Everything Central Banks Have Tried Has Failed: According To Citi's Buiter Just One Thing Remains

Tyler Durden's picture

Seven years after ZIRP (then NIRP) was launched and central banks grew their balance sheets by $13 trillion, in the process inflating the biggest bubble the world has ever seen, sending risk prices to record highs and trillions in government debt to record negative yields, first the Fed admitted QE was a mistake, and now the investment banks - especially those who were bailed out and were the biggest beneficiaries of QE such as Citigroup - admit central bank quantitative easing failed.

The reason for this failure? What we said from day one dooms all unconventional monetary policy - too much debt.

Here is Citi's Willem Buiter, finally catching up to what we said in early 2009.

We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC. There has been some shift from the private sector to the public sector, but the overall debt burden remains unprecedentedly high for an economy in peacetime (and for which the debt incurred during the last major war (1939-1945) has long since been worked off).


The wealth effect of higher stock prices appears to do little to boost private consumer expenditure and the lift given by higher stock prices to ‘Tobin’s q’ does not appear to have stimulated private capital expenditure much. The weaker external value of the euro has clearly increased profit margins in exporting and import-competing industries and may have boosted the stock market valuations of internationally active Eurozone-listed companies, but its effect on the volumes of exports and imports appears to be moderate (in part because a number of other countries are pinning their hopes on generating a bounce in inflation and activity through weaker exchange rates, too). Extremely low interest rates have boosted residential mortgage borrowing in Germany and caused German house prices to rise at a, by German standards, alarming year-on-year rate of six percent during several months in 2015.


Excessive indebtedness means households save much of any increase in disposable income in an attempt to pay down the debt. Highly indebted governments, prompted by necessity (limited market access) and/or by the constraints of the Stability and Growth Pact, are less likely to cut taxes or to boost public spending on real goods and services when lower debt service costs raise their disposable incomes. Corporations, even if they are not debt-constrained, are unlikely to boost investment when interest rates go down and the cost of capital falls because of persistent excess capacity amid an uncertain outlook for top-line growth and profits. Profits generated by favorable movements in asset prices (including the exchange rate) are distributed to shareholders (who save a large share of this) and used for share buybacks or debt repayment.


To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.


So while the Eurozone’s IS curve may not be exactly vertical, it may well be disconcertingly close to being vertical in the future.

In short: the ECB's attempts at reflating the economy, while admirable, have failed.

The combination of a near-horizontal LM curve and a near-vertical IS curve suggests that expansionary monetary policy is by no  means guaranteed to boost demand sufficiently to achieve the ECB’s inflation target, regardless of the scale on which this is pursued. What is to be done?

Well, since admission of failure means the end of the neo-Keynesian, and monetarist system, and according to some, the end of the fiat, fractional reserve system itself, one must - according to Citigroup's chief economist - pursue the only option left.

"Helicopter money drops (what else?)"


Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.


This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.



* * *


We do expect the ECB’s asset purchase program will expand considerably further, with the Eurosystem’s balance sheet reaching €4,000-4,500bn over the next year or two. But we doubt that even this will be enough to achieve the inflation target of close to but below 2% on a lasting basis. It might take even greater ECB balance sheet expansion to achieve the target.


But the larger central banks’ balance sheets get, the louder will become the voices of those that criticize the power vested in unelected and mostly unaccountable central banks. In addition, it is worth remembering that the laws and regulations that underwrite and circumscribe central bank actions were written at a time when their current range of actions, let alone the potentially even larger future ones, seemed exceedingly unlikely and maybe even (in the case of the ECB) inconceivable. Political concerns likely played a role in the SNB’s decision to rely less on its balance sheet and more on negative rates when managing its currency (and indeed allowing a sharp appreciation of the Swiss franc and greater exchange rate volatility). The ‘Audit the Fed’ movement is likely to be followed by ‘Audit the ECB’ movements and eventually by explicit limits on central bank actions as their balance sheets grow to politically unacceptable levels. We do not say that moment is near, but to dismiss the idea that political limits to the size of the central bank balance sheet exist seems naïve.


