One could easily accuse the gold bugs and, more globally, the Austrian school pundits, of being systematically pessimistic and of constantly predicting financial crashes to come. Since their beloved gold standard was abandoned, they have been railing relentlessly against the central banks’ money printing and its huge threat on money. Well, of course, one could take pleasure in predicting the Apocalypse, remaining stuck in a posture.
But sometimes these worries are confirmed by analyses coming from different intellectual horizons – let’s enjoy without restraint – and it’s the case with this survey from Natixis Bank’s research service, entitled “Financial Instability is Irreversibleâ€, which corroborates all aspects of the criticism exposed in my writings and in (a few) other columns.
By “financial instabilityâ€, they mean excessive indebtedness followed by debt relief crises, bubbles in asset prices followed by their explosion, increasing amount of international flow of capital, generating excessive variability in exchange rates. And all of these convulsions are tied, according to Natixis, to “the excess of monetary creation by the central banks.†Well, thanks for this confirmation.
The monetary base, or “central bank money†– money created directly by a central bank – has gone from 10% of GDP in 2008 to 35% at the end of 2016 in OECD countries! And nothing seems to be able to stop this frenzy which was triggered by the subprime crisis.
When a central bank purchases a financial asset from an economic agent and pays it with money it creates out of thin air, said agent can do what he pleases with the money – buy financial assets (stocks, bonds, credit…) or real estate. This money created without any counterparty then artificially inflates the value of these assets, until they reach a breaking point – sooner or later. The study warns, “The larger the amount of money created by the central banks is, the larger the amount of asset buying/selling builds up, and the stronger financial instability becomes.â€
