Are Central Banks Nationalizing The Economy?

The FT recently ran an article that states that “leading central banks now own a fifth of their governments’ total debt.”

The figures are staggering.

• Without any recession or crisis, major central banks are purchasing more than $200 billion a month in government and private debt, led by the ECB and the Bank of Japan.
• The Federal Reserve owns more than 14% of the US total public debt.
• The ECB and BOJ balance sheets exceed 35% and 70% of their GDP.
• The Bank of Japan is now a top 10 shareholder in 90% of the Nikkei.
• The ECB owns 9.2% of the European corporate bond market and more than 10% of the main European countries’ total sovereign debt.
• The Bank of England owns between 25% and 30% of the UK’s sovereign debt.

A recent report by Nick Smith, an analyst at CLSA, warns of what he calls ”the nationalization of the secondary market.”

The Bank of Japan, with its ultra-expansionary policy, which only expands its balance sheet, is on course to become the largest shareholder of the Nikkei 225’s largest companies. In fact, the Japanese central bank already accounts for 60% of the ETFs market (Exchange traded funds) in Japan.

What can go wrong? Overall, the central bank not only generates greater imbalances and a poor result in a “zombified” economy as the extremely loose policies perpetuate imbalances, weaken money velocity, and incentivize debt and malinvestment.

Believing that this policy is harmless because “there is no inflation” and unemployment is low is dangerous. The government issues massive amounts of debt and cheap money promotes overcapacity and poor capital allocation. As such, productivity growth collapses, real wages fall and purchasing power of currencies fall, driving the real cost of living up and debt to grow more than real GDP. That is why, as we have shown in previous articles, total debt has soared to 325% of GDP while zombie companies reach crisis-high levels, according to the Bank of International Settlements.