Moreover, even if the ECB were to expand its balance sheet sufficiently to achieve the inflation target in the next few years (say, to €5tn or €6tn), the monetary policy toolkit would then seem to be rather empty, with little option for stimulus if and when the next downturn hits (as it inevitably will). Experience teaches that downturns do happen – either for internal or external reasons – and sometimes happen when output gaps have not been closed. What happens then? Draghi’s answer seems to be: perhaps a balance sheet expansion to €10tn or €15tn. We are doubtful that such a course of action would be both perceived to be politically legitimate and economically effective.

Why thank you for telling us 7 years later that the entire path on which global central banks set off in 2009 had been a dead end. We could say we warned you but... well, we did. Every single day.

So now what? Well, this.

Buiter concludes:

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with “emergency” levels of asset purchases and interest rates becoming the norm.


* * *


In orderly markets and with the policy rate at the ELB, the central bank can talk loudly, but on its own – without the fiscal support required to turn its monetized balance sheet expansions into helicopter money drops – it carries but a small stick.


* * *


If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue.

He is right.

So let's stop pretending that the Fed has a chance in hell of reflating the economy by hiking rates just as the recession begins, and fast forward to the inevitable next step: the beginning of the end for fiat, starting with its widespread paradop above populated urban centers, much to the delight of millions of people everywhere, and a few very big and very underwater debtors, for whom runaway inflation is just what the Doctor (of economics) ordered.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
junction's picture

The End Of Days is near.

Captain Debtcrash's picture
Captain Debtcrash (not verified) junction Dec 26, 2015 3:00 PM

Of course the helicopter drop is an option that’s left, but they can also ban cash and push rates significantly negative, or in one fell swoop with the E-dollar. Central banks are far from out of bullets like many believe.

Perimetr's picture

Right, I fully expect a cash ban is coming soon.

Then it may be about time for our turn to try everthing.

Skateboarder's picture

Go to any place outside the Western system, and cash is still king - impossible to get entire nations whose lifebloods revolve around cash, to get rid of it. It's simply not happening this decade, and TPTB know it. Most of the world has smartpoops now - the number one tool in getting cashless rolled out. What doesn't exist is the global phone-to-phone / service-to-backend payment system. You can bet your ass that Visa and MasterCard and the rest are busy at work on that.

There aren't too many businesses in the US that are cash-only, but from bars to boba-tea shops, largely in the food/drink service sector, they still exist. What is the economic impact in the Western world of a cashless system? Probably not that big. Some businesses go under, and life as a whole does not change. The same is not true in Africa and Asia.

One interesting place is India, likely the biggest cash user in the world - everything is done through cash there. They are also the world's leading mobile e-commerce users. That presents an interesting dynamic in which the propensity towards a cashless all-electronic system is high, but the natural ecosystem is cash-based.

How it all plays out is completely up in the air, but I do not foresee an easy cashless rollout without a major reset/rejiggering and whatnot globally.

Pairadimes's picture

If the phrase 'helicopter money' begins to appear in the dialogue among people who's decisions can affect the quality of life of millions of people, it is a gargantuan red flag that the system of money being used in that economy is a sham and a fraud, and must be replaced by a sound money strategy. Period. There is no need for further discussion. 

Dr. Spin's picture

PMs, Au Ag & Pb

Bwahahaha, urp, urk, koff, koff

C'mon 2016, Bring it on...


malek's picture

I'm also surprised Tyler counts it as a success, when Buiter simply weasels his way out of his previous argumentation.

rbg81's picture

ZIRP is not an accident by any means--it is the planned stop on the way to NIRP.  Rates have been on a downward path since the early 1980s.  At the same time, the Government deficits have ballooned and increasing numbers of people are totally dependent on Government for their existence.  And I'm not just talking about the welfare cases--I'm also talking about college grads who work for the Government either directly or indirectly (via contractors).  It cuts across the social/educational spectrum and w/o the Government $$ flowing, all these people would be shit out of luck.  As private industry has downsized and offshored, the Government has steadily taken up the slack to maintain the illusion of prosperity.

