Central Bankers - Unorthodox Policy Options Left In The Armory

Tyler Durden's picture

A week ago, Mark Carney was announced as the Bank of England’s next Governor amid much fanfare. This week, Japan’s election could herald a new more aggressive approach from the BoJ. 2013 will then see speculation mount about Bernanke’s successor and also likely see the operation of the ECB landmark OMT program. It will also mark the 100 years of the Fed and probably much reflection on their impact on the US/Global financial system. So, as Deutsche's Jim Reid notes, central banks will remain in the spotlight for 2013. However whilst their actions to date have certainly minimized the tail-risk post-GFC, they have yet to lift real GDP above their 2007/2008 peak in most countries and virtually every developed economy is operating well below what is perceived to be trend growth.

So in this section Deutsche Bank discusses what new ideas might start to be debated as to what central banks can do to be more innovative if growth continues to remain subdued, or if fresh crises hit markets. QE 3 or 4 years ago would have been seen as highly unorthodox and unique for most central banks stretching back through their history. However fast forward to today, that old unorthodoxy has become the new orthodoxy. But what have the world’s central banks got left to offer a world that at some point might be hungry for more?

Option 1: Debt Monetization

In recent weeks, Adair Turner, a former front runner for the recently filled Bank of England Governorship, apparently privately raised some interesting policy ideas in his failed bid to get the nod. He argued that QE may be becoming less and less effective in promoting economic growth and that more unorthodox monetary policy measures may be called for, going so far as to discuss whether the Bank might tell the British Treasury it wouldn’t have to repay some of the £375bn of government debt it currently holds as a result of its quantitative easing program.


In truth this is not so much a new idea (for example, the German Reichsbank did it in 1921-24) as a very old and potentially very dangerous one. If central banks cancel the government debt they have bought through newly created money, they will effectively have directly monetized government budget deficits. One technical way to do this would be to roll the bank’s government debt holdings into perpetual zero-interest debt as and when those holdings mature, writing the debt off in all but name. Such a policy is extreme and a long-way off but such an outcome somewhere in the developed world might occur at some point. Maybe 2013 is too early for this but it might be tempting at some point somewhere around the world.

Option 2: Getting the Helicopter Going

Debt monetization is one rather roundabout form of Milton Friedman’s helicopter drop, where the Fed simply prints say $2000 for each and every citizen and then puts it in the mail to them. Unless the recipients save all of this $2000 it should stimulate consumer spending and/or asset prices in the economy and give growth a shot in the arm. To formalize such extreme policy it has been suggested that the governments could introduce a temporary lump-sum tax cut which is financed by issuing bonds, which the central bank buys and agrees to give all redemption payments and interest straight back to the government.


Such a policy has two issues: first is the concern it may just generate inflation with no gains to the real economy. Indeed if the central bank financed government budget deficits, and the government used this as an excuse to run ever higher budget deficits, this would undoubtedly risk a path towards hyperinflation. Second it would require a change in the relationship between many of the world’s central banks and governments and, given most central banks deep-seated opposition to the risk of high inflation, likely end the age of independent central banking. Again one to watch but maybe not for 2013.

Option 3: Changing the Central Bank’s Inflation Mandate

On the theme of redesigning central banks from the bottom up to deal with the economic challenges of the world’s economies, two other options have been discussed: (1) raising the Banks inflation targets or (2) changing these inflation target for price targets.


First, the economics. The policies derive from the economic principle that if expectations over future inflation increase then inflation will, in turn, increase. This will disincentivize individuals, firms and investors from holding cash and cash-like Treasury securities and put their money to work buying goods, building new factories and investing in equities and other riskier assets in an attempt to stay ahead of the inflationary tidal wave.


By changing the central bank’s mandate so that they target a higher level of inflation (say 4% a year) this should raise inflation expectations in the economy by the simple fact the central banks are now under orders to raise inflation if it’s below 4%. The price target is a little more sophisticated. The idea is to say that prices should grow (i.e. inflation) at 2% a year and the central bank should account for any periods where inflation is below 2% by raising inflation above 2% for a period of time until the price level is back on target. If central banks were told that prices should have increased by 2% a year since 2007 in many of the world’s economies there’d be a fair amount of catching up to do, again lifting inflation expectations.


