![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
abomvubuso posting in ![[community profile]](https://www.dreamwidth.org/img/silk/identity/community.png){kind=small}
talkpoliticsFor more than a decade, the central banks have funnelled trillions of dollars/euro/lira/yen etc almost without control into economies just to keep them afloat. The process began with the global financial crisis from the beginning of the first decade of the century and then continued and then only deepened due to the Covid pandemic. The Fed, the European Central Bank, the Bank of England, the Central Bank of Japan, the Swiss Central Bank, and dozens of smaller institutions generously bought bonds and shares and issued loans to commercial banks at zero or even negative interest rates. Sound familiar?
Some analysts warned that this process could not continue indefinitely and if not stopped in time, too many imbalances would accumulate in the global economy and a crisis would follow, making the Great Depression pale in comparison. Others, including representatives of the same banking institutions, never stopped playing this down, saying the situation was under control and the economy would be gradually guided to a soft landing mode. But as it happened, wishful thinking is one thing, and reality is quite another.
Last year the world turned from one crisis to another as a result of its post-pandemic pains and the desire to return to some kind of normality, combined with the distorted economic reality caused by too much cheap money being kept around. The final drop that spilled the cup and even threatened to tip it over was the war that Russia started against Ukraine, adding to the already existing troubles caused by the energy and food crisis.
At the time the future looked rosy at the end of last year, the pandemic was coming under control, the global economy had slowed down but remained at an acceptable level, even then the problems were looming but had not yet surfaced. One after another, the central banks announced they were starting to wind down the so-called policy of quantitative easing and were moving towards quantitative tightening. In plain language, the buying of stocks and bonds in the open market would stop and turn into a sell-off, combined with a rise in interest rates.
And then a forgotten specter hung over the developed world, one that everyone justifiably feared, inflation. Forgotten for several decades, this problem not only complicated the situation, but also put the central banks in a situation of a kind of chess zugzwang - whatever they did, it would still be a bad move.
Almost everyone chose the path of belt tightening. The big exception being the Bank of Japan. But no matter what they'd do now, the epoch of "cheap money" generosity was bound to backfire on themselves as well as the taxpayers. After raising interest rates sharply to combat rampant inflation, the Fed and its European counterparts have had to make huge interest payments to commercial banks on deposits that the institutions themselves had created through huge bond purchases and cheap loans.
This comes at a time when millions are suffering from the skyrocketing cost of living, and governments are once again forced to untie the purse to avoid social upheaval. The central banks keep sending money to the private banks while we the rest of people have to cut their spending. Clearly, this is becoming a purely political issue at this point.
The boomerang of cheap money is already flying back. The question is who will be hit the hardest - the banks, the governments or the citizens, and how hard exactly. Or, to put it another way, the question is who will foot the bill for this past decade of uncontrolled capital outflows. And while on the one hand, calls to limit interest payments to banks are growing, they themselves complain that this is not fair, since it was this sector that bore the brunt of the decade of low interest rates. Many believe lenders should take the hit. If taxpayers end up footing the bill, it would be grossly unfair, they argue.
In the UK, there are also calls for the Bank of England to cut interest rates on commercial bank reserves and save 30-45 billion pounds in each of the next two financial years. According to calculations by Morgan Stanley, a 1% increase in interest rates would reduce revenues for the Ministry of Finance by 10 billion pounds a year.
The US Treasury Department may not have to worry about bailing out the Fed which can simply postpone any loss. But they may be short of roughly $50-100 billion that they've been getting from the central bank every year since the financial crisis. Granted, the Fed will not fail financially, but it may lose credibility politically.
The problem is particularly painful for the ECB, which has to decide what to do with interest rates and its own payments after decades of lending money to commercial banks at negative interest rates. Now these are on course to making a huge and guaranteed profit by simply returning that money back to the central bank, earning 0.75% annual interest rate, which is likely to double this month and is expected to rise to 3% by next year.
Such a move would bring commercial banks between 31 and 35 billion euros, if the rate on deposits reaches between 2.5% and 4.5% in the coming months. According to Morgan Stanley, with such a development, the central banks in the Eurozone would suffer losses of about 40 billion euros in the coming year alone. Ironically, the central banks of the most fiscally cautious countries - the Netherlands, Germany and, to a lesser extent, Belgium - will be most affected because they hold the largest share of bank deposits and the bonds they have bought on behalf of the ECB, at zero or negative returns.
