Throwing money in the air

Throwing Cheap Money at the Business Cycle

15.09.2016 • The Economy

From Charlie Morris – Fleet Street Letter (Great Britain) –

In financial markets, there is always a healthy disagreement between the bulls and bears. After all, in order to buy, another must sell. When looking at the bond market in particular, many old timers scratch their heads. It seems that the majority opt to be sellers yet bonds remain at elevated prices (with low yields). The buyers are the central banks, which are only too happy to keep money cheap in a vain attempt to dispel the idea of a business cycle.

The state of the bond market is ridiculous. You don’t need to elaborate on it. According to the Swedish economist, Knut Wicksell, the ten-year yield should be approximately the same as the rate of nominal GDP growth. In the UK today, reported inflation is around 1.9% (and rising) and historical real GDP growth is 2.2%. That means the ten-year gilt yield should be around 4.1%. Instead it touched 0.5% in August and has since started to rise.

The Bank of England’s heroic defense of the financial system is entirely unnecessary. The rock star governor, Mark Carney, believes the British economy avoided catastrophe because of his stimulus program. Consider instead that the economy is enjoying an entirely natural post-referendum bounce as things stabilize. The pre-referendum uncertainty caused investors to sit on the sidelines. That uncertainty is now behind us and Britain faces a bright future as she negotiates her way out of the European Union (EU).

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