There are two key challenges to these policies. First is they may lead to overkill on the inflation front as individuals lose faith in the central banks targets and simply assume they will continue to inflate beyond their new targets, generating un-controlled inflation. The second is that even if the central banks can control inflation at the new higher target, the gains will be nominal and not real, failing to deal with key economic problems such as real growth and unemployment. For an economy to grow, firms need to start making/providing more actual goods and services and hiring more people to do so, not simply charging more for what they were going to make anyway.


Such policies would also threaten many Government bond markets and possibly require financial repression to force more and more holdings of government bonds amongst its long-term savings and its financial institutions.

Option 4: Central bank purchases targeting a wider range of assets

A more widely touted unorthodox monetary policy is for central banks to begin buying assets other than government and government agency-backed securities. Whilst current QE purchases have an indirect effect on other financial assets by driving the yields down on government bonds, a more direct approach would be, well, more direct. Central banks could begin buying more long-term government debt, corporate debt, real estate or even equities to stimulate the economy. This is less a brand new policy but rather simply replacing the current QE gun with a bigger brother.

Option 5: Intervening in FX markets to weaken the currency

As with monetary deficit finance, central banks intervening to weaken their currencies to promote the growth of export industries not new and unorthodox. Both the Japanese and Swiss central banks have intervened directly in FX markets to weaken what they saw as an overvalued home currency. A problem that many central banks have found when attempting to weaken their currencies is that they have been overtaken by events: attempts to weaken their currency have been more than offset by investors fleeing risk in other parts of the global economy (e.g. the Eurozone crisis). The other problem is that not every economy can have a weakening currency as each currencies value is determined relative to other currencies. So, for example, large US intervention to weaken the dollar would, if unanswered, strengthen the Euro and Yen etc. Could 2013 be a year where competitive attempts at devaluations increase?


Outside of FX intervention, the policies discussed above are well outside the mainstream of economic thinking and/or have been deemed by policy makers to pose more dangers then benefits. However as the world economy peers into the future and sees a growing threat of a recurring recessions and below target inflation, radical monetary policy may become increasingly appealing as elected politicians stuck in gridlock turn to (relatively) politically unconstrained central bankers to save them from their failings and get their economies racing again. For better or for worse.

Evidently - one word comes up again and again - inflation (and long with it - uncontrollable); which merely supports the holding of hard assets as wealth preservation...

Source: Deutsche Bank

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SheepDog-One's picture

I call bullshit Deutsche Bank....at best you are becoming baffled by your own bullshit, and you're certainly not the only ones either....there's ONE bazooka the FED central planners have and thats monetizing the debt, that is all.

MillionDollarBonus_'s picture

In my opinion, Benedict Bernanke is next in line for the Nobel Peace prize after President Van Rompuy. Professor Bernanke's dollar swap lines may have prevented a war between European states. Meanwhile Bernanke's monetary policy at home has staved off a double dip recession and thus saved the global economy from a potentially devastating slowdown. Meanwhile, inflation remains astonishingly low, leaving room for even more monetary easing in order to boost employment to acceptable levels. The actions of Professor Bernanke have been simply heroic, and I can think of no other man who has matched his contribution to humanity.

game theory's picture

A peace price seems unlikely: humans have a habit of crucifying saviors.  The thesis that war may have been prevented...interesting...but with all the ongoing unrest, it seems like we may need a decade before one could declare success on that account. 

aldousd's picture

See example one: Barack Obama, given the peace price months before unleasing military strikes.

1100-TACTICAL-12's picture

This is like watching my kids play monopoly, they just make shit up as they go and the game never ends...

AldousHuxley's picture

teach them realities of paper money using paper monopoly money.


funny how parker bros lessons from last century still hold and prime real estate is still prime real estate?

elite status quo has tons of power to keep themselves and their assets high.

ZerOhead's picture

"The actions of Professor Bernanke have been simply heroic, and I can think of no other man who has matched his contribution to humanity."

You are of course forgetting Gideon Gono...


  • Gono was awarded the Ig Nobel Prize for mathematics "for giving people a simple, everyday way to cope with a wide range of numbers — from very small to very big — by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000)."[27][28]
TWSceptic's picture

Bernanke will be responsible for the biggest crash and possibly civil war, you have no idea what you're talking about. On the other hand, that prize is worthless anyway and looking at the other winners they might as well...

