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Central Banks

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Central Banks

Unread postby vox_mundi » Sun 11 Oct 2015, 07:57:03

Central bank cavalry can no longer save the world

In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system. Seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy.

A report by the Group of Thirty, an international body led by former European Central Bank chief Jean-Claude Trichet, warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures.

"Central banks have described their actions as 'buying time' for governments to finally resolve the crisis... But time is wearing on, and (bond) purchases have had their price," the report said.

In the United States, the Federal Reserve ended its bond purchase program in 2014, and had been expected to raise interest rates from zero as early as June 2015.

But it may struggle to implement its first hike in almost 10 years by the end of the year. Market pricing in interest rate futures puts a hike in March 2016.

The Bank of England has also delayed, while the European Central Bank looks set to implement another round of quantitative easing, as does the Bank of Japan which has been stuck in some form of quantitative easing since 2001.

Reuters calculates that central banks in those four countries alone have spent around $7 trillion in bond purchases.

The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies, the Group of Thirty said.

The Fed has pledged that when it does hike rates, it will be at a slow pace so as not to strangle the U.S. economic recovery, one of the longest, but weakest on record in the post-war period. Yet, forecasts by one regional Fed president shows he expects negative rates in 2016.

AN END TO "EXTEND AND PRETEND"

Most policymakers at the semi-annual IMF meetings this week have presented relatively upbeat forecasts for the world economy and say risks have been largely contained. The G30, however, warned that the 40 percent decline in commodity prices could presage weaker growth and "debt deflation".

Rates would then have to remain low as central banks would be forced to maintain or extend their bond programs to try and bolster growth and the price of financial assets would fall.

That is not just a developed-world problem. In China, credits to state-owned enterprises and increasingly by the shadow banking sector have been a driving force in an investment splurge in the world's second largest economy.

According to an IMF report issued this week, there is "excessive" lending of $3 trillion in emerging market economies, an average of 15 percent of gross domestic product, which runs the risk of unwinding should economic conditions worsen.

"Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop," the G30 report said.

Even in a more benign economic outlook, central banks will have a tough time exiting easy money policies and may face demands to hold rates low. The IMF has repeatedly urged the Fed not to hike rates yet.

None of the world's major central banks are remotely close to hitting their inflation targets and many of them are haunted by memories of high inflation. The European Central Bank was born with, and still has, a sole inflation mandate.

With the consequences of an exit from easy money so unpredictable, the G30 said the risk was of exiting too late for fear of sparking another crisis.

"Faced with uncertainty, the natural default position is the status quo," the G30 said.

Report: https://www.imf.org/external/pubs/ft/gfsr/
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Re: Central bank cavalry can no longer save the world

Unread postby onlooker » Sun 11 Oct 2015, 09:09:03

First I preface by saying I am not expert. But like many here we read up on certain issues and become knowledgeable. I would say all this makes sense. As the structural foundations of the real economy have been weakening over let us say the last 40 years when the neo-liberal policies have been implemented around many parts of the world. All this increasing the interconnections among nations and stock markets so we have a integrated economic system that has been able to sustain itself based on ever more lending and borrowing. Also these neo-liberal policies swelling the ranks of the poor around the world particularly in some rich countries. In turn oil has steadily risen in regards to real cost and utility. In turn stock markets have been the catalysts for several bubbles which eventually have burst like the dot.com and the real estate one. Also, recently the specter of peak oil began to be factored in. All of this leading to the 2008 financial crisis and the initiation of Quantum Easing or Fiat money creation. This has flooded the world with money in the form of debt. But now it is Debt which is the problem and you cannot solve it with more debt. All this has created a deflationary environment along side the risk of currency devaluation and subsequent inflation. Yet the economic system of much of the planet is hopelessly burdened by and tied to lending and debt. In turn, markets are becoming jittery as the fundamentals of resource constraint, peak oil and countries with superficial economies based on lending are making the viability of healthy economic activity more problematic. Finally, add to that countries in political and social turmoil, and a lead country - the US overextended militarily as well as debt wise and hopelessly dependent on cheap oil and another in China which has also overly relied on lending and manufacturing and so is tied by the hip to consumer oriented economies like the US. Finally, you have very very overvalued (bubble) major stock markets and you have all the ingredients for volatile downward trending if not collapsing world economy
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Re: Central bank cavalry can no longer save the world

Unread postby GHung » Sun 11 Oct 2015, 09:09:33

"Faced with uncertainty, the natural default position is the status quo,"
Carry Trade: The Multi-Trillion Dollar Hidden Market

“The dollar is soaring. The U.S. stock market is making new highs. U.S. T-bond yields are declining, causing T-bond prices to rise while all the experts say they are too overvalued. European government bonds actually yield less than U.S. Treasuries, which makes no sense because the U.S. bonds are considered much safer. Many analysts confess that they are mystified.

