The banking system has crossed the Rubicon, by David Evans.

This graph is a record of how much money the US Fed, the European Central Bank, the Bank of Japan, and the Bank of England have created out of thin air. Notice that they have been printing at a great rate ever since the Great Financial Crisis in 2009, and that the response to covid far exceeds that to the GFC.

A central bank creates money by typing numbers into a bank account at the central bank. It then uses that money to buy stuff — which is how the newly manufactured money leaves the central bank and goes out into the world. Note that most money only exists as numbers in bank accounts.

This method of creating new money is called monetization. The amount of money created this way is recorded as the assets on the balance sheet of the central bank (see graph above).

Central banks only buy solid financial products, typically bonds issued by their government. The covid responses of governments were financed like this in most countries. Notice that taxes didn’t go up, but governments were able to spend much more money. Sure, technically they “borrowed” it by issuing more bonds, but most of the money used to buy those bonds came from their central bank. In effect, the government printed most of it.

(This is the second most important way that new money is manufactured. Easily the most prolific mechanism is in commercial banking. When a commercial bank makes a loan, it is generally by creating a new bank account and typing in some numbers. Modern money is literally IOUs. Commercial banks are subject to limits set out in the Basel Accords and by national governments. Central bank money manufacture is limited only by inflationary expectations.)

Tyler Durden, commenting on the graph above:

Needless to say, this is all very troubling not in the least because it is obviously expanding what is already the biggest asset bubble of all time: troubling, because while both US and global stocks are currently at all time highs, this has only been made possible thanks to the relentless, record firehose of central bank liquidity that is openly propping up asset prices.

Indeed, we have gotten to the point where even established strategists cast aside the lies and admit that liquidity is all the matters, as [Morgan Stanley’s Matthew Horbach] did when he said that “central bank liquidity both greases the wheels of transactional finance and changes the opportunity set available to investors.”

Now, central bankers — dumb career academics as some of them may be — are not all idiots, and they clearly understand that what they are doing is merely buying time while in the process making a massive bubble even bigger, so much so that when the next crash comes, it could mean the end of fiat currency and western capitalism as we know it, especially if central banks lose what little credibility they have. …

The Fed itself is starting to have doubts that its shotgun approach of stimulating the markets, or rather “the economy” as they call it, may be reaching its limits and that the next major expansion in QE could have “unintended consequences”, i.e., a market crash. …

Of course, such warnings come and go; meanwhile what the Fed also said is that for all its concerns, it will most likely continue to pump liquidity, as the central bank is absolutely mortified of another crash — as only then will its lack of tools to sustain financial markets become apparent. As such, the Fed will do everything in its power to not only short circuit the business cycle in perpetuity, but also avoid any market drops … ever again.

Credibility is all important in banking, because modern money is just numbers in bank accounts (and a few bank notes). If people don’t believe it will have similar purchasing power next year as it does this year, then it rapidly becomes worthless. The game is all about inflationary expectations.

At this point the central banks are locked into a path of ever increasing printing to stimulate the economy and prevent a crash … until there is a mammoth crash that destroys banking itself. In the history of paper currencies, all paper currencies eventually end this way. The average lifetime of a paper currency is about 50 years. Technically the current paper currencies all started in 1971, when the last link to gold was broken by President Nixon.

The current system has entered the terminal phase. There is no rescue back to “normal” (e.g. pre GFC or, better, pre-1982). The only variable is how long before a cataclysmic meltdown. Could be a decade or two, or just a year or two. No one really has much idea. When it occurs, it will blow away all other political issues for a decade.