Why keep monetary conditions loose when a kitty can wag the stock market?
Central banks cannot tighten monetary conditions too much because of the sheer amount of debt in the world. The IIF estimates the amount of private and public debt in the world at around $ 320,000 billion. If we use the SITD method (shot in the dark) and assume that the average maturity (length) of debt was five years, we would have to refinance over 60,000 billion of debt each year. This is equivalent to about 70% of total annual global GDP.
In total, debt represents about 330% of world GDP.
(Of course, global debt is also financial wealth. It's the flip side of the desire of saving individuals and corporations to accumulate financial assets.)
This week's return of meme stocks makes one wonder whether central banks, the Fed in particular, have tightened monetary conditions enough. The meme stock GME rose from the grave this week with a rise of up to +400% at best (or worst?) when stock pumper @TheRoaringKitty tweeted a picture of a man leaning forward in a chair on X after years of silence.
Bloomberg's Financial Conditions Index, which takes into account factors such as stock market levels and interest rates, is well on the loose side. You would think that in a strong economy with persistent inflation, there would be a case for further monetary tightening.
As I have been saying for some years now, central banks can fight inflation with high interest rates (encouraging savings rather than spending) but at the same time use balance sheet measures to keep the debt-driven wheels of the global economy turning. It is no coincidence that when the Bank of England ran into trouble in the fall of 2002, as liquidity in the UK debt market dried up, the Fed also changed its tune. Since then, net liquidity has developed favorably, even though quantitative tightening (QT) of the balance sheet is officially still underway. However, the federal government expects QT to officially end this year as well, and the balance sheet to start growing again to finance federal deficits.
The liquidity show must go on, if only by force, unless the central banks want to plunge the world into a financial crisis. And that is the last thing they want to happen.
