Impunity wrote:slick wrote:UKs Central Bank ie the Bank of England is about to embark on a Zimbabwe style money printing operation called debt monetization
Debt Monetization is a scheme where a central bank directly buys government bonds in the primary market.In prior money printing schemes called Quantitative Easing (QE),the Western central banks were buying government bonds from the secondary market ie banks and other investment firms buy treasuries from the government then the central banks buy the bonds from these investment houses.In debt monetization,the investment firms middleman is cut out and the central bank buys outright bonds issued by governments.Just like Mugabe or Maduro of Venezuela.
Even this scheme is being questioned by the UKs Financial Times in article below as being a Zimbabwe style shenanigans but the Bank of England is assuring its a "temporary" program.The article states that when QE was launched in the West during the 2008 GFC,it was touted then as a "temporary" measure yet 12 years down the line QE is still ongoing and now expanded to ludicrous levels.Its almost obvious that Debt Monetization by the major economies will now become normal just like QE.
https://www.ft.com/conte...whv1XD3iKdEoUNTwBnefNro
The Fed is already monetizing the US corporate bond market.
As they say there is nothing more permanent than a temporary government program.
We can only hope that Opus Dei doesn't send us down this mad path.
What will happen to wanjiku bond holders if opus dei goes that direction?
To answer this first we need to understand why Western central banks are buying government bonds,why are they getting away with this so far and why this cannot work in a third world country like Kenya.Ever since the 2008 GFC,the shenanigans of developed world central banks buying massive amounts of government bonds through the process known as Quantitative Easing started as it facilitated the GFC bailouts.There were lots of toxic assets (like Mortgage Backed Secutities,Junk Corporate Bonds,Collaterized Debt Obligations (CDOs))in the Wall Street banks and corporates like AIG,Ford,General Motors,General Electric etc that collapsed in value in 2008.Practically all major US firms would have filed for bankruptcy like Lehman and to prevent that the Fed offered to buy these near worthless toxic assets at par value and at times even at a premium.The Fed took these toxic assets into its balance sheet and recapitalized these failing firms with cash.Also,the government had to bailout the economy and rollout stimulus programs e.g. provide welfare for the jobless and still continue to meet its excessive government obligations while tax revenue had reduced drastically during the GFC due to reduced business activity.To plug that government deficit gap,the Fed offered to buy bonds floated by the US treasury.Thus the entire scheme of the fed buying toxic corporate assets and government bonds is the infamous QE program.At first it was touted as a one off emergency measure to prevent a total collapse and that the Fed would sell back these assets back to the corporates and government once the crisis was over but more QE programs continued throughout the next 12 years in the US and most of the developed world and its QE cash that has fuelled the biggest stock and bond bubble in history thats now collapsing.
By doing QE,the first world central banks would not only recapitalize the government and corporates but also reduce yields for these bonds.If government bond yields fell then loan interest rates would also fall in tandem and households,corporates and governments could borrow cash at even lower rates.Its this mechanism has resulted in loan rates being so low in the developed world.I think most here know that mortgages and other loans in the West tend to be about 5% and below while in Kenya we cry about mortgage rates of 13% and even higher before the interest rate caps.Sounds wonderful to have such low loan rates in the West but its at the expense of their central banks massively printing money to buy bonds and suppress yields and subsequent borrowing costs.The Fed has bought so many government bonds that the US 3 month bill yields a paltry 0.24% as at yesterday ( 2 weeks ago this bill yielded negative).In the Eurozone and Japan the European Central Bank and Bank of Japan went totally nuts and bought so many government bonds that yields went negative and an investor would be crazy to buy these bonds and hold them to maturity as its a guaranteed loss.With low borrowing costs due to suppressed bond yields from money printing,the Western world went on a mad borrowing spree with corporates borrowing cheaply to fuel stock buybacks,ridiculous executive bonuses through stock options and fund overleveraged speculations in risky derivatives;households and consumers borrowed massively in student loans,credit card debt,mortgage debt etc and now find themselves debt saturated.Governments could also borrow very cheaply if the central banks could just print new money to buy government bonds hence sovereigns could spend lots on welfare and other bloated programs like the US 700 billion military budget.Its the debt binge on ultra low rates that makes developed world debt to GDP ratios to be so high e.g. for US its 106%,for Japan its 250% and China its 300% debt to GDP ratio.
So if Western central banks are just printing money to buy government and corporate bonds and right now even buying stocks indirectly,why havent their currencies collapsed and hyperinflated like Zimbabwe?Its because their currencies despite the mad money printing are still considered to be valuable in the global markets and almost all global debt is denominated in these currencies especially the USD.People assume there is no alternative to the currencies of the developed nations and thus accept them as valuable.If not the USD then which other currency would the world use?Its this reason that the Fed is printing trillions but the USD is rising in value (relative to other major fiat currencies that are also printing money too) as its the world's reserve currency and everyone needs dollars for global trade.Also,almost everyone is unaware of the money printing schemes of the first world nations.It looks unbelievable that the advanced nations are just printing money and if many caught on to the shenanigans,they would shun these currencies but almost everyone is oblivious to this and accept the USD,Euro,Yen,Pound,Yuan as solid currencies assuming the governments and central banks are responsible and prudent yet they are quite reckless.
Its sounds ridiculous to say this but many third world nations including Kenya run a far better central bank monetary policy than the developed world.Opus Dei is definitely not lowering central bank rate to zero like the Fed or even negative like in Europe and Japan.Opus Dei is not printing trillions of KES to buy Kenyan treasury,corporate bonds in ludicrous proportions to fund GoK programs,corporate schemes and surpress interest rates.Opus Dei isnt printing trillions to hand over to corporates to buy back their own stock and fuel a stock bubble or as its recently in the West,CBK isnt indirectly buying stocks.If CBK did this,yes then our bond yields would be near zero or negative and out loan rates would be 5% and less and every Wanjiku,Mutiso and Otieno would borrow massively to buy houses,cars etc and fuel a massive bubble that was unsustainable and collapse like the housing bubble burst of the 2008 GFC.Yes its painful to have high loan rates in Kenya but its a sign of a healthier central bank policy that shuns mass money printing and prevents grotesque bubbles of cheap money like in the West that burst violently.If Opus Dei intervened and printed money to buy stocks and bonds then Safaricom would be trading at 500 KES
but then the Kenya shilling would massively devalue and possibly hyperinflate so the nominal gains in bond and stock prices would be eroded by inflation and be practically worthless.As I said,so far the West is getting away with this due to psychologically high demand of their currencies even though the fundamentals of mass money printing make their currencies bogus.Although the laws of economics are being bent in the West they cannot be completely broken and it will eventually come to bite them hard if they keep this up.There is no way Opus Dei could print money like the Fed and other developed world nations and the KES remain useful and hopefully we wont go down that destructive path
Contrarian Investor and Trader.Advocate of free markets,limited government interference in the economy and sound money