The UK Just Launched a Bond DEI Scheme. (This is not a Joke)
The New Bond Model Will Kill Us Slowly
As the amount of safe assets held by the Federal Reserve — such as gold, tender notes, and government and commercial bills — has fallen in relation to the size of its balance sheet, the purchasing power of the dollar has been relentlessly diminished.
- Simon White, Bloomberg macro strategist
Contents: (1300 words)
Background: The DEI Bond Model Will Kill Us Slowly
Western Currencies on a Path to Permanent Debasement
Why Central Bank Balance Sheets Matter:
The BOE’s New Path: All Bonds Are Equal
A Warning from History:
The U.S. Outlook:
Conclusion:
TL/DR:
Central banks are normalizing the deterioration of their balance sheets.
As they continue to accept lower-quality collateral, fiat currencies like the dollar and the pound will keep losing value.
In the end, it’s the real value of these currencies and those who need to buy things with them that will bear the brunt of this ongoing debasement.
1- Background: The DEI Bond Model Will Kill Us Slowly
The analysis and commentary written below was provoked by reading Bloomberg Macro Analyst Simon White’s excellent piece titled Western Currencies Are On A Path Of Secular & Permanent Debasement covering Fiat debasement risk as it relates to Central Bank balance sheets.
On the way to doing so, it touches on a little talked about, and extremely important approach to how Central Banks maintain solvency when they are in a market crisis. This CB approach is worth elaborating on as it is a risky tool necessarily used in times of crisis now being implemented in “normal” times. It is also an end-around cause of currency debasement.
The crisis tool being normalized is: CBs are lowering collateral standards applied for loans to Commercial Banks that guarantee money those CBs give to them.
In English: CBs will treat bad collateral (your kid’s rusty bicycle) as equal to good collateral (your 2024 Bugatti) in making loan rules justifying more money be given to you.
The Fed cannot cannot turn corporate banks (with rusty bicycles) away in need; And so, lacking QE or an ability to lower rates, they lower collateral standards. Specifically Central banks are moving to use a well-worn crisis tool as an every-day policy to keep commercial banks solvent and the economy afloat. That tool involves lowering their own standards of what good collateral is for Commercial Banks.