In our research, we’ve been mentioning that we believe the most powerful force in the markets right now are the world’s Central Banks. And, in fact, we think the economic and financial maneuvers they are making are taking us further and further away from traditional economic principles. These “new” economic concepts are designed to provide more flexibility and options for Central Bankers in their attempt to grow the global economy.
These new economic concepts can cause traditionally trained economists to have serious issues with how much debt the global economy has accumulated. However, there are some interesting caveats and, dare I say, tricks embedded in their strategies.
Ask yourself this; our Central Bank (The Federal Reserve) has been accumulating assets on its balance sheet. What happens when the U.S. Treasury bonds they own mature?
Well, one scenario is that the bonds mature and the Treasury makes good on their obligation to pay the principal to the Fed in full. But if the Fed elects not to roll those funds into more bonds, they, by mandate, must pay that money back to the Treasury. In this case, the bonds/debt disappear and the Treasury is paid back in full.
Magic!