What is the driving force for these moves? The “carry trade.”

What is the carry trade? It’s the borrowing of a currency in a low interest rate country, converting it to a currency in a higher interest rate country and investing it in the highest rated bonds of that country. The big trading outfits do this with leverage of 100 or 300 to one. This causes important moves in the financial markets, made possible by the trillions of dollars of central bank money creation.

The monetary stimulus in Japan is aimed to produce a cheaper yen, and thus a stronger dollar. That causes the U.S. bond market to rise, bond yields to decline, commodity prices to plunge, and precious metals prices to decline. If you are in any of these investments, you must know what drives their prices.

Here is how the “yen carry trade,” a favorite currency for the trade, basically works now:

Hedge funds and other very big traders borrow the yen at very, very low interest rates now approaching zero. The yen are converted to dollars, which are invested in U.S. Treasuries at a much higher yield than the interest cost for the borrowed yen. That creates a “positive carry” because of the differential in interest rates.

The buying drives up U.S. bond prices. The traders accrue big profits, when done with high leverage, assuming the yen value doesn’t rise.

Additional profits are made when a) The dollar rises vs. the yen as the BOJ intends, b) U.S. Treasuries rise in price (as is happening).

Triple Profits: A leverage 100:1 means that a 1% rise in the value of the dollar vs. yen doubles the value of the equity investment. An additional profit is made if the U.S. T-bonds rise in price as they have done. Further profits are made from the positive carry, i.e. when the yield on the T-bonds is greater than the interest cost on the yen. That’s a “triple profit.”

So far, so good. And that’s what is happening now. Some of the profits are probably reinvested in the stock market for diversification.

The emerging markets have benefited from this as well. The currencies of the lower-interest countries like Japan or the U.S. are borrowed and invested in the much higher-yielding bonds of emerging countries. The danger is that when one of these countries has trouble paying the interest on its debt, there is a huge unwinding of this trade, hundreds of billions of dollars flow out, and an emerging market crisis produces a world-wide market crash. That’s what happened in 1997 and 1998. The emerging markets carry trade is estimated to be at least $2 trillion in size. That’s huge.

The carry trade is great for the big trading outfits, but it doesn’t help the average person. And that is why there is such great income disparity. It’s just financial engineering.

However, there is possibly another, much more important element to these trends: Russia!

When Russia basically annexed the Crimea in March of this year, I proposed in our Wellington Letter that the U.S. could easily manipulate the oil price down to levels that would significantly damage Russia’s economy.

How do you get the international oil price down? Oil is denominated in dollars. If the central bank (the Fed), in collaboration with the large financial firms manipulate the U.S. dollar upward, it increases the cost of oil around the world. That reduces consumption, which reduces the oil price. Above I described how the carry trade increases the value of the dollar. Everything works together.

Oil revenues are the greatest source of foreign currency reserves for Russia. It needs these reserves to service its international debt. If these reserves dwindle, another Russian debt crisis and possible default similar to the late 1990’s could occur. The global markets would plunge, but Russia would be hurt the most. Perhaps that would cause Putin to retreat from his apparent plan to reassemble the old Soviet Union.

Conclusion: The carry trade causes a rising U.S. dollar, rising U.S. bond prices, rising U.S. stocks, and deflation in commodity prices. Of course, an unwinding of the carry trade will cause the opposite.

The soaring dollar and strong U.S. Treasury market confirm that the carry trade is alive and well. If and when the Bank of Japan hikes interest rates in order to combat rising inflation, the carry trade will unwind, perhaps ferociously. So, watch the BOJ.

