Summarizing The Challenges Facing The "Global Central Bank"

Tyler Durden's picture

Morgan Stanley, traditionally the second most Kool-aidy bank on Wall Street, just after Deutsche Bank (and specifically the Germans' head economist) begins its latest report on the challenges facing the "global central bank" on a rather downbeat note: "Slowing growth is threatening the creditless, jobless recovery in the US and the Fed stands ready to act. The European flu has flared up and the risks to the ECB’s strategy of normalising policy have risen markedly. And emerging market central banks are balancing domestic growth against downside risks to developed market economies as they keep policy from becoming restrictive or even tightening too quickly. The world today appears to be in an eerily similar place to mid-2010." Hmm, where have we heard this 2011=2010 theme before... Anyway, it gets worse: "there are some important differences too. This time, the US and euro area economies are facing downside risks to growth just as normalising monetary policy is slowing EM economies down too. A year ago, EM monetary policy was still stimulative and domestic demand growth was encouraged as output gaps were still negative. The risks to global growth today are thus broader now than they were last year. At the same time, the thresholds for central banks to ease appear to be higher this year too. Rising core inflation in the US, elevated inflation in the euro area and a recent battle with inflation in the EM world all make it difficult for central banks to abruptly reverse the direction of policy. A look at the challenges facing DM and EM central banks has the Fed, the ECB and the RBA facing the biggest downside risks to growth in the DM world while the ECB (again), the BoE and the Riksbank face immediate inflation concerns. In the EM world, central bankers have no time to rest despite a recent victorious battle with that old enemy, inflation. European contagion and weaker global growth should keep policy-makers there on their toes for the next few months." Indeed it should, but with so many central bank actors, each of which experiencing their own set of unique challenges, who can keep track of all the often times opposing responses that the central planners are presented with? Well, courtesy of this handy, dandy tearsheet from MS, now you can too.

What does all this mean. For what it's worth here is Morgan Stanley's base case:

While the discussion has centred on the materially higher risks and the scope for policy mistakes, we maintain our base case of a better 2H performance in the US and a policy-led containment of euro area problems (though not a comprehensive solution to these problems). The EM giants, China and India, were expected even before the onset of these higher risks to return policy from their slightly restrictive stance towards a more neutral one as confidence about inflation receding grows. Other EM economies are either close to the end of their normalising cycle or are likely to postpone it to early next year. Should our base case work out without the need for outright policy easing from the major EM and DM central banks, the direction of the next rate move from not just DM but also EM central banks could well be higher.

Naturally since this is Morgan Stanley the one guarantee is that the base case will not occur, which means that further easing is guaranteed. Naturally, even Morgan Stanley recognizes its horrendous predictive track record and thus adds a risk factors section:

[T]he risks surrounding our base case may prompt one or more of these to occur, probably starting with renewed purchases of assets by the ECB to augment the stop-gap measures we expect euro area policy-makers to administer – though things would have to deteriorate dramatically for the ECB to carry out renewed purchases. These risks are already raising the risk of contagion outside the euro area to CEEMEA economies. Should the downside risks to US growth materialise, further easing from the Fed and another round of policy accommodation from EM central banks would be reasonable to expect

And the conclusion:

Finally, it is worth emphasising that the ‘global central bank’ still has ammunition left, if needed. The Fed and the Bank of England could do another round of QE, the ECB could lower rates and purchase (more) bonds, and EM monetary authorities have room to cut policy rates: hardly an empty arsenal.

And let's not forget Japan, which yesterday Christine Lagarde's IMF realized that Japan is way overdue for more monetizations and easing:

The International Monetary Fund signaled that the Bank of Japan should buy more assets to combat falling prices as it forecast stronger deflationary pressure than the central bank.

"To ward off deflation risks and support the recovery, the Bank of Japan could increase purchases of longer-dated public securities and expand its asset purchase program for private assets," the IMF said in a statement yesterday in Washington.

The recommendations may put more pressure on the BOJ to consider further monetary easing by increasing its asset purchase fund, which it doubled to 10 trillion yen ($126 billion) after a record earthquake and tsunami in March. A Bloomberg survey of 14 economists last month showed that all but one expect the BOJ's next move would be to provide more stimulus and four expect the BOJ to expand the asset fund around August.

