Sunday, July 6, 2014

The rise of central banks as sovereign financiers

Among the many distortions that have accompanied the extended period of quantitative easing across developed economies has been the rise to prominence of central banks as the predominant financiers of public debts. In the US, the Fed purchased 71% of all Treasuries issued in 2013.
Since the beginning of its latest QE program in April 2013, Bank of Japan has been purchasing about 70% of all government securities. Japanese bond yields have declined continuously despite upward tick in inflation. 
In UK, the Bank of England's share of UK public debt has ballooned to over 25%, up from negligible levels in 2008. 
In all these cases, the story is the same. Governments issue securities either to finance investments or to bend the yield curve. In the absence of adequate market demand, central banks print money, buy the securities, and thereby lend to governments. Central bank interventions keep interest rates low, thereby both discouraging  fiscal prudence and encouraging easy money-based asset market speculation.  

This cannot go on forever. When the circle gets broken and interest rates inevitably rise, governments will be stuck with massive debt loads and unsustainably high financing costs. 

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