Proof: money printing is a boom on steroids

How exactly will all this fresh money spark a boom in property? I tell you.

So this one is for the folks who want to understand just how epic the money-printing madness is right now, and just how it’s going to make asset markets explode.

So last week the RBA committed to print another $100bn – at a pace of $5bn a week.

Yeah. Like it’s nothing.

Which it actually is. It is literally nothing to the RBA because they just press a button on the computer and BRRRR – brand new money.

Hooray!

Anyway, this means that the RBA is further expanding their balance sheet. So when the RBA prints money, it uses that money to buy assets (typically government bonds), and so their balance sheet ‘expands’.

(Don’t you wish you could do that?)

Anyway, this is what their balance sheet looked like before the most recent announcement:

So the RBA’s balance sheet was already looking bloated, even before the most recent announcement.

Since Covid struck, the RBA’s balance sheet has doubled, from $160bn to over $320bn.

Pew.

On top of that, you can add what’s left on the current printing program, which ends in April, and the fresh commitment of another $100bn, which will take us through until September.

All told, we’re looking at a tripling of the RBA’s balance sheet.

It’s massive.

What impact does this have on the economy?

Well, that’s where I thought this chart was interesting. This is the American story:

This comes from Lyn Aiden Investment Strategy, via Twitter. The point Lyn is making is that when money printing happens without huge government spending, then it just sort of gets mopped up by the financial sector.

Huge demand for government bonds drives down their prices, which suppresses interest rates across the economy.

That obviously has a real impact – particularly on financial assets (remember the US stock market tripled between 2010 and 2019) – but it mostly ends up being contained to financial markets.

What happens though when there’s massive government spending to go with it, is that that freshly printed money escapes the financial system, and gets into the real economy.

The government takes the money they get for their bonds, and spends it, on roads or schools or trips to Thailand or whatever.

When it enters the real economy, it pushes up the money supply.

And that’s what the most recent episode shows us. Massive money-printing, combined with massive government spending, has caused a massive expansion in the money supply.

That, in theory, should bid the price of everything up, but hard assets in particular. (That is, it’s super bullish for property.)

So what’s happening in Australia? We’ve got the expansion of the balance sheet. We’ve got the money printing. Do we have the spending?

Yes. Yes we do.

On current estimates, the government (state and Federal combined) are spending the equivalent of 15% of GDP in 20/21 alone!

It’s huge!

That means, that we’re going to see a huge expansion in the money supply.

Which means an explosion in prices, and particularly hard asset prices.

This is where we’re going.

So hold on to your assets folks. The RBA’s is printing and printing hard. This is going to get wild.

JG