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Out of the Box: Every Move You Make

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Every breath you take

Every move you make

Every bond you break

Every step you take

I’ll be watching you

-The Police

Imagine it, money made from nothing except a keystroke, a wand waved by an “independent” central banker, a computer is some small room where some clerk hits the button and produces money from nothing and they could care less if the checks are free or not. They are the only people on Earth who cannot be charged with counterfeiting.

It is all Magic!

They stand alone, as the great Alchemists of the modern age, who can turn thin air into money and then into gold. The truth is that the markets, all of the world’s markets, would be nowhere near where they are now except for their creation of money and then their ability to invest it where they desire. In the U.S. it is Treasuries and Agencies but in places like Japan and Switzerland, the central bank invests their money in not just sovereign debt but in Corporate Bonds, equities and Exchange Traded Funds. Magic, it is magic alright, the greatest financial Wizardry in the history of the planet.

“Disbelief in magic can force a poor soul into believing in government and business.”

-Tom Robbins

The St. Louis Fed estimates the “Free Cash Flow” of the United States at $2.615 trillion dollars at the end of the fourth quarter of 2018. This is as considered against a $22 trillion-dollar economy, which means that the “Free Cash Flow” of the country is 11.8% of the total GDP. Then if you consider what “Money Made from Nothing” means, it gets very tricky. There are no costs for this money, no salaries, no overhead, no cost of production, nothing at all, Zero, so that the “Free Cash Flow” of the central banks’ creation is not truly indicative of the “Real Value” of the newly minted cash.

Now Yardeni Research puts the total amount of assets at the world’s four major central banks at $19.4 trillion which is composed of the Fed, the ECB, the BOJ and the PBOC. The is a larger amount than China’s $13 trillion economy and just slightly behind the GDP of the United States. You might stop there, and be stunned, by that, but if you do that, you haven’t gone far enough in your thinking.

Since this central bank money is a “Free Cash Flow” then, if we use the American “Free Cash Flow” of 11.8%, and apply it to the central bank’s cash creation, then REAL value of the of the central banks’ money, the equivalent “Free Cash Flow,” equates to a “Free Cash Flow” from an economy of $171.11 trillion, by comparison.


In other words, it would take an economy of $171.11 trillion Dollars, to have a “Free Cash Flow” of $19.4 trillion Dollars, which is the amount of money that the four central banks have created so far. I say, “so far,” because the all of this “Crown of Creation” was really begun with the financial crisis of 2008/2009 and it has not stopped. The Fed has cut back some, down approximately 800 billion dollars from its high mark, while it currently holds $3.9 trillion in assets. This is as the ECB has grown its balance sheet to $5.3 trillion, the BOJ assets are now $5.0 trillion and the Peoples Bank of China now commands $5.2 trillion in assets.

Also, to be considered, is that the Fed’s assets now equate to 18.8% of America’s GDP, while the ECB’s assets equate to 39.7% of the European Union’s GDP and the Bank of Japan’s assets equate to 100.6% of the Japanese GDP. In the case of China, the data is highly suspect but, if official figures are used, it would put the PBOC’s assets at about 40% of their GDP.

You might wonder, “Is there an End-Game here,” and the answer, in my estimation, is yes. You might look at Japan and think that the central banks can continue to create money in perpetuity, but that is not my conclusion. The “Escape Valve, in my view, is their currency.

There has not been one whisper of this, anywhere, that I have seen, but I think that at a certain point, under certain circumstances, that some central bank’s national currency could get hammered, if things turn nasty enough. I would assert that the creation of money from nothing has a limit somewhere. It is just a limit that the world has ever experienced, but I think one is there, lurking.

To the world’s central banks, I say:

You are the crown of creation.

You are the crown of creation,

And you’ve got no place to go.

-Jefferson Airplane

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.

Redistribution/reproduction of this material is prohibited.  See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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