Central Bank Intervention Can’t Last Forever

For the second time in 2016 Janet Yellen and the Federal Reserve moved further away from their bullish plan to raise interest rates four times in 2016.  They have cut that plan down two hikes, but only if conditions are right.  As a result many financial professionals have decided they can’t count on the Fed to follow through on what they say and are charting their own course.  Another result of the Fed reversing their direction again is the USD has dramatically fallen in value against all the other major currencies.

Central bank intervention is no longer effective say world finance leaders
The world’s finance leaders gathered in Shanghai in February, Germany’s finance minister opposed any fiscal stimulus plan from the Group of 20, whose top economic officials gather Friday, and instead sought to focus on structural reforms to strengthen national growth rates.  German finance minister Schaeuble said, “The space for monetary policy has been exhausted. He warned that using debt to fund growth just leads to “zombifying” economies.  Talking about further stimulus just distracts from the real tasks at hand,” and …“that expansive fiscal policies could lay the groundwork for a future crisis.”  Other comments echoed Schaeubles, “Central bankers have done their bit in recent years to stabilize the world economy,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “But as their tools are losing their effectiveness, only more aggressive fiscal policy and structural reforms will help to lift growth.”  Mr. Ostwald a credit expert at ADM said, “the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc.”

Theory behind low interest rates and central bank intervention
The benefit or theory behind low interest rates is that they create liquidity.  Additional liquidity makes it easier for businesses to expand, hire more people, drive down unemployment, increase production, which increases the number of consumers, which should increase growth.  In the same way consumers will be able to afford to purchase homes, cars and larger ticket items, driving up real estate prices, home building, the auto industry and the retail markets, which will increase growth.   Then wages should begin to rise and inflation begins to go up and interest rates are increased to keep inflation in check and lower rates are no longer needed.

This is the theory, but it’s not working or getting the desired results in the US, the EU, China or Japan, as well as many other nations.  The IMF and the International Bank of Settlement have both said, central banks have printed too much money, created too much debt and interest rates have been artificially low too long and that monetary stimulus is having less and less effect.  None of the for-mentioned countries have been able to stimulate growth, inflation or economic expansion, instead many are experiencing deflation.  Central bank intervention has created artificial environments & bubbles which can’t exist in normal market conditions without continued intervention.  It’s like putting the economy on life support, you can’t keep pumping money into something that’s dead, if it can’t breathe on its own, it costs too much to keep it alive artificially.  As painful as it might be, you have to let it breathe on its own or die.

BIS claim central banks are backed into a corner
Let me conclude with a warning from the Bank of International Settlements (BIS) taken from an article below: “The so-called central bank of central banks launched a scathing critique of global monetary policy in its annual report. The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies.  These low interest rates have in turn fueled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.  Monetary policymakers have run out of room to fight the next crisis with interest rates unable to go lower.  The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crisis”.  

The Fed’s Credibility Dilemma (3-22-16) By Narayana Kocherlakota
http://www.bloombergview.com/articles/2016-03-22/the-fed-s-credibility-dilemma
How Far Can Lower-Rate Central Bank Experiment Go (2-26-16) Bloomberg Video
http://www.bloomberg.com/news/videos/2016-02-26/how-far-can-lower-rate-central-bank-experiment-go
G-20 Wants Governments Doing More, and Central Banks Less (2-27-16)
http://www.bloomberg.com/news/articles/2016-02-27/g-20-wish-list-wants-governments-to-do-more-central-banks-less
Germany Opposes Any G-20 Fiscal Stimulus Focuses on Reform (2-25-16)
http://www.bloomberg.com/news/articles/2016-02-26/germany-opposes-any-g-20-fiscal-stimulus-focuses-on-reform
The Germans Got It Right on G-20 Stimulus…..Nein! (2-26-16) by David Stockman
http://davidstockmanscontracorner.com/man-up-my-eye-the-germans-got-it-right-on-g-20-stimulus-nein/
BOJ’s NIRP failure Triggers Doom-Loop In European Bank & Credit Markets (2.10.16) The Telegraph http://www.telegraph.co.uk/finance/economics/12149114/Europes-doom-loop-returns-as-credit-markets-seize-up.html
Are Central Banks Causing Market Volatility (1-7-16) Bloomberg Video
http://www.bloomberg.com/news/videos/2016-01-07/are-central-banks-causing-market-volatility-
The End of the Monetary Illusion Magnifies Shocks for Markets (1-8-16)
http://www.bloomberg.com/news/articles/2016-01-08/the-end-of-the-monetary-illusion-magnifies-shocks-for-markets
The World Is Defenseless Against The Next Financial Crisis, Warns BIS (6-29-15)
http://www.telegraph.co.uk/finance/economics/11704051/The-world-is-defenseless-against-the-next-financial-crisis-warns-BIS.html

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