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Central Banks Running out of Steam

As the world economy once again appears to be slamming on the brakes, central bankers around the world are now preparing for a new round of lowered interest rates as a measure to kickstart the economy.

As the Wall Street Journal reports, many of these measures are complicated and rather extreme:

The European Central Bank cut a benchmark short-term lending rate to a record low 0.75% and reduced another rate that it pays banks to zero. The People’s Bank of China said it would cut a one-year yuan lending rate by 0.31 percentage point to 6%. The Bank of England—having already reduced short-term interest rates to near-zero—increased a bond-buying program by £50 billion ($78 billion), to £375 billion, in an effort to drive down long-term interest rates.

Some of these moves are even more radical: Denmark is effectively charging banks a negative interest rate to encourage more lending. Few other countries have gone quite as far, but more and more of the world’s leading economies are at least moving in that direction.

These moves may be exciting to students of unconventional monetary policy, but in reality this is a sign of desperation. As the Journal notes, few analysts have much hope that these measures will succeed—interest rates are already near zero in many western countries—and international stock markets dropped upon learning the latest news about aggressive new banking measures. Investors now seem to believe that the world’s central-banks are running out of tools to fight slow growth.

The only safe thing to say is that the world economy is now in uncharted territory. There has never been a moment like this before, and nobody, not even the heads of the worlds richest and most respected central banks, knows what the next step should be.

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  • Anthony

    WRM, you’re correct as it relates to Central Banks – we really don’t know; but one factor that could eventually stimulate economies: policies that improve capability of workforce across country or world perhaps.

  • alex scipio

    The redistributive economies driving this economic disaster have chosen to do so on their own, i.e. it’s THEIR problem

    In order to redistribute as the Left has been doing since WW2, an economy needs two things: Wealth and children to pay the costs. Europe has chosen to retire at 50 or 60 rather than work, and so has no money. The costs of the redistributive state are so immense they only can be borne via integenerational weatlh transfers. “Intergenerational” implies future generations. Yet european countries have chosen for 3 generations not to reproduce. Not one european nation is anywhere close to a 2.1 fertility rate.

    Europe has CHOSEN to disappear. Why ANYONE would take money FROM countries who believe in the future enough to populate it, to GIVE that money to nations whose people do NOT believe in the future enough to populate it is unknown, but it IS insanity to do so. They don’t need money not to be here.

    Same with giving money to residents of Blue states here in America; only 3 are at (NV, NM) or above (HI) 2.1. Leftists don’t believe in the future.

    It’s time to stop burdening the children of Conservatives to pay for the leisure today of Leftists. Past time.

  • Eurydice

    Well, of course the central banks are running out of tools. They’re not supposed to be a substitute for good governance.

  • Cromwell

    also worth noting: shorter-dated paper (two years and less) in Switzerland, Finland, Norway, Sweden, Denmark the Netherlands and Germany all trading at negative yields. Safe to say that some of this reflects capital flows from the periphery and the “weak core” (that means you france) fleeing sovereign/redenomination risk. What it means is that banks in those nations will be flush with deposits, which of course could be lent in speculative ventures (real estate? Facebook?) with all sorts of bad outcomes. The Nordics and Germany and the Netherlands are basically telling the haven flows to park it somewhere else. and with the Fed gobbling up longer-dated Treasuries, where is that money gonna go exactly? One wonders.

  • Kenny

    It is QE to infinity.

    Once the economy stalls, helicopter Ben will start the printing (digital) presses.


    Because,there is no other tool in the elite’s bag of tricks. They will eventually destroy the paper currencies with inflation.

  • Corlyss

    Wake me when the banks start paying people to borrow money.

  • Boritz

    ***not even the heads of the worlds richest and most respected central banks.  knows what the next step should be***
    Market capitalism? (crickets chirping)

  • Jacksonian Libertarian

    And still no one wants to admit that we are in Great Depression 2.0, negative interest rates really? This is what happens when the capital markets are being sucked dry by the government deficit spending.

  • Jim.

    No one knows what the next step will be? All the more reason to devolve authority onto smaller groups, and see which ones can come up with ideas that let them thrive and which ones fall of their own dead weight.

    Central bankers are buying the Adjustable Rate Mortgage — cheap money now, that there’s no way to pay back when it comes due.

    Obama and Bush will go down in history together as the two presidents who bankrupted this country. We have to change course in 2012, or we’re sunk.

  • Lorenzo

    Investors now seem to believe that the world’s central-banks are running out of tools to fight slow growth. They may believe it, but it is not true. Lars Christensen explains here

  • Lorenzo

    The only trap we are in is the expectations trap. The Fed, the BoE, the ECB and BoJ have all been crap at managing expectations about income/spending. They have what I call “unbalanced credibility” — plenty of credibility in keeping inflation low, very little credibility in keeping the level of transactions up.

    I have produced an Easy Guide to Monetary Policy for lay folk who want to sort through the claims and counterclaims. As I say in the Guide, think about money and monetary policy in supply, demand and expectations terms, and the so-called “zero bound” interest rate limit looks like nothing more than a policy phantasm from over-relying on a specific signalling device.

  • GC

    “The only safe thing to say is that the world economy is now in uncharted territory. There has never been a moment like this before, and nobody, not even the heads of the worlds richest and most respected central banks.(sic) knows what the next step should be.”
    Speak for yourself.
    Take all the central bankers and lock them up. Throw away the key (yes, one room, one key).
    Whatever Hollande does, do the opposite.
    Eliminate all business taxes so that business can sensibly allocate capital and so the single moms living in cardboard huts under the railroad bridges don’t have to pay the corporate taxes embedded in the prices of milk and bread when they gather enough handouts to feed their children.
    Eliminate most environmental laws and regulations.
    Eliminate third-party payer healthcare programs and replace with user co-payments.
    Pass a constitutional amendment that forbids FDIC-supported financial services firms and employees from contributing to politicians’ bank accounts.
    Require all high school students to take a course that teaches one primary lesson: you can’t spend beyond your means unless you want to go broke and if you go broke you are on your own.

  • GC

    I did not see Alec Scipio’s insightful comments before I posted. I thank him for his contribution.
    Reading his comments, it is crystal clear that Europe is managed by idiots (I hope this label does not offend our host.
    On the one hand, Europe’s socialist policies drive deficit spending that results in perpetually increasing government debt and on the other hand Europe’s birth rates lead to perpetually decreasing populations that are forced to service the debt.
    Why not simply get this whole sad story over with? Europe’s leaders should have one last meeting: renounce 90% of their debt.
    Start over. The sooner the better.

  • Kolya

    The next step is when citizens start questioning the integrity of their currencies and banking systems. What does a dollar mean when the Fed can produce as many as it likes whenever it wants?

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