Have Central Banks failed?

gerhard dengler

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For the past number of years, European Central Bank (ECB), Japanese Central Bank (JCB), Federal Reserve Bank (FED) and the Bank of England (BOE) have for the past few years worked together to try to

(1) save the international economic and financial/banking systems
(2) stimulate economic activity across international regions

In a co-ordinated way, central banks have created and implemented a whole range of policies from buying government issued debt, buying corporate issued debt, forcing down interest rates to zero percent and below, flooding the international banking system with liquidity, trying to keep bond yields as low as possible for as long as possible.

The JCB as well as purchasing japanese government debt has also invested in equities issued by japanese companies.

Where are we now after 8 years of central bank interventions?

The balance sheets of the centrals banks has grown cumulatively from $6 trillion (in 2007) to $21 trillion (in 2016).

We have historically interest rates (close to zero, zero, below zero) for borrowing costs.
We have historically low bond yields (for example, those buying German government 10 years bonds pay Germany for the privilege of loaning money to Germany).

Investors have piled in to the bond market on the assumption that no government will default on repaying their debt. Therefore already indebted nations as they issue more government bonds sink further and further in to debt.

But on the other side of this equation levels of indebtedness are increasing. The number and the value of bonds being issued continues to increase. What happens when bond yields begin to increase? The answer is that bond prices start to fall. Lower bond yields is indicative of the level of higher demand for bonds, so once yields increase would this could be the harbinger for a bond sell off?

In a world flooded with bonds, higher yields would be a bad harbinger therefore central banks have their work cut out trying to manage the bond situation.

In respect of interest rates, given the level of indebtedness that there is out there, can the economic/financial system absorb even a minute rise in interest rates?
On a separate question, low interest rates make it far more difficult for already battered banks to make a profit (or reduce their losses). Also low interest rates are bad for savers.

So where are we at? The central banks may have saved the economic/financial system but it can be argued that in saving that system the patient is barely alive and any further remedy to improve the patients condition could be fatal.

Have central banks failed? That is the question.

Here is a good summation given in June 2016 by Andy Hoffman (in which he predicts Brexit vote, predicts Deutsche Bank imploding).

SilverFarm: Liberty, Metals and Austrian Economics » Andy Hoffman AUDIOBLOG #150 - IT
 


Watcher2

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Debt levels are frightening alright but scariest of all is how its viewed officially, as if "tis alright sher, twill be grand begorah". Just read the posts on p.ie when anyone tries to suggest there is too much debt around.
 

gerhard dengler

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Debt levels are frightening alright but scariest of all is how its viewed officially, as if "tis alright sher, twill be grand begorah". Just read the posts on p.ie when anyone tries to suggest there is too much debt around.
IMF world debt report shows highest amount of debt ever - Business Insider

The level of debt is frighteningly high.

What happens when the cost of servicing this debt begins to rise?

We're living in a time of historically low bond yields and historically low interest rates.
If either the yield increases, or if interest rates go up, then debt will increase in value.

This is where we now find ourselves after 8 years of Central Bank interventions.
 

Watcher2

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IMF world debt report shows highest amount of debt ever - Business Insider

The level of debt is frighteningly high.

What happens when the cost of servicing this debt begins to rise?

We're living in a time of historically low bond yields and historically low interest rates.
If either the yield increases, or if interest rates go up, then debt will increase in value.

This is where we now find ourselves after 8 years of Central Bank interventions.
I know and I have been banging on about this in the Irish context for a long time now. Very few posters seem to even want to grasp the enormity of this headwind. Back when things started to go pear shaped and we had a debt crisis, our debt level was a fraction of what it is today. If there is another collapse, and many are predicting another financial collapse and even commercial activity is fragile, things will be a magnitude of the terrible they were back 2008/09.
 

gerhard dengler

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It seems to me that looking at the data the attempt to try to solve the financial crisis has resulted in creating the precarious condition that could entail another crisis.

Instead of allowing capitalism to run it's course and to wipe out insolvent banks and insolvent businesses at the onset of the crisis, it seems that the concerted effort to not allow insolvent banks to die and to not allow (certain) insolvent businesses to die, has made a very bad situation much worse.

Moral hazard has been completely abandoned because the consequences of allowing debt to grow to these levels are unquantifiable should anything go wrong.

That's why any increase in yields and any increase in interest rates cannot be countenanced because these increases can potential start fuse for debt unwinding.
 

