Friday, August 2, 2013

How Central Banks Buy Growth

Nicole Fose
When it comes to the real measure of a nation’s economic output, we can rely on constantly changing definitions of what constitutes the creation of goods and services and transactions of same, or we can go to the core of ‘growth,’ which is and always has been a reflection of the increase or decrease in broad and narrow liquidity (money supply), which in turn means how much currency is created through loans, either via commercial banks or via central banks.
These days, if there is loan creation, and thus injection of liquidity into the system, there is growth. If there is no liquidity injection, there is no growth—and therein lies the problem.
Most economists agree that when it comes to economic growth, what is really being measured are liabilities (i.e. credit) in the financial system. This is seen most vividly when comparing the near dollar-for-dollar match between US GDP, which stood at $16 trillion as of Q1 and total liabilities in the US financial system, which were just over $15.5 trillion in the same period.
What few will analyze, or admit to omitting, is the asset-matching of these bank liabilities: because there is no loan demand (and creation), those trillions in deposits have to go somewhere, and that somewhere is Fed reserves. It is here that we can discern directly just what the contribution of the Fed to US GDP, or economic growth, is.
The questions that economists should be asking: What effect will tapering have on US GDP (hint: very negative), and what happens when the establishment admits that, as of last quarter, some $2 trillion in US GDP was exclusively thanks to the Fed, a number that will rise to $2.3 trillion at September 30 (and continue rising).
Meanwhile, reports are that house prices will continue falling in much of Europe this year, the euro region is at high risk of stagnation, Fed tapering could reignite the euro debt crisis, and the Eurozone debt burden has hit an all-time high despite tough austerity measures.
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