Like Atlas holding up the Earth, central banks are holding up the financial market. Very few people give it a thought, even though it is paramount for determining the future of our economies. We had previously written about this last year (Are Central Banks Starting to Nationalise the Economy?). It is important we get back to this subject because new data confirms this peculiarity: according to Goldman Sachs, central banks now hold a full third of the world’s bond market!
We often hear that markets are prey to speculators, but in fact, central banks are taking up more and more room. And central banks are just an arm of the State, even though they try to show some kind of independence from governments. “Unbridled capitalism†has become more and more a tale, and the notion of free market is becoming more and more diluted.
So, according to Goldman Sachs, of the 54 billion dollars of bonds (sovereign and private) traded in the world, central banks hold $18 billion, a third exactly (33%). They have even surpassed the hedge funds (28%), demonised by the media for their brand of capitalism… With their printing presses (QE) these institutions have much more firepower than the traditional participants… all systems go… rampant collectivisation! And all this printed money finds its way to the stock markets, pushing them higher (that is, if they don’t buy stocks directly, like Bank of Japan).
Obviously, bonds wouldn’t be priced this high in the world if it weren’t for that colossal intervention but, after all, this is the objective of the central banks, since they want to keep interest rates as low as possible (low bond rate = high bond price). Now they want to “normalise†their monetary policies, which implies stopping QEs, selling those $18 billion worth of bonds, and being ready for a significant rise of interest rates. Nobody in his right mind thinks that this would not provoke a major financial crisis… Central banks are stuck between a rock and a hard place.