1100-TACTICAL-12's picture

How long till the bottom falls out Keiser says april or sooner , starting in UK or Japan.

walküre's picture

Central Bankers around the world are gate keepers of the elite private wealth. They're the watchdogs for the wealthy elite.

Their mandate is to protect said wealth at all cost. Their objective is to find a method to eat their pie AND keep it. Their only option is to BAMBOOZLE the masses with BULLSHIT so that the masses don't catch on to their trick and they keep the game going which benefits THEM.

The only sensible solution would be to cancel debt with a jubilee. The balance sheets are filled with too much debt. That debt however translates into wealth for the elite. A debt reduction is actually a wealth reduction which is not acceptable to this group. Their greed stands in the way of any sensible long term solution. In the past this group has made concessions but it eventually always ended in war. For now they are trying to avoid making concessions and of course, going to war.

Unfortunately for us all, their lack of vision will erode faith in currency further. They're employing thousands and spending billions to keep the masses distracted and confused with lies and propaganda. That is their biggest tool. The expense of propaganda is far cheaper than the total loss of control over markets, currency and politics. The masses are easily persuaded and distracted with sports, religion and "education".

The real issues will not get addressed anywhere in a broad discussion. There are no real advocates for mankind, no real opponents to the elite's current status quo.

They will PRINT and they will PRINT MASSIVELY. They will keep inflation under control because they control everything. The system will keep working for them. The obvious failures such as Greece will not be allowed to operate as they have because the Greeks themselves made such a mockery of the system.

As long as the elite is in control, there won't be Armageddon. There will be a slow unwind and there will be casualties but it will not be to the extent that the masses will get restless. It's a controlled demolition.

The world global financial system is WTC7. We've had the collapse of the twin towers with the market meltdown in '08. Since then the teams are busy installing the fuses to take out the evidence. Those hours between the apocalyptic event and the controlled demolition are expanded over years. But in the end, there will be a another collapse that only few will even notice and with that collapse the evidence will be destroyed and the rebuilding can begin on their terms.

Implicit simplicit's picture

"... and I can think of no other man who has matched his contribution to humanity."

How about Ivan the Terrible, jack the Ripper, and Hannibal?

RealFinney's picture

MDB, they can't give him the prizes for economics and peace in the same year.

prains's picture


your lameocity is quickly reaching terminal, time to bury it to the hilt and end this thing, 3 minutes no breath, promise

bunnyswanson's picture

Alan Greenspan:  "Bubble?  What Bubble?" 



Ladies and Gentlemen, We Have a Winner...

When one considers the possibility that the Fed Chairman actually works for the banks, all the pieces begin falling into place.

It’s only natural, after all, given that the original mandate of the Fed was to preserve banking stability. It is the Federal Reserve’s job, first and foremost, to make sure that the U.S. financial system (and by extension the executives who stride atop it) perseveres through all economic storms.

In principle, the good of the country and the good of the U.S. financial system are supposed to be one and the same thing. In practice, the two can be at odds, sometimes dramatically so.

The charade of pretending that the two considerations are one and the same, though, is a key aspect of the brilliant bait-and-switch job foisted upon us all. Whenever a Fed (or Treasury) official’s actions can be wrapped in the guise of “saving the system,” it is implied that said action was undertaken for the good of everyone. Ha!

What’s more, not all bankers are created equal... as with seating arrangements in the king’s court, it is always better to be closer to the throne. Given their combination of heft, gravitas and “too big to fail” status, the top four banking institutions probably wield more power and influence than the next 40 combined And beyond that, no man’s land. One can trace out the priorities of the Fed and Treasury in real time by observing how the giant money center banks get attended to hand and foot. The Bumbershoot Bank of Kalamazoo Kansas, meanwhile, is left to choke on prairie dust.

Banana Republics and Dictatorships

The main trouble with arrangements like this one is the way they tend to be favored by banana republics and dictatorships. When a small, concentrated “elite” class is consistently favored at the expense of everyone else, the long-run result is rarely pretty.


Zerohedge mentioned a couple of times in the Comment section of the above article(rave reviews). 

bullionbaron's picture

"Central bank purchases targeting a wider range of assets" Some of the smarter central banks have already started doing this, buying Gold, although they do this not to stimulate the economy but because they know the actions of their helicopter flying counterparts is destinned for failure.



