Repressing Black HolesSubmitted by Atlas Indicators Investment Advisors on October 8th, 2020
Some forces are beyond our full comprehension. Take black holes for instance. They are thought to have nearly infinite density, creating such a strong gravitational pull that not even light is capable of escaping their influence. This immense force creates a point known as a singularity where the laws of physics break down. The most recent Nobel Prize in physics was awarded to three scientists for their contributions to more fully understanding these forces of nature.
While not a force of nature, America’s central bank certainly exerts influence on our economy and financial system. During periods of economic disruption, their recent tendency has been to intervene as a way of keeping some things from collapsing. Take the covid-19 period. They inflated their balance sheets quickly, pulling interest rates lower. This “financial repression” keeps borrowing rates low for the government and has been used in other period of crisis (e.g., post-WWII Treasury purchases by the Federal Reserve). Academic estimates in this report from the International Monetary Fund suggest these efforts kept inflation adjusted interest rates negative for roughly half the time from 1945 – 1980. Ultimately, it allowed America’s debt-to-GDP ratio to collapse by 68 percentage points.
Despite the central bank’s powerful position, it does not exist in a vacuum. Like the processes which are thought to be just beyond the event horizon of a black hole, financial innovations are breaking down the previously understood laws of finance. Crypto currencies continue gaining density as their popularity causes assets to gravitate toward a dark corner of the financial universe. This is an area of finance whose narrative is in its infancy. And yet, the central bank is already trying to force its way into the market with research on their own central bank digital currencies.
Black holes have been around for billions of years, and we are early in our understanding of them. Albert Einstein’s general theory of relatively is barely 105 years old. Our current iteration of central banking in America is only two years older. How its attempt to keep government borrowing costs low will impact this era isn’t fully understood. Some believe it will provide a gravitational slingshot for our economy, changing output’s velocity. Others fear it could collapse upon itself as the scaffolding provided by confidence fades. No matter what the future holds, we have a lot to learn.