Following the great financial crisis in which capitalism was almost wiped out due to too much debt, a funny thing happened on the path to recovery (paved with some $57 trillion in even more debt) – Quantiative Easing, that deus ex conceived by central bankers as the miracle tool that would fix the world, stopped working. And it stopped working for a very simple reason.
As central banks have scrambled to push risk assets ever higher in hopes of creating that elusive Keynesian inflationary “trickle down”, they are limited in the security they can buy. In fact, most can only purchase government treasurys, which they have done en masse. This is known as QE.
According to BofA calculations, central banks now own $22 trillion in “assets” – almost entirely in the form of government debt (an amount greater than the GDP of the US and Japan combined) – which they have to buy in order to create the balance sheet liability, reserves, which primary dealers and the world's commercial banking system use to bid up risky assets.
Furthermore, according to Citigroup, the amount of debt monetizations in 2015 will be the greatest in history: so great is the scramble to reflate that central banks around the globe (most recently the BOJ's expanded QE and the ECB's brand new Q€) that the money printing academics have now gone all in.
As the chart above shows, the global financial situation is so grotesque, central banks will monetize all net debt issuance around the entire world just to push everyone into the riskiest of assets: stocks.
If there is still any question why nobody believes the falacy of a “recovery”, the chart above should be sufficient to prove to anyone that there is no self-sustaining economy in the world anymore just one massive printing orgy and a doomed attempt to reflate $200 trillion in global debt at all costs.
But back to the topic of QE: as central banks rush to issue reserves, they have no choice but to buy government bonds. Some $22 trillion of them as we noted above. And what happens when epic, epic amounts of government debt are purchased by central banks (just yesterday the BOJ monetized about $10 billion in debt in its daily POMO – and this happens several time per week)? Well, as we have shown since 2012, the bond markets freeze up because central banks soak up all the liquidity, but more to the point, bond prices go up and yields go down.