Manthong's picture

>>>  Options 4 and 5 are already being implemented through stealth

>>>  Options 4 and 5 are not yet being implemented at all

bullionbaron's picture

Option A, but with about as much stealth as a bulldozer in a glass shop...

bobthehorse's picture

We're in a tough spot.

If Bernanke's man-tits quit squirting milk, we'll go into a deflationary depression.

Conversely, if Bernanke's man-tits continue squirting milk, we'll end up in an endless Japanese-style recession.

So what's a central banker to do?

ZerOhead's picture

The tits will never stop squirting in the direction of the primary dealers and the chosen few with access to new and practically free mega Fed credit. Expect this flow to become a flood as economic conditions deteriorate transferring all known wealth in the process.

The (deflationary?) depression however is a by-product of over financialized and non-productive economies dying due to lack of new consumer debt required to keep the ponzi going.

Invest accordingly and have a nice day!

Ned Zeppelin's picture

Man Tits Squirting - quite an image.

Ghordius's picture

In the pre-shadow-banking age the lag between printing and price-rises was 18 months, min. Now "it depends".

Plenty of good feelings of "successfully managing monetary matters" ahead.

Interesting times

Mad Mohel's picture

All options are variations of fucking over Joe Public. Vaseline, spit, or grape jelly?

NidStyles's picture

So their options are Print Paper, Print Paper, Print Paper, Print Paper, and Print Paper.


I'm so glad they know what they are capable of doing, which is pay some other guy in their printed paper to print more paper. Still waiting for the absurdity of this situation to dawn on everyone. A society that values it's laziest con-men as being the experts of the society itself is a society that has lost all real value. 

Chupacabra-322's picture

Keynesian economics advocates deficit spending while the school of Milton Friedman/Greenspan advocates money printing.  Historically we're at the highest levels of doing both.  The reality is we're bankrupt and the restructureing is already either in the works or done. 

NidStyles's picture

In real terms the two are the same thing.

Dr. Engali's picture

Option 6) End the fucking fed and issue an asset backed currency.

NidStyles's picture

Better yet, let the markets decide what will be used.

AE911Truth's picture

Uhh, "let the markets" ?

You are the market! Vote with your wallet.

Stop using worthless paper currency. Start using physical metal.

LongSoupLine's picture

Fuck you Douche Bank.  You know exactly what the fuck is happening with the CB's because your ass sucking self is at tthe receiving end of the happy ending the fucking Fed gives you daily. Go fuck yourselves and your $30+ billion bad paper hiding fucking asses.  dickheads.

lolmao500's picture

Or you know, the bond market says BULLSHIAT and then all collapses, hyper-deflation takes hold and Uncle Ben can't stop it.

Anyway I'm praying for hyperinflation. Back in the Weirmar days, during hyperinflation, hundreds of politicians got their heads blown off...

Catullus's picture

What?! If they cancel the debt of the US treasuries that they own, theyre not monetizing at that point. They've already monetized it. They just create no ability to sell the treasuries back into the market to drain liquidity.

But really if they cancel the debt, effectively nothing happens BECAUSE all profits from the Fed are remitted back to the Treasury. Interest payments are sent right back to the treasury in an epic circle jerk. And the fed uses twist to take their increasingly shortening maturity date to buy the out years.

Option 2 was tried under Bush in 2008 with the stimulus check mailed to everyone. That paid everyone's gasoline bill that summer.

Option 3 is bullshit.

Option 4 is already occurring with QEinfinity

Option 5 is already occurring with the Fed in the FX swaps market.

The "radical" changes they could adopt are monetizing the short end of the yield curve, sell puts in the stock market, begin the perishable money idea. Lopping off a zero might help too. That would create an instant 90% devaluation.

A DUDE's picture

That's why stocks are going to hit new highs. Mr. Lamoureux says so and he was right on with his call on bonds.


QE49er's picture

The Bond twist is over at year end, get ready for $85,000,000,000 a month of PURE QE.  Fortunately for ZH'ers we all know what this means, the rest of the sheep...good luck.

buzzsaw99's picture

the unorthodox joo banker. i get it!

Madcow's picture

things they have not yet tried - 

- puppy slaughtering 

- monetizing social commerce in the clouds

- highway robbery (internatioal pirating)

- astrology combined with aromatherapy

Stuck on Zero's picture

One way for the Fed to weaken the currency would be to buy large amounts of physical gold under strange aliases and store it in Fort Knox.  Oh, wait.  That's not Keynesian.