By Bill Wilson
A small number of central banks around the world have begun investing
their foreign exchange reserves in equities, according
to Bloomberg News. These include the Swiss National Bank, the Bank
of Israel, South
Korea and others.
So far it’s not much, several billion in stock buys by central banks.
But all over the world, there are about $10.2 trillion of foreign
exchange reserves that could be tapped, according
to the International Monetary Fund’s Currency Composition of Official
Foreign Exchange Reserves (COFER) database.
Interestingly, the IMF
notes that “COFER data for individual countries are strictly
confidential.” So, when central banks flood equities markets with
excess reserves, investors likely won’t know until after the fact, and
then, only if such purchases are disclosed.
But why would central banks purchase stocks? Aren’t those… risky?
In 2000, none other than current Federal Reserve Chairman Ben
Bernanke — then a professor — commenting
on Japanese policies after their housing bubble popped in 1989,
included corporate bond and equity purchases in his menu of options
that might be pursued in an environment with near-zero interest rates.
Bernanke left no mistake that the reason to boost aggregate demand in
this fashion is to raise prices: “The object of such purchases would
be to raise asset prices, which in turn would stimulate spending”.
Vince Reinhart, then Fed Director of its Division of Monetary
Federal Open Market Committee (FOMC) meeting in June 2004 described
the circumstances under which a central bank might engage in such
purchases: “if the policymakers believed that deflationary forces
Reinhart also dismissed the possibility at the time, saying, “These
options would change how we are viewed in financial markets, involve
credit judgments of a form we are not used to, perhaps smack of
desperation, and pull us into a tighter relationship with other parts of
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