Gross: “Without QE From ECB And BOJ, The U.S. Economy Would Sink Into Recession”

Back in November, when describing the perverse global fund flows in which record money creation out of the BOJ and ECB amounting to roughly $200 billion per month was being used indirectly, via spread differentials, to create demand for US Treasuries by foreign official and private investors – an observation first made by Deutsche Bank – we dubbed it “global helicopter money“, and were surprised that “nobody has noticed” what is going on. Three months Bill Gross has made this phenomenon the topic of his latest letter titled “happiness runs” in which he writes that central banks remain stuck in a “QE-forever cycle”, and explains that “a client asked me recently when the Fed or other central banks would ever be able to sell their assets back into the market. My answer was “NEVER”. A $12 trillion global central bank balance sheet is PERMANENT – and growing at over $1 trillion a year, thanks to the ECB and the BOJ.”
He then observes something we have pounded the table on repeatedly in recent years, namely that without the Trasury backstop bid from central banks, there would be a sharp sell off in rates, which would eventually catalyze a sharp contraction in financial conditions, leading to a recession, to wit:
A 2.45%, 10-year U. S. Treasury rests at 2.45% because the ECB and BOJ are buying $150 billion a month of their own bonds and much of that money then flows from 10 basis points JGB’s and 45 basis point Bunds into 2.45% U. S. Treasuries. Without that financial methadone, both bond and stock markets worldwide would sink and produce a tantrum of significant proportions. I would venture a guess that without QE from the ECB and BOJ that 10-year U. S. Treasuries would rather quickly rise to 3.5% and the U. S. economy would sink into recession. He calls this “global helicopter money” circular scheme “financial methadone”, and writes that “the interest earned on the $12 trillion is already being flushed from central banks back to government fiscal authorities. One hand is paying the other. But the transfer in essence means that monetary and fiscal policies have joined hands and that the government, not the private sector, is financing its own spending.”
This fusion of monetary and fiscal policy is the very definition of “helicopter money”, however because it takes place at the global, and not national level, few are outraged.

This post was published at Zero Hedge on Feb 6, 2017.