrusive policies are deeply destroying the economy.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.