Blood, sweat and tear vs press, paper and ink

Central banks who have power to issue currency (aka money printing) and to ignite creation of credit have also been buyers and manipulators of several major asset classes.

This is what you have to do to make a million dollar.


This is what government has to do to “make” a million dollar.


It’s exactly the same million dollar. Blood, sweat and tear vs press, paper and ink.


The biggest market in the world is heavily influenced by Central Banks. First and foremost, the governments control supply of money. Constant increase of money supply over the last century has resulted in massive value loss in for the dollar.


In 1910 you could purchase 1500 mg of gold with 1 dollar. In 1970 before Nixon shock, you could purchase 900 mg of gold with the same amount. Today you can purchase less than 50 mg of gold with one dollar. The value of the dollar has decreased over 90%.

Currency Wars are fought by central banks around the world in order to achieve their policy goal. They buy/sell local and foreign currencies in order to either weaken its currency (e.g. China pre-2015) or strengthen its currency (e.g. United Kingdom, 1992). In order to execute these transactions, the central banks print money (either physically or electronically by click of a button). Every time new currency is created value of the existing currency stock decreases. In the same way as the tomato trader should expect the price of tomatoes to go down when more tomatoes enter the market from new producers, the holders of dollars should expect the value of the dollar to go down when new dollars enter the market. By creating money from thin air governments and central banks confiscate value which savers stored in the existing currency stock. Mainstream pundits like to bash Chinese government for manipulating value of CNY (which is supposed to boost Chinese exports). At the same time, when the American or European central banks create trillions dollars/euros out of thin air they label it “innovative and forward-looking monetary policy”. Between 2011 and 2015 Swiss National Bank set the price of CHF against EUR at 1.20. For some reason, mainstream media considered this a prudent and smart monetary policy which was supposed to protect Swiss exporters. When the same policy was implemented by a Chinese government it was labelled manipulative and anti-free market.


The biggest government bond markets are heavily influenced by central banks’ interest rate policy. The yields on bonds are dependent on interest rates set by the central banks. The recent “Zero Interest Rates Policy” and “Negative Interest Rates Policy” are engineered to artificially push down interest rates in order to lower the interest paid by the government to finance and increase their debt. Debt which was acquired on behalf of tax payers without their individual consent. Debt is expected to be repaid at some point and the general public will have to bear the consequences of the reckless and short-sighted policy of central bankers and politicians. In the recent 40 years debt of most countries has moved one direction only – up. Governments almost never intentionally repay their debt. They get more into debt, year after year, decade after decade.

Government debt of the European Union has doubled in the last 15 years.


Japanese government debt has tripled since the Japanese bubble busted in 1990.


US debt has increase 6 times since 1990. Imagine that the US government was a private person who owned 200 thousand USD of mortgate debt in 1990. Today it would own 1.2 million USD of mortgage debt.


Pretty much every month and every year in the last 30 or 40 years, governments spent more than 100% of their “salary”. They consume more than they “produce” (confiscate from the general public would be more accurate description). You don’t have to be a financial mastermind to understand that constantly living beyond your means and increasing your debt burden is NOT a prudent financial behavior. On the opposite, it poses a massive financial, societal and security risks in case the tax revenue rapidly declines (vide 2007/2008) or interest rates rapidly increase (to be seen soon, when trust in omnipotence of central banks evaporates). Governments set the worst financial example to the general public. All reckless spending and debt accumulation are only possible because governments granted central banks privilege to print currency on the expense of those who don’t live beyond their means (savers).

Newly created currency is used to purchase government bonds directly in the bonds markets which push the bonds yields down and in consequence the debt burden of the governments is temporarily alleviated.


Even though interest rates have been lowest in the history of the world (close to zero in the US, negative in Switzerland, Sweden, Denmark, Eurozone and Japan) government expenditure on debt interest payments has gone up.


When the central banks finally lose control over interest rates, the market forces will rapidly push the interest rates to levels considered above “normal”, therefore forcing governments into insolvency.

Long-term down trend has reached its absurdity level in the last two years. 10Y government bonds in Europe and Japan started to trade with negative yield. Buyers of the bonds HAVE TO PAY interest to the governments. YES, YOU READ THAT CORRECTLY. The further into the negative territory the yields go, the higher interest payments will be administered to the bonds buyers. Who would be so stupid to buy government bonds in this environment? Central banks of course (the most clueless, irresponsible and destructive market participants the world has seen). Since 2007, FED has purchased almost 2 trillion worth of US government debt (equal to 11% of US GDP), therefore increasing its holdings 3 times.


