Central Bankers Admit that Central Banks Have Failed to Fix the Economy

Between 2008 and 2015, central banks pretended that they had fixed the economy.

In 2016, they’re starting to admit that they haven’t fixed much of anything.

The current head of the Bank of England (Mark Carney) said last week:

The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibriumFor the past seven years, growth has serially disappointed—sometimes spectacularly, as in the depths of the global financial and euro crises; more often than not grindingly as past debts weigh on activity ….

This underperformance is principally the product of weaker potential supply growth in virtually all G20 economies.  It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change [background] and productivity growth.

***

In most advanced economies, difficult structural reforms have been deferred  [true, indeed]. In parallel, in a number of emerging market economies, the post-crisis period was marked by credit booms reinforced by foreign capital inflows [including from central banks themselves], which are now brutally reversing….

Since 2007, global nominal GDP growth (in dollars) has been cut in half from over 8% to 4% last year, thereby compounding the challenges of private and public deleveraging ….

Renewed appreciation of the weak global outlook appears to have been the underlying cause of recent market turbulence.  The latest freefall in commodity prices – though largely the product of actual and potential supply increases – has reinforced concerns about the sluggishness of global demand.

***

Necessary changes in the stance of monetary policy removed the complacent assumption that “all bad news is good news” (because it brought renewed stimulus) that many felt underpinned markets [Zero Hedge nailed it].

***

As a consequence of these developments, investors are now re-considering whether the past seven years have been well spent.  Has exceptional monetary policy merely bridged two low-growth equilibria?  Or, even worse, has it been a pier, leaving the global economy facing a global liquidity trap?  Can more time be purchased?  If so, at what cost and, most importantly, how would that time be best spent?

***

Despite a recent recovery, equity markets are still down materially since the start of the year.  Volatility has spilled over into corporate bond markets with US high-yield spreads at levels last seen during the euro-area crisis.  The default rate implied by the US high-yield CDX index is more than double its long-run average [background here and here].  And sterling and US dollar investment grade corporate bond spreads are more than 75bp higher over the past year.

Similarly, the former head of the Bank of England (Mervyn King) is predicting catastrophe:

Unless we go back to the underlying causes [of the 2008 crash] we will never understand what happened and will be unable to prevent a repetition and help our economies truly recover.

***

The world economy today seems incapable of restoring the prosperity we took for granted before the crisis.

***

Further turbulence in the world economy, and quite possibly another crisis, are to be expected.

***

Since the end of the immediate banking crisis in 2009, recovery has been anaemic at best. By late 2015, the world recovery had been slower than predicted by policymakers, and central banks had postponed the inevitable rise in interest rates for longer than had seemed either possible or likely.

There was a continuing shortfall of demand and output from their pre-crisis trend path of close to 15pc. Stagnation – in the sense of output remaining persistently below its previously anticipated path – had once again become synonymous with the word capitalism. Lost output and employment of such magnitude has revealed the true cost of the crisis and shaken confidence in our understanding of how economies behave [Correctomundo].

***

Almost every financial crisis starts with the belief that the provision of more liquidity is the answer, only for time to reveal that beneath the surface are genuine problems of solvency [We told you].

A reluctance to admit that the issue is solvency rather than liquidity – even if the provision of liquidity is part of a bridge to the right solution – lay at the heart of Japan’s slow response to its problems after the asset price bubble burst in the late 1980s, different countries’ responses to the banking collapse in 2008, and the continuing woes of the euro area.

Over the past two decades, successive American administrations dealt with the many financial crises around the world by acting on the assumption that the best way to restore market confidence was to provide liquidity – and lots of it.

Political pressures will always favour the provision of liquidity; lasting solutions require a willingness to tackle the solvency issues.

Former Federal Reserve chairman Alan Greenspan said today that the Dodd-Frank financial bill didn’t fix anything [d’oh!], that we’re in real trouble, and that he’s been pessimistic for a long time:

We’re in trouble basically because productivity is dead in the water…Real capital investment is way below average. Why? Because business people are very uncertain about the future.

***

The [Dodd-Frank] regulations are supposed to be making changes of addressing the problems that existed in 2008 or leading up to 2008. It’s not doing that. “Too Big to Fail” is a critical issue back then, and now. And, there is nothing in Dodd-Frank which actually addresses this issue.

***

 I haven’t been [optimistic on the economy] for quite a while.

And the world’s most prestigious financial agency – called the “Central Banks’ Central Bank” (the Bank for International Settlements, or BIS) – has consistently slammed the Fed and other central banks for doing the wrong things and failing to stabilize the economy.

If the central bankers’ words aren’t clear enough for you, their actions reveal their desperation.

