Central banks are no longer independent

In an interview the  former chief economist of the ECB and monetary hawk, Jürgen Stark made some interesting remarks about global central bank policy:

Central banks (in the US, Europe, Switzerland and Japan) are flooding the financial system not to avert deflation but to support economic growth and decrease interest rates of over indebted government. Hence, there policy is no longer independent. The chart below show the explosion of money supply. Only the central bank of  Japan did not increase its balance sheet (yet), but this might happen soon, as the new PM Abe is demanding a weaker currency.

Today, central bankers are trouble shooters for non-monetary problems like weak economic growth, high unemployment and the burden of interest payments for over indebted governments, which is increasing the bankers power enormously.

The result of the monetary flood is financial repression (i.e. savers lose out due to interest rate not covering inflation anymore) and bubbles in various asset classes (e.g. bonds, swiss real estate etc.).

At the moment the increased money supply is not inflating consumer prices because the liquidity is not fueling the real economy (the liquidity is contained in the financial system fueling asset bubbles). But once the transmission works again and prices increase, it is doubtful whether central banks are willing and able to reduce this monetary sea in due time. In that case we will face substantial inflation!

To protect your investments you have to find real assets which are not yet in bubble theory. As indicated, real estate could be the wrong place to be!

After QE3 Inflation Measure Jumps

Today's FT (Septermber 18, 2012) reports a jump of the market expectations for the US inflation. I have found a nice chart on bloomberg.com of the development of expected inflation (calculated using 5-year treasuries):

Break even rate: difference between the yield of treasuries and the inflation protected treasury debt

The FT sports another graph over a longer time period:
 

 The market sees a higher risk of increased inflation over the coming years because of the ultra expansive monetary policy of the Fed (QE3). The Fed seems to focus more on unemployment than on inflation. Accordingly the US Dollar traded lower and gold higher.

On June 3rd, 2012 the FT reported an even worse development taking place in secret:
Debt cancellation by central banks 
US, UK and Japan's central bank would cancel government debt on their balance sheet to reduce the outstanding government debt:

Just look at the amounts. They are just breath taking! What this means is a permanently increased monetary base, which will lead to higher inflation, if the central banks cannot take the liquidity out of the system in due time. Remember that there is a significant time lag of six months between central bank action (e.g. raising interest rates) and its effect on inflation.

I guess the Euro area will face inflation too, since Mr Draghi's recent declaration go in the same direction.

Investors have to protect themselves against these inflationary risks: long term bonds will be hit hardest. Stocks will also be hit, should inflation be above 4.5%. Only gold, commodities, and maybe real estate as well as gold mining stock will provide cover.