Where did they take all the money to purchase all these bonds? In the same time period tax revenues has increased by 500 billion USD only.


They created it out of thin air of course and then bought bonds from the markets, artificially pushing interest down. Magic!


Another buyer of government bonds with negative yields are current workers/future pensioners which are forced by the governments to pay some of their money into state-designed pension funds. The idea behind government administered pension funds is that the employees pay share of their monthly income to state or “privately owned/government regulated” pension funds. Those funds are forced by law to purchase government bonds. When interest rates are positive the value of pensions invested in bonds increases. When the interest rates are negative, the value of pensions decreases. No sane investors would purchase financial instruments which are EXPECTED to lose money. State-regulated pension funds are forced to purchase investments which lose money on behalf of the general public. It’s a hidden tax imposed on current workforce. Besides the negative impact this policy have on current purchasing power of general population the governments create a false sense of security. People think that they don’t have to save money because the government promised to provide them with pensions. On top of that, the governments often collect over 50% of gross income via taxes, fees and social contributions. Also, the policy of low interest rates has resulted in the real estate bubble. This has substantially increased cost of housing. Most people can’t save even if they wanted to. How can you save if most of your income is confiscated by the government, and the other part is spent on basic needs like housing and food? You may think that the prices of housing, food and other goods are simply too high to have anything left to save. Central bankers think they are too low. Their policy is to push prices by another 2% every year.

When the world finally realizes that the governments are insolvent, the value of the bonds holdings will plummet, and the pensions won’t be paid out or they will be paid out amounts dramatically lower than expected. When this scenario finally plays out, the social unrest on the global scale is the “best case” scenario. It can be much worse.


Japanese central bank owns over 50% of all ETFs which are invested in Japanese stock exchange. Current holdings of the Bank of Japan is equal to 68 billion USD.


Swiss National Bank holds equity portfolios purchased at stock exchanges around the world. “Assets under management” of the Swiss National Hedge Fund, pardon Swiss National Bank, are valued at 99 billion CHF.


The biggest hedge fund in the world, AQR Capital Management has $60 billion equity assets in their portfolio which looks more like a small fish comparing to the Swiss National Bank. Another example of government manipulation of equity markets is done through „too big to fail” bailouts. When the economy is doing well, banks take massive risks and bankers make massive profits. These profits go to private accounts of bankers. As long as the asset prices are rising, everything seems to be fine. When the economy enters recession/crisis stage the real risks taken by the bankers are exposed. Banks incur massive loses which at this point become public. Money collected in taxes is injected to the failing companies. Banks losses are covered by the public. Private gains, public losses.


This special treatment is limited to big corporations with close links to governments and central banks. “Too big too fail” banks and corporations are the only potential beneficiaries of the government bailout plans. Don’t expect a small or medium size entrepreneurs to be saved by the government when they struggle. They are not there to be saved, they serve as organ donors to big politically connected corporations. Collect tax from small businesses and general public and give it to irresponsible, corrupt and politically established banks and corporations.

Socialist redistribution at its best. Confiscate it from the masses, give it to the elites. This policy is in strong opposition to the capitalist system which assume that the government is not allowed to interfere with any private enterprise in the economy. Inefficient banks and firms should be allowed to fail, and they are replaced by better, more efficient, less corrupt competitors. In the capitalist economy, everyone is given a chance to make profit but also everyone is accountable to the risk they take. This is not the case in the central bank/government managed economy. Profits are private, losses are public should be their motto.


European Central Bank has announced euro-denominated corporate bonds purchase programme of 20 billion EUR per month which is going to start in June 2016. Market intervention of the ECB will most likely inflate prices of corporate bonds. Prices/yields of corporate bonds indicate how market perceives riskiness of the bonds. ECB purchasing programme will lower yield on the bonds, sending false signals indicating that risk of bonds has improved. The market has already reacted to the announcement, even though the programme hasn’t started yet. Markit iTraxx Europe index, which follows the cost of default insurance for investment-grade corporate bonds in Europe has fallen 16% since the announcement. Index falls when the perceived default risk on bonds decreases. In the same time, nothing has improved in the underlying business of the bonds issuers. ECB has indicated to the market that it will purchase bonds regardless whether they go up or down in price. Once again, private gains, public losses. When the investors purchased high-yield bonds, they were allowed to keep the profits. When the credit standing deteriorates, the central bank will use public money to cover any potential losses.

If you want to be informed about the next post which will show governments’ manipulations in real estate, commodity and consumer credit markets, like the profile on facebook.


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