Watcher2

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It seems to me that looking at the data the attempt to try to solve the financial crisis has resulted in creating the precarious condition that could entail another crisis.

Instead of allowing capitalism to run it's course and to wipe out insolvent banks and insolvent businesses at the onset of the crisis, it seems that the concerted effort to not allow insolvent banks to die and to not allow (certain) insolvent businesses to die, has made a very bad situation much worse.

Moral hazard has been completely abandoned because the consequences of allowing debt to grow to these levels are unquantifiable should anything go wrong.

That's why any increase in yields and any increase in interest rates cannot be countenanced because these increases can potential start fuse for debt unwinding.
Trump could be that trigger.
 

Erudite Caveman

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Debt levels are frightening alright but scariest of all is how its viewed officially, as if "tis alright sher, twill be grand begorah". Just read the posts on p.ie when anyone tries to suggest there is too much debt around.
There might be an unmanageable amount of debt. The main objection would be to the idea that you have a clue what you are talking about. In reality it is nothing but a declaration of faith, and others are entitled to be sceptical.
 

Watcher2

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There might be an unmanageable amount of debt. The main objection would be to the idea that you have a clue what you are talking about. In reality it is nothing but a declaration of faith, and others are entitled to be sceptical.
Another debt monkey I see.
 

Lumpy Talbot

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No
I stopped worrying about the financial system years ago. There was a time when you could see a vague equilibrium at play in it. Interest rates went up and other indicators moved accordingly etc etc.

It stopped behaving as it should and became a distorted thing some years back and I realised that in reality we are looking at an enormous fiction. Money gets printed and dumped into one country's financial system. No indicators in particular move- and yet the currency apparently doesn't depreciate.

Countries are buying their own debt via third party countries. Weird interventions in many markets.

The markets themselves race ahead and bear no relation to the underlying actual economies they are reporting from.

I had a handle on what should happen around loosening and tightening the money supply in a system back then. Now you might as well stick your finger up your nose.

There is apparently enough 'dry powder' (investment capital searching for an investment) to launch the world's biggest private equity fund at $100 billion which is four times the size of the previous world record fund back in 2006 I think.

The tech sector valuation analysts are banging zeros on the end of anything that moves worse than US Navy bangery on a visit to Bilbao.

It is like a kid has stomped all over a lego set and is stood there asking you to admire what he has 'built'.

So I no longer worry about it. There's no point. There's nowhere to start any more to even try to understand it with logic, economics or politics. The whole lot in my opinion is being propped up by hope.

I wouldn't discount hope's ability to prop everything up for a few years yet and maybe there'll be a new paradigm out of it and a shape will form that is understandable. But for now nothing to me seems to mean anything as any kind of economic indicator.
 

Mad as Fish

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I stopped worrying about the financial system years ago. There was a time when you could see a vague equilibrium at play in it. Interest rates went up and other indicators moved accordingly etc etc.

It stopped behaving as it should and became a distorted thing some years back and I realised that in reality we are looking at an enormous fiction. Money gets printed and dumped into one country's financial system. No indicators in particular move- and yet the currency apparently doesn't depreciate.

Countries are buying their own debt via third party countries. Weird interventions in many markets.

The markets themselves race ahead and bear no relation to the underlying actual economies they are reporting from.

I had a handle on what should happen around loosening and tightening the money supply in a system back then. Now you might as well stick your finger up your nose.

There is apparently enough 'dry powder' (investment capital searching for an investment) to launch the world's biggest private equity fund at $100 billion which is four times the size of the previous world record fund back in 2006 I think.

The tech sector valuation analysts are banging zeros on the end of anything that moves worse than US Navy bangery on a visit to Bilbao.

It is like a kid has stomped all over a lego set and is stood there asking you to admire what he has 'built'.

So I no longer worry about it. There's no point. There's nowhere to start any more to even try to understand it with logic, economics or politics. The whole lot in my opinion is being propped up by hope.

I wouldn't discount hope's ability to prop everything up for a few years yet and maybe there'll be a new paradigm out of it and a shape will form that is understandable. But for now nothing to me seems to mean anything as any kind of economic indicator.
Quite so, we are moving around in a dream state, it has all become so remote as to be meaningless to everyday folk as we go about our business so why should we bother, what can we do about it as we see the standard of living decline as the government shouts it is rising and nobody seems to have a proper job anymore? At least there is some amusement to be had watching governments running around pretending that they are in control of the situation but we all know it's all a show, a pantomime, and it's only natural to wonder as to how long it will last.
 