Whatever the ECB decides later, the bank has already fallen into its own trap, and the boomerang of cheap money is rapidly headed back. Sure, the ECB could divert it and redirect it towards the governments or the citizens, but in both cases only one thing is for sure - the crisis will only deepen, and 2023 will be much more difficult than 2022. Because cheap money always turns out to be expensive in the end.
Some analysts warned that this process could not continue indefinitely and if not stopped in time, too many imbalances would accumulate in the global economy and a crisis would follow, making the Great Depression pale in comparison. Others, including representatives of the same banking institutions, never stopped playing this down, saying the situation was under control and the economy would be gradually guided to a soft landing mode. But as it happened, wishful thinking is one thing, and reality is quite another.
Last year the world turned from one crisis to another as a result of its post-pandemic pains and the desire to return to some kind of normality, combined with the distorted economic reality caused by too much cheap money being kept around. The final drop that spilled the cup and even threatened to tip it over was the war that Russia started against Ukraine, adding to the already existing troubles caused by the energy and food crisis.
At the time the future looked rosy at the end of last year, the pandemic was coming under control, the global economy had slowed down but remained at an acceptable level, even then the problems were looming but had not yet surfaced. One after another, the central banks announced they were starting to wind down the so-called policy of quantitative easing and were moving towards quantitative tightening. In plain language, the buying of stocks and bonds in the open market would stop and turn into a sell-off, combined with a rise in interest rates.
And then a forgotten specter hung over the developed world, one that everyone justifiably feared, inflation. Forgotten for several decades, this problem not only complicated the situation, but also put the central banks in a situation of a kind of chess zugzwang - whatever they did, it would still be a bad move.
Almost everyone chose the path of belt tightening. The big exception being the Bank of Japan. But no matter what they'd do now, the epoch of "cheap money" generosity was bound to backfire on themselves as well as the taxpayers. After raising interest rates sharply to combat rampant inflation, the Fed and its European counterparts have had to make huge interest payments to commercial banks on deposits that the institutions themselves had created through huge bond purchases and cheap loans.
This comes at a time when millions are suffering from the skyrocketing cost of living, and governments are once again forced to untie the purse to avoid social upheaval. The central banks keep sending money to the private banks while we the rest of people have to cut their spending. Clearly, this is becoming a purely political issue at this point.
The boomerang of cheap money is already flying back. The question is who will be hit the hardest - the banks, the governments or the citizens, and how hard exactly. Or, to put it another way, the question is who will foot the bill for this past decade of uncontrolled capital outflows. And while on the one hand, calls to limit interest payments to banks are growing, they themselves complain that this is not fair, since it was this sector that bore the brunt of the decade of low interest rates. Many believe lenders should take the hit. If taxpayers end up footing the bill, it would be grossly unfair, they argue.
In the UK, there are also calls for the Bank of England to cut interest rates on commercial bank reserves and save 30-45 billion pounds in each of the next two financial years. According to calculations by Morgan Stanley, a 1% increase in interest rates would reduce revenues for the Ministry of Finance by 10 billion pounds a year.
The US Treasury Department may not have to worry about bailing out the Fed which can simply postpone any loss. But they may be short of roughly $50-100 billion that they've been getting from the central bank every year since the financial crisis. Granted, the Fed will not fail financially, but it may lose credibility politically.
The problem is particularly painful for the ECB, which has to decide what to do with interest rates and its own payments after decades of lending money to commercial banks at negative interest rates. Now these are on course to making a huge and guaranteed profit by simply returning that money back to the central bank, earning 0.75% annual interest rate, which is likely to double this month and is expected to rise to 3% by next year.
Such a move would bring commercial banks between 31 and 35 billion euros, if the rate on deposits reaches between 2.5% and 4.5% in the coming months. According to Morgan Stanley, with such a development, the central banks in the Eurozone would suffer losses of about 40 billion euros in the coming year alone. Ironically, the central banks of the most fiscally cautious countries - the Netherlands, Germany and, to a lesser extent, Belgium - will be most affected because they hold the largest share of bank deposits and the bonds they have bought on behalf of the ECB, at zero or negative returns.
Whatever the ECB decides later, the bank has already fallen into its own trap, and the boomerang of cheap money is rapidly headed back. Sure, the ECB could divert it and redirect it towards the governments or the citizens, but in both cases only one thing is for sure - the crisis will only deepen, and 2023 will be much more difficult than 2022. Because cheap money always turns out to be expensive in the end.