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  • In other Bankster news, February 29th, 2016 Citigroup Fined Again For Fraudulent Credit Card Practices

    Citigroup once again faces government fines for committing fraud in its credit card division. February 23, the Consumer Financial Protection Bureau (CFPB) fined Citigroup and its consumer division Citibank for the way it handles selling credit card debt; ordered Citigroup to pay $8 million — $5 million in restitution and $3 million in fines — for “selling credit card debt with inflated interest rates and for failing to forward consumer payments promptly to debt buyers.”

    https://shadowproof.com/2016/02/29/citigroup-fined-for-fraudulent-credit-card-practices/

  • Interest accumulates, and this has serious implications. Lenders may spend the interest and borrowers may default so that it doesn’t always happen, but on aggregate the accumulation of interest on loans produces the rationale for fiscal and monetary policies. To pay for the interest on existing debts, new debts are needed. The following example can be used to demonstrate this.

    Assume that Jesus’ mother put a small gold coin weighing 3 grammes in Jesus’ bank account at 4% interest in the year 1 AD. Jesus promised to return. Suppose that the account was kept for this eventuality. How much gold would there be in the account in 2015? The answer might sunrise you. It is an amount of gold weighing 10 million times the mass of the Earth. The yearly interest would be an amount of gold weighing 400,000 times the mass of the Earth.

    Some would argue that increasing economic output can pay for the interest. But even if economic output grows much faster, for example at a rate of 15% per year, that still doesn’t make the Ponzi-scheme of interest on loans work, simply because you cannot turn economic output into gold. When the Ponzi-scheme of interest fails, there is a financial crisis. Central banks therefore print currency to keep this scheme from imploding.

    Both fiscal and monetary policies are meant to deal with compounding interest. To pay for the interest on existing debts, new debts are needed, and if no one is willing to go further into debt, Keynesians think that the government needs to step in. Central banks manage money supply and interest rates so that debts do not grow too fast or too slowly.

    When new debts are made too slowly, the Ponzi-scheme of interest runs into trouble, money disappears from circulation, and a financial crisis can be the consequence. If new debts are created too fast, the amount of money in circulation increases, causing an economic boom, and more debts that carry interest will be created, which can cause an even greater economic bust afterwards.

    This is basically the problem. Monetary economics has become so complicated in order to justify interest on loans. Interest on loans could not be avoided for a long time, but now we have so much excess capital in the world that negative interest rates will become the norm in the future. And that can solve a lot of problems!

  • 02/08/2015 Post-Crisis Scorecard: Debt Up $57 Trillion, 60% Of Jobs Created Are Low Level, Record Youth Living With Parents

    On Friday, my Twitter stream was filled with some of the most outlandish bullish economic victory laps from pundits I’ve ever seen.

    http://www.zerohedge.com/news/2015-02-08/post-crisis-scorecard-debt-57-trillion-60-jobs-created-are-low-level-record-youth-li

  • Mar 2, 2016 What’s Ahead with Ron Paul

    Recorded at the Mises Circle in Houston, Texas, on 30 January 2016. Includes an introduction by Jeff Deist. Special thanks to Christopher Condon, TJ and Ida Goss, Terence Murphree, and an Anonymous Donor for making this event possible.

    https://youtu.be/BXKG3hGCc0c

  • Black Swan

    ” The study of money, above all other fields…is one which complexity is used to disguise truth, or to evade truth, not to reveal it. The process by which central banks produce it, is so simple the mind is repelled.” J.K. Galbraithe: Money whence it came and went…1975
    The solution to central bank printing of IOU debt currency is for the U.S.Treasury to issue and print interest free currency and foreclose upon the insolvent federal reserve system as JFK planned to do in the early 60s.

  • Crash baby Crash! I’m all stocked up on gold, silver, bitcoin, and food. I have my popcorn and will enjoy watching this corrupt financial system fall.

  • Shamus

    Ive been out of the market since 2011. I will hold gold and not touch the stocks until 1. The national debt is defaulted on and I know GOV is not going to steal my investments. 2. The Federal Reserve gets OUT of the markets, and stops manipulating everything so that the little guys loses and banks win. 3. The Shipping index shows the globe is trading again. 4. Fiat currency around the planet is replaced by currency backed by REAL LIMITED ASSETS. These currency devaluations are BS! These derivatives which manipulate valuations are BS! The REAL MARKET values are unknown, and FREE MARKET CAPITALISM (or something close to it) is the only way to safely RE-ENTER a STABALIZED market without guarantee of shifting your wealth in a losing HFT game! ITS RIGGED- GET OUT!

  • SanityClaus

    The process of “economizing” the populace is functioning perfectly.
    Steal people’s labor by printing fake money. Turn their children into corpses and cannon fodder

    to the traitors and murderers from the military. Pay the army with fake money so that permanent war is something that is affordable. It only costs the lives of millions of debt slaves.