The massive money creation of the major central banks and their “ZIRP” policy (zero interest rate policy) has created such huge financial speculation using other methods as well, making big speculators very rich. And that includes the large trading operations at the Wall Street firms, the biggest global banks, and hedge funds.

http://www.forbes.com/sites/investor/20 ... en-market/

What we have is a global currency stalemate that no major economic power dares to break. But break it will, at some point. Meanwhile, bank profits and equities are largely reflective of these purely financialised schemes of making money for nothing, not reflective of actual production and growth, and any movement in interest rates made by central banks risks upsetting this apple cart.
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Re: Central bank cavalry can no longer save the world

Unread postby vox_mundi » Sun 11 Oct 2015, 09:25:06

Fight, Flight ... or Freeze

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Re: Central bank cavalry can no longer save the world

Unread postby Hawkcreek » Sun 11 Oct 2015, 11:04:12

I don't believe it was ever their intention to save the world. They just wanted to extend the period of theft a bit longer.
The system will crash, and the next system will again be put in place by the rich. It will have a different name, but will still be a process of stealing from the poor or stupid, and giving to the rich.
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Re: Central bank cavalry can no longer save the world

Unread postby onlooker » Sun 11 Oct 2015, 11:45:58

Hawkcreek wrote:I don't believe it was ever their intention to save the world. They just wanted to extend the period of theft a bit longer.
The system will crash, and the next system will again be put in place by the rich. It will have a different name, but will still be a process of stealing from the poor or stupid, and giving to the rich.

Bulls eyes Hawk. In fact you can say they are paving the way to retain power by allowing critical systems failures and capitalizing on the chaos with martial law and crackdowns and basically a more intrusive and oppressive regime (s), all in the name of security. Witness all the current surveillance and laws that seek to grant the authorities ever more authority. Of course this is all part of the organic process, those in power wish to stay in power, those wealthy wish to remain so, nothing tinfoil or conspiracy oriented about all this. Just more of the same of what we have had for thousands of years. By the way the War on Terror has conveniently helped this process along.
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Re: Central bank cavalry can no longer save the world

Unread postby Apneaman » Sun 11 Oct 2015, 12:55:55

"Faced with uncertainty, the natural default position is the status quo,"



Fed officials seem ready to deploy negative rates in next crisis



http://www.marketwatch.com/story/fed-of ... 2015-10-10
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Re: Central bank cavalry can no longer save the world

Unread postby Apneaman » Sun 11 Oct 2015, 13:00:54

The world economic order is collapsing and this time there seems no way out

"The heart of the economic disorder is a world financial system that has gone rogue. Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level. That banks create credit is nothing new; the system depends on the truth that not all depositors will want their money back simultaneously. So there is a tendency for some of the cash banks lend in one month to be redeposited by borrowers the following month: a part of this cash can be re-lent, again, in a third month – on top of existing lending capacity. Each lending cycle creates more credit, which is why lending has always been carefully regulated by national central banks to ensure loans will, in general, be repaid and sufficient capital reserves are held. .

The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees."


http://www.theguardian.com/commentisfre ... -recession
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Re: Central bank cavalry can no longer save the world

Unread postby vox_mundi » Sun 11 Oct 2015, 13:35:59

http://m.youtube.com/watch?v=bHzov33tgfg

... Express elevator to hell, going down.
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Re: Central bank cavalry can no longer save the world

Unread postby AgentR11 » Sun 11 Oct 2015, 14:42:55

re: forbes and russophobia
Oil revenues are the greatest source of foreign currency reserves for Russia. It needs these reserves to service its international debt. If these reserves dwindle, another Russian debt crisis and possible default similar to the late 1990’s could occur. The global markets would plunge, but Russia would be hurt the most. Perhaps that would cause Putin to retreat from his apparent plan to reassemble the old Soviet Union.


Russia's international, non ruble debt is very, very small. The amount of that debt held by their government is even smaller; and pretty much all their expenses are in ruble. If Bob's Oil Drillers defaults on a commercial loan, you don't suggest the US has defaulted; you just take Bob's into bankruptcy, divvy it up to cause the least harm to investors, and call it a day.

In addition, I'd note, Putin's objectives are ok with this turn of events; wanting to push down oil and gas as percentage of Russian exports, while increasing agriculture and industrial exports. Success here remains to be seen, and will only really show themselves in a decade or two; but that is the objective.

