This page has been archived and commenting is disabled.

Central Banks Are Rapidly Running Out of Options

Phoenix Capital Research's picture




 

Central Bankers are flummoxed.

 

Having cut interest rates over 600 times since 2009 (and printed over $15 trillion), they’ve yet to generate the expected economic growth.

 

This failure hasn’t produced any change in their chosen course of action. The Bank of Japan (BoJ) and the European Central Bank (ECB) are both currently engaged in QE programs. The US Federal Reserve is the only major bank not to be employed QE, though it does continue to expand its balance sheet every month during Options Expiration weeks (see our recent Weekly Market Update on 10-14-15).

 

Regarding interest rates, the ECB has already moved to employ Negative Interest Rate Policy (NIRP). The BoJ and the Fed are still at ZIRP, though the latter has several officials who have begun calling for NIRP.

 

Why, after six years, are we still seeing such aggressive policies?

 

Because deflation, the bad kind, is once again lurking around the corner.

 

Anyone with a functioning brain knows that deflation is a good thing. No one complains when they are able to buy something at a lower price, whether it is a home, gasoline, or computer.

 

However, debt deflation is a different story. Debt deflation means that future debt payments are becoming more expensive. This means that debt servicing will become more difficult, eventually leading to default and debt restructuring.

 

It is debt deflation that remains the primary focus for the global Central banks. Indeed, if you consider the threat of debt deflation, every Central Bank move makes sense. ZIRP, NIRP, and QE all have the same goal in mind: to lower interest rates and push bonds higher (thereby making sovereign debt loads more serviceable).

 

With this in mind, even a whiff of debt deflation is enough to give Central Bankers nightmares. It’s also why they are so fond of inflation via currency devaluation, as it permits them to render massive debt loads more serviceable.

 

Unfortunately, the great “reflation experiment” is failing. Indeed, as Societe General has noted, it appears the developed world may be “turning Japanese” i.e. moving into a long-term deflationary cycle similar to that which has plagued Japan for the last 20 years.

 

To whit, inflation expectations are collapsing globally.

 

In Europe, despite three cuts into NIRP, the announcement of QE and an extension of QE, inflation barely positive at 0.2%.

 

 

 

Then of course there is the US.

 

There, one of the better measures of inflation expectations is the 5 Year, 5-Year Forward Inflation Expectation Rate. That is simply a long way of saying that this chart measures where investors expect inflation to be in five years… and running for five years after that date.

 

As you can see, inflation expectations have collapsed in the latter half of 2015. Post-2008, any time this measure has fallen below the Fed’s desired threshold of 2%, it has launched a new monetary policy. In 2010 it was QE 2. In 2011 it was Operation Twist.

 

We’re now well below that level. And this is AFTER six years of ZIRP and $4 trillion in QE!

 

 

While the ECB is actively fighting its weak inflation, the US Federal Reserve is tightening for the first time in 10 years.

 

However, as debt deflation rears its head again in the west, Western Central Banks will soon be forced to answer the question:

 

Can we actually stop deflation?

 

Unfortunately for them, the answer is likely no. 

 

Consider Japan.

 

Japan has engaged in NINE QE programs since 1990. Since that time, the country’s GDP growth has been anemic at best. Indeed, even its latest MASSIVE QE program (a single monetary program equal to 25% of Japan’s GDP) only boosted Japan’s GDP for two quarters before growth rolled over again. Indeed, Japan is once again back in technical recession as of our writing this.

 

 

The reality is slowly beginning to sink in that Central Banks cannot put off the business cycle. They’ve spent over $15 trillion and cut interest rates over 600 times and all they’ve generated is one of the weakest recoveries on record.

 

What happens the next time global GDP takes a nosedive when Central Banks have already used up all of their ammunition?

 

Two works: Markets Crash.

 

Smart investors are preparing now.

 

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

 

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

 

We are giving away just 1,000 copies for FREE to the public.

 

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

 

Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 12/19/2015 - 17:29 | 6943725 Kraut
Kraut's picture

"Anyone with a functioning brain knows that deflation is a good thing."? That is only true for people who "earn" their money with useless newsletters. Anyone who produces real value will understand that deflation means LESS INCOME FOR PRODUCERS. Unproductive people prosper with deflation, productive people suffer.

Sat, 12/19/2015 - 16:34 | 6943534 Latitude25
Latitude25's picture

Is Bloomberg trying to hide the coming collapse?  Hugo Salinas Price thinks so.\

http://www.plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=279

Sat, 12/19/2015 - 13:14 | 6943105 DontWorry
DontWorry's picture

Central banks have more options than are dreamt of in your philosophy

Sat, 12/19/2015 - 13:06 | 6943083 Bemused Observer
Bemused Observer's picture

I think what a lot of people don't consider is the possibility that there won't BE a market event, like a crash. The people controlling things may have found a way to avoid sudden catastrophic happenings...

Of course they haven't 'fixed' anything, and the markets will still do what they're going to do. Just more slowly than most folks expect. The danger in that would be that, absent such an event, most folks will fail to see the danger until it is well past them already, and too late to take any meaningful action.

At every downturn, it will seem to turn around, only to again resume the ever-downward trajectory after everyone breathes a sigh of relief at the 'rally'. Everyone will ask "Where is the crash?", not realizing they are IN it, and everything has gone slo-mo...

Sat, 12/19/2015 - 19:11 | 6944148 economichitman
economichitman's picture

the proverbial boiling frog... interesting take

Sat, 12/19/2015 - 17:15 | 6943678 HowdyDoody
HowdyDoody's picture

They haven't tried the nailgun option. I think that might work, if the nailguns are used in the correct manner.

Do NOT follow this link or you will be banned from the site!