Lumpy Talbot

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No
On the question of Central Banks, no, they haven't failed. They are just a PR front for the banks and Finance Departments of whatever state or group of states they are located in.

Bit of pretend regulation, look as if you are in charge, press release every now and then and whatever you do don't risk-analyse anything as that could give you and your stakeholders answers to questions you don't want to be asked.

So no they haven't failed yet. The Irish Central Bank has failed monumentally but only if you assume they had a role beyond the one I've described. Otherwise they've succeeded in that they are still around looking as if they know all about the national and international financial system.

They are most likely sneaking on and off Facebook like everyone else and hoping no one asks them anything too technical such as 'do you actually understand the system'?
 

gerhard dengler

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Quite so, we are moving around in a dream state, it has all become so remote as to be meaningless to everyday folk as we go about our business so why should we bother, what can we do about it as we see the standard of living decline as the government shouts it is rising and nobody seems to have a proper job anymore? At least there is some amusement to be had watching governments running around pretending that they are in control of the situation but we all know it's all a show, a pantomime, and it's only natural to wonder as to how long it will last.
The problem here is that historically low bond yields and historically low interest rates effect the ordinary citizen.

Public and private pensions are predicated on the what's happening in the bond market. Low/negative yields kill pension returns. This effects the person in receipt of said pension. An investment product which is predicated on what is happening in the bond market is getting killed in this environment. The same applies to people saving money in their bank. Negative/zero interest rates means that those savings earn effectively no interest. So it is very misleading to say that what is happening in the bond market has no direct effect on the ordinary citizen.

If the bond market begins to disintegrate however, the effects of this will be far worse. Every other asset class is predicated on how the bond market performs.
If the bond prices begin to fall, the holders of those bonds will look to sell the bonds. But given that the market is flooded with bonds who's gonna buy those bonds in those circumstances?
The real concern here is that if the bond price falls there may well be a stampede to sell all of the bonds circulating in the market.
That means that yields on bonds increases which means that the cost of servicing interest on those bonds goes up.

At present the central banks cannot afford to let bond yields go up because given the low yield level now any increase on that low level will mean governments having to ringfence more and more taxation to repay the costs of servicing those borrowing costs.
Even a movement upward of a few basis points could add billions to the annual interest charge.

Central banks are the biggest buyers of sovereign bonds and corporate bonds in the bond market. Because they're purchasing bonds in such quantities they've created an asset bubble in the bond market arguably.
 

gerhard dengler

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This is a very good video explaining the relationship between central banks and the bond market bubble (don't be intimidated, the concepts explained in the video are pretty straight forward).

[video=youtube;IAiQTcmc_Hg]https://www.youtube.com/watch?v=IAiQTcmc_Hg[/video]
 

Shpake

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Going back to Economics class here... (years back)
There was this mention about something called a "liquidity trap".
If interest rates got so low... i.e. so close to zero, that printing money would only make interest rates even lower, so who would buy the bonds if they expected the interest to be close to null.
 

clearmurk

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It's worth noting that since 2008, the ECB's balance sheet has doubled, from about 1500 billion euros, to about 3500 billion euros.

Compare this to the paltry 70 billion or so that would have been needed to extinguish the bad bank assets of this country over the period.

I'll now wait for ibis to come along with the smoke screen that it couldn't be done, because, well, it couldn't be done.
 

gerhard dengler

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Central banks are spending approximately $200 billion every month buying bonds. These bond purchases are sovereign bonds and lately corporate bonds.

45% of all bonds traded globally are returning a negative yield.

Because 45% of all bonds globally have negative yields, the buyer of these bonds pays the issuer for the privilege of purchasing those bonds.

So Central Banks buying a negative yield bond from ABC Ltd, are paying ABC Ltd a premium (yield) for the privilege of loaning them money (in exchange for the bond).

It is speculated that many of these corporate bonds are being used by those companies to buy their own shares (thus inflating their company share price).

Taxpayers money is being used to purchase these negative yielding bonds.

Where are Central Banks leading citizens to?
 

Spanner Island

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Politicians around the world have failed and have over-relied on Central Banks to solve various woes by using increasingly ineffective mechanisms as time goes on.

As a result if/when another crash occurs there's going to be f*** left in the tank of Central Banks to deal with it thanks to clueless gutless wonder politicians.
 


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