And finally, it has no similarity with the 90s. 1) Russia is now a net food calorie exporter, by far; much like the US, only bigger and with a much larger proportion of productive land undeveloped. 2) Russia's trade ties with China are now very different. In the 90's they were convinced China would invade, and they would starve to death if it weren't for import of food calories. So no, any parallels between the two points in time is futile and ridiculous. The physical conditions just do not permit similar expectations.

And finally, Russia isn't trying to recreate the USSR. Crimea is the exception, not the rule; they can't even be motivated to take Donetsk which is theirs for the taking; they certainly aren't likely to try to (re)capture the stans, nor the Baltic countries. Compared to D&L the stans and Baltics are useless sinkholes for money. So just no.

Back to the original topic; when someone says the central bank can no longer save the world... save it from what precisely? I guarantee you there will NOT be nominal deflation under any circumstance. If they have to tap a key and stuff $500, $5000, or $50,000 into every checking account in the country to prevent it, that is exactly what they CAN AND WILL do. Nominal deflation is pretty much the only existential threat to the financial system; and the central banks of each prevailing currency have more than enough tools to guarantee that such will not happen. If anything, I would say the central banks are being instrumental in executing "power down"; as food and fuel consumes ever greater proportions of middle and upper middle class income; people will be forced by price to reduce inappropriate, excess consumption; leading to contraction, which is matched with monetization thus achieving power down and a simultaneously slightly increasing money supply. Unfortunately, this version of power down does not produce the communal ecotopia people seem to pine for; it creates an empowered, untouchable oligarchy and operator class to serve them; all kept safely partitioned and guarded from the unwashed masses.
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Re: Central bank cavalry can no longer save the world

Unread postby pstarr » Sun 11 Oct 2015, 16:36:08

Agent11 wrote:Nominal deflation is pretty much the only existential threat to the financial system; and the central banks of each prevailing currency have more than enough tools to guarantee that such will not happen.


Your reading of the planetary economy seems at odds with recent experience. Less work is accomplished when oil is expensive, thus fewer commodities are extracted, manufactured consumer goods are not made and sale and income declline. The current debt will never be paid back, because future wealth is all but gone.

When too much energy is lost in producing more energy (turning a drill bit in a 30,000 ft. wellbore, and then pumping fracting liquids, shipping liquids on diesel trains, dragging monster platforms to the Arctic) there is simply not enough left over to run a complex society. This is first expressed by high oil prices, then collapsing demand. What we see now. The pincers are closing, the Triangle of Doom is about complete.
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QE in numerous countries has not managed to stimulate reflation. Not in Japan, England etc. What other tools are there?
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Re: Central bank cavalry can no longer save the world

Unread postby AgentR11 » Sun 11 Oct 2015, 17:02:19

pstarr wrote:QE in numerous countries has not managed to stimulate reflation. Not in Japan, England etc. What other tools are there?


Why would it do that? The current environment is extremely deflationary, and without QE prices would be falling like a rock on everything, grain would be rotting in the field, and this whole game would be over in weeks, jobs would be disappearing like people on "Left Behind".

With QE they are able to keep inflation (barely) positive, except, interestingly, food, which is at a substantially higher rate. Food being one of those things that you can't fudge. (haha) People need 2k kcal/day; whether that is priced at $2, $20, or $200 is irrelevant. The requirement remains the same. My opinion is that we are seeing the true magnitude of the QE interventions in the price of food; and that combined artificial, upward pressure on price is sufficient to offset the other deflationary forces in play in this, the Final Depression.

As to the comment, "Debts that will never be paid back". Sure they will, in the same currency they were issued, US Dollars; typed into a computer at Treasury/FED; of which they have an infinite quantity. For now, they issue new debt in that same amount; but they really aren't required to. If deflationary forces get to large for slight-of-hand-QE; they can and will just create it, without creating an offsetting debt. That is a hugely inflationary move, and really to large a force to be used for the current level of natural deflation; so that is yet to come. And of course, the final, and most powerful force of inflationary pressure, is that the congress very much can take a lump of silver, strike the words "100 Trillion Dollars" on it, and deposit it. Thats an in extremis example, but it would be massively inflationary and would overpower any existing market signal for currency valuation.

