Monday, October 20, 2014

How Central Banks Printing Money Turns Into Stock Bubbles

From Bloomberg:
Japan’s $1.2 trillion Government Pension Investment Fund will increase its allocation target for local shares to about 25 percent from 12 percent, the Nikkei newspaper reported without attribution. GPIF will also boost its holdings of foreign bonds and stocks to about a combined 30 percent from 23 percent, while reducing domestic debt to the 40 percent level from 60 percent, the Nikkei said Oct. 18.
  1. The Bank of Japan (BoJ) prints money. 
  2. It uses the money to buy government bonds (domestic debt, above). 
  3. The Government Pension Investment Fund sells its government bonds to the BoJ.
  4. The Government Pension Investment Fund uses that money to buy Japanese stocks. 
  5. Stock prices rise and everyone feels wealthier. 
  6. Yay!
Printed money has become real wealth. Well, it's real only so long as you can get yours out of the market and run away to some place where they don't print money out of thin air to inflate stock prices.

Is there such a place any more?

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