“Remember, my son, that any man who is a bear on the future of this country will go broke.”JP Morgan 1908
Initially the case was built by Adam Smith’s famous “invisible hand” that the unseen forces behind the economy are largely driven by self-interest and the freedom of production and consumption. Further, that the constant pressures of market supply and demand cause the natural movement of prices and trade.
Has the role of the “invisible hand” been taken over by Central Banks?
The various central banks around the world have one main prerogative and that is to stimulate growth. This is done utilising a number of economic utilities ranging from reducing or raising interest rates, regulating foreign exchange capital controls and since the Great Financial Crash in 2008, quantitative easing (now in the Oxford dictionary). Controlling / manipulating the economy as much as possible to ensure growth.
Almost two years ago the Bank of Japan’s balance sheet exceeded the size of the entire Japanese economy through what it calls “quantitative and qualitative” easing policy. The BOJ was the world’s second central bank after the Swiss National Bank and among the first Group of Seven countries to own a pool of assets bigger than the economy it is trying to stimulate.
Let that sink in; the BOJ has more assets than its entire $5trn economy! Followers of the Austrian School of economics will turn in their austerity graves.
The Federal Reserve of the US also hasn’t missed out on asset purchases. It has grown its balance sheet from $870bn in 2007, $2.23trn in 2009, to the current $5.3trn (that is roughly a quarter of the total US Economy), and it doesn’t look like it’s going to slow down. At $5.3trn in assets on balance sheet it is however still only a quarter of US GDP, clearly room for more.
When one thinks of the US, you will agree that no nation has innovated, developed and grown like the United States of America. It truly is an amazing story, a civil war, 2 world wars, a multitude of corporate scandals and numerous asset bubbles but they keep going. No other nation has been able to match their level of industrious activity or ingenuity.
With the largest economy in the world along with the largest central bank showing intent to keep the music going, the question is, are you willing to bet against America and fight the Fed?