According to legend, Russian minister Grigory Potemkin erected fake settlements along the banks of the Dnieper River in order to fool Empress Catherine II during her visit to Crimea in 1787. According to Kyle Bass, managing director of Hayman Capital, central banks around the world today have erected their own Potemkin villages to deceive the public into thinking that the world’s economic problems are solved. They aren’t.
In a recent conversation with Bass, a prominent central banker noted that a central bank pursuing aggressive monetary policy can have some positive effect on economic growth. However, the simultaneous engagement in expansionary monetary policy by many central banks yields almost no benefit to economic growth. To illustrate this point, Bass showed a chart of the balance sheet growth of the four major central banks: US Federal Reserve, Bank of Japan (BOJ), European Central Bank (ECB), and People’s Bank of China. In aggregate, the balance sheets of the big four central banks grew from $3 trillion in 2008 to over $13 trillion today. Moreover, many central banks are printing new money on an unlimited basis, maintaining zero interest rates, and simply shifting the day of reckoning out into the future. Nowhere is this more true than in Japan.
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