On Tuesday, Bank of Japan surprised the Asian markets by doubling the size of funds it makes available to banks to spur bank credit. It was at pains to explain that the overall size of its monetary base increase will still be around its previous estimate of just below $700 billion for the current year. For a $6 trillion dollar economy, that is still a whooping increase.
In the previous week, the Bank of England went on say that it does not intend to keep its promise of reviewing its monetary stimulus even if its unemployment reduction target is achieved much before it ever anticipated.
Elsewhere, some ECB officials claimed ready to slay the dragon of deflation rearing its head in their backyard --- by printing more money.
In the USA, in spite of tapering, the Fed is still printing $65 billion a month, which is the highest speed of printing ever if you ignore the last few quarters.
It seems that central bankers globally feel that the global economy is a Hilbert’s Grand Hotel. Mathematician Hilbert developed this thought experiment just about a century ago.
Imagine you are a manager of infinitely large hotel, with infinite number of rooms. And, you are so lucky that guests are occupying all the rooms tonight. Now, imagine, an infinitely large bus drives up in your front door, and the driver announces that he has brought an infinite number of new guests. What do you do? Do you ask the driver to try his luck at some other hotel? Or do you welcome the newly arrived guests?
Prof Hilbert said, he would welcome the new guests. He would ask the existing guests to move to a new room with double the original room number. That is guest in room three moves to room six & so on. Remember there are infinite rooms, so for every room with number N, one should be able to find a room with number 2N. Now, all odd rooms are empty, which Hilbert will assign to new guests.
The central bankers are behaving as if the economy can absorb the infinite amount of paper money they shower without ever causing a deluge. The working assumption here is that the economy is like Hilbert’s Grand Hotel.
Alas, the global economy is not a Hilbert’s Grand Hotel. The numbers of players are limited, and the resources are limited. The only thing that is unlimited is want or greed. Unfortunately wants can only be satisfied with real goods and with nothing else. Artificially stimulating them with ever-larger wave of paper or electronic money is eventually going to cause grief. But, by that time, the current set of officials would have retired from their position. So, that event is beyond their horizon. If you, as an investor, are expecting to enjoy your wealth beyond the official tenures of current policymakers, be ready to make significant adjustments to your investment portfolio.