Of course, this helpful reminder to the BOJ is precisely what will end up happening. Which also means that the forecast for Japanese total debt to hit one quadrillion (Yen) needs to be brought up quite a bit. And when Japan start QEasing again, it will be the green light for all other central banks to follow suit. And so on, and so on, until China one day says enough and fully unpegs the CNY, making it fully convertible and in essence ending the dollar's reserve "tradition."

h/t John

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Quixotic_Not's picture

Let them eat cake ~ The Bernank

Mr Lennon Hendrix's picture

Let them eat ink and paper.

-B.S. Bernanke

Herd Redirection Committee's picture

Challenges?  I'd say these are the goals of the central banks, keep people dependent on the central banks, convince people central banks are necessary, central banks are good, and by the way, we only need one "Global Central Bank"! That would solve all our problems /sarcasm!

Check out the latest from the Capital Research Institute "Selling Gold You Don't Have":

"It Seemed Like  A Good Idea At The Time"

"It would be  wise to understand the repercussions of this debt not being paid back.  Those most affected will obviously be those who lent the most money to Greece, Italy, Spain, etc.  It turns out that the governments of Europe have been lending each other the money (that’s right, lending money they don’t have, to their also-broke neighbors, it would land a normal person in jail)!  And not only that, financial institutions across Europe have loaded up on the stuff (government debt).

So that means stay away from government debt and don’t touch bank stocks until after the dust has settled.  Last but not least, currency exchange rates will be affected.  So if you have large savings denominated in either US dollars or Euros it would be wise to reconsider that position.   It is tough to predict how exchange rates will change, because both the Euro and the US dollar will both be greatly devalued 2-3 years from now, but the timing, order and magnitude of the moves that will get them there are not knowable at this point in time.

Anecdotally, the CRI was started at the start of 2011.  At that time the price of gold was $1364/ounce, and today, even after a sharp decline in the last 24 hours, gold is at $1591.  Thats a 16% increase!  Or a 16% devaluation in the value/purchasing power of the US dollar,  if you look at it that way (as we at the CRI do)."

bearnanke's picture

God. And now suddenly half of the people around me know about, think about and worry about this stuff.. only a few months ago no-one cared..


This is scaring me more than anything to be frank...

Let's get it over with please...

I long for whatever shows up after 'the fact'.



Herd Redirection Committee's picture

LOL, I know, right.  It gives you some hope for humanity though, to see that people have become aware at an almost exponential rate.  After 9/11 very few could see it for what it was.  It was America's Reichstag fire.  A turning point used to justify everything that would follow.  War, deficit spending, currency devaluation, expansion of big government...

Quixotic_Not's picture

Remember, democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy yet that did not commit suicide! ~ John Adams

oldmanagain's picture

About half of the econ world is contracting, other half fighting inflation.  The later may draw money from the former  via higher interest rates.

The new historical wrinkle for the contractors is rising resource prices.  The Fed is trying to fight, but now the vote is to see who takes the hit.  Those that have assets or those who need help.  Welfare state or solyent green.

fishbum2's picture

This report orginates out of London, not NYC.

carbonmutant's picture

Euro could face its 'splat moment' as José Manuel Barroso breaks cover

Mr Barroso broke cover with an unusually stark warning that the existence of the euro is at stake at Thursday’s summit because of growing frustration at the top of the EU and IMF that national governments are dodging their responsibilities and endangering global economic stability.

“Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can't do and won't do. This is what I ask from them, he said on Wednesday.

Smiddywesson's picture

Utterly delusional:

Finally, it is worth emphasising that the ‘global central bank’ still has ammunition left, if needed. The Fed and the Bank of England could do another round of QE, the ECB could lower rates and purchase (more) bonds, and EM monetary authorities have room to cut policy rates: hardly an empty arsenal.

Did the last round of QE fix things or were things worse when the effects wore off?  If lowering rate would work then why didn't it work last time? 

No the arsenal is empty and they are out of ideas.

Edward Fiatski's picture

More QE... you want an uncontrolled breakdown of society in the medium-tern future?? :0 Start that world war already, kill off the unemployed, write off the debt, hang your creditors, introduce a cashless currency. Huzzah!

slewie the pi-rat's picture

Of course, this helpful reminder to the BOJ is precisely what will end up happening.

well, maybe so, but it is still really funny that christine lagarde & the imf are lecturing japan about deflation. 


gwar5's picture

The central banks all went to the Jim Jones school of economics and are committing fiat suicide together. They're joined at the hip with incestuous QE instead of DNA.