But for now. QE, very low inflation, ZIRP, no deflation. Food available in the store.
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Re: Central bank cavalry can no longer save the world

Unread postby pstarr » Sun 11 Oct 2015, 17:09:39

Money is created via debt. Who will buy worthless bonds? Why would they?
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Re: Central bank cavalry can no longer save the world

Unread postby dissident » Sun 11 Oct 2015, 17:21:13

The phony baloney OECD growth model via cheap credit and debt accumulation has saturated and is failing to yield GDP growth at necessary levels. There is no Plan B, there is total paralysis as to what to do. Perhaps those good for nothing court sycophants known as economists can figure it out but for now they are totally clueless. It would be nice if oil could explain this saturation effect, but it is not sufficient. In fact, we are now seeing nice low prices that are not generating the stimulus that they should be.

It is hilarious to see the NATO MSM project all sorts of economic doom and gloom on Russia as NATO swirls down the toilet itself. This is one of the symptoms of the current crisis, total detachment from reality. I think it must be one of the key variables in the failing growth model. Too many decision makers are idiots and the system cannot run properly with such deficiencies.
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Re: Central bank cavalry can no longer save the world

Unread postby AgentR11 » Sun 11 Oct 2015, 17:29:31

pstarr wrote:Money is created via debt. Who will buy worthless bonds? Why would they?


Who will buy. Easy as pie. Federal Reserve will buy.
Why?
Because they can.

How much can they buy?

1,000,000,000,000,000,000,000,000,000,000,000.................

Its just zeros on a balance sheet. Its no big deal, just a tapa-tapa on the keyboard.

Its why we really won't get to the point of congress minting a 100 trillion dollar coin. I only point it out, because they certainly have the constitutional power to do so. Push comes to shove, they can overpower any deflationary force that might come along; so, given that, the FED makes sure it doesn't come to push and shove.
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Re: Central bank cavalry can no longer save the world

Unread postby AgentR11 » Sun 11 Oct 2015, 17:33:31

I do agree with diss kinda; the model itself is failing, "growth" as we've defined it is failing. But a failing model in a country like the US or Russia, who both, honestly produce enough food and energy to get by OK on just internally; is a very different experience of failing in a country like Saudi Arabia which starves if global commerce blows up.

Kinda funny, the two powers going head to head, being obnoxious, also happen to be the ones most insulated by accidents of history from the effects of the circumstances they might create.
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Re: Central bank cavalry can no longer save the world

Unread postby pstarr » Sun 11 Oct 2015, 17:44:03

Yes agent, Russia and the US are fighting over failed states. And more and more oil.

(wrote this earlier): The real deflation is in the real economy. Without energy, without fuel, without a consumer economy there is no demand. It matters little how much money is floating around. It matters how little or how much that money valued. The growth model is failing because economies can not grow without access to commodities and people can not work without transport.

But then some believe in the information-economy hype, the decoupling of intelligence from work lol
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Re: Central bank cavalry can no longer save the world

Unread postby Subjectivist » Sun 11 Oct 2015, 20:56:19

pstarr wrote:Money is created via debt. Who will buy worthless bonds? Why would they?


Money can also be created through printing, debasing, or in the case of America, digitizing it into existence.
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Re: Central bank cavalry can no longer save the world

Unread postby ralfy » Sun 11 Oct 2015, 21:23:49

As explained in other threads, capitalism (mixed, state, free market, etc.) requires continuous growth, and given financial speculation coupled with a growing global middle class, more growth. It cannot be sustained in a world with physical limitations.

Much of what the rich use does not consist of physical assets but money. The irony is that the value of that money can only increase if it's used for more goods and services bought and sold. That means growing consumer markets and a global middle class among the same poor that are supposed to be controlled.

Money is generally created because there are borrowers (willing or otherwise), who in turn use money for more speculation or for buying or producing more goods and services. In any event, it all boils down to availability of goods and services, which are in turn dependent on availability of resources and energy, and both in turn affected by a limited biosphere.

Lack of resources and energy contribute to financial instability, which in turn weaken the global economy. Hence, volatile oil prices while oil production costs keep rising due to physical limitations.

Finally, one outcome of such limitations is conflict, which generally involves military forces and financiers using groups of people against each other.
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Re: Central bank cavalry can no longer save the world

Unread postby Tanada » Sun 11 Oct 2015, 21:57:26

Only Industrial Capitalism requires constant growth. The kind of Capitalism practiced before 1750 or so existed with a steady rate of profit and loss balancing each other so that net growth was zero or darn close to it on either side.
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