If 10Yr UST rates ever tops 4%, the deficit becomes unaffordable (even with Fed intervention) and all Hell would break loose.   All the smart politicians realize this.  That scenario cannot be allowed to happen, so the "emergency" will continue without end because the alternative is simply unacceptable.

That is also why I consider NIRP the most likely outcome.  After all, at it's core, NIRP is a wealth tax.  With ZIRP, Government deficits become managable; with NIRP, they become PROFITABLE. What remains of the Middle & Upper classes (short of the 1%) won't like it, but these folks are less likely to riot than those at the bottom of the ladder.

TuPhat's picture

That is a mistake that some people make.  Thinking that anything will be profitable with NIRP.  NIRP will only be a very short stop before total collapse.  Aside from that the government doesn't profit from anything, not even NIRP.  They will simply continue to borrow and spend.  I don't see how you think that is profit.

rbg81's picture

Simple.  With NIRP, people & organizations pay you for the privilege of loaning them $$.  So, with NIRP, the Government would make $$ off its debt.  Granted, not every government could pull that off, but the US Government probably could.

You may ask:  why would anyone put up with that?  The answer is: convenience & wealth preservation.  If a bank charges you 1% a year to park your $$ there, you will be outraged but may do it because 1) parking it other places (like the stock market, corporate bonds or under the matress at home) may be too risky;  2) you still need to access it on demand using an ATM or debit card; 3) you can't think outside the box (& the vast majority of people cannot).

Pipetex's picture

Straight from the land where all economic choices are half-taken...




Genius by mistake?

MrNosey's picture
MrNosey (not verified) junction Dec 26, 2015 3:34 PM

Yes we are approaching the onset of helicopter cash and total collapse then WW3!

The rest of the agenda can be seen here......





Well, they haven't tried just directly boot fucking everyone yet...........................

Winston Churchill's picture

You can't feel that jackboot up your arse ?

Prolapsed rectum perhaps ?


Hey, Winston, I know you Brits live for that prep school buggery nonsense, but we like our pussy over here for the most part.

With the exception of our fearless leader, and the Wookie In Chief.

I live in The Land Of The Fee, Land Of The Brave, Ain't Gonna Be Nobody's Slave.

Wrote the musical, will sell movie rights for the right pile of silver and gold.

True wealth is being able to range anyone less than 800 yards from the home who is there uninvited.

Winston Churchill's picture

Where do you think I live ?

Hint:I have free range aligators,rattlesnakes and water moccaisins in my garden.

Never saw the buggery in my PUBLIC school,thats a private  school, for those unschooled

in British snobbery.

Glad to say my old school is back in the number one place in the UK for academics again this year.

You misspelt Fee and Slave in your ditty.


We live in the Land Of The Fee nowadays.

Slave is spelled correctly.

Land of the Free disappeared in the sixties starting to really gather speed about the time Kennedy was assassinated.

If you went to public school instead of prep school, then you must be one of the Great Unwashed, not one of The Elites.

Therefore, you may have missed out on high society's more well rounded celebrations of quality of life.


As for your current location, it does not dispel the DNA, or conditioning imposed by centuries of Royal boot fucking of the peasants.

kotfare17's picture

So, who is going to produce goods and services?

Keynesians say the darndest things's picture

I'm guessing Bernanke will be flying those copters?

VWAndy's picture

There you have it. The last man standing theory of economnomics. Helicopter fiats. Then everyone can pay for your production without lifting a finger themselves.

i_call_you_my_base's picture

The irony is that people will save that money or pay off debt. It won't do shit for "demand". You can't "create demand" when it's all been pulled forward in the form of debt.

Winston Churchill's picture

He already stated that in his article so the disconnect, and sheer desperation is palpable.

Doing it will cause the severe deflation they are trying to avoid.

Truly, they have no clue what to do anymore.

wanderer9641's picture

Give me free currency and watch demand increase - for silver

oddjob's picture

In the last 10 years Citi equity holders are down a mere 95%, meanwhile holders of Gold have received a 100% gain over the same timeframe.

dirtscratcher's picture

If they're going to drop money from helicopters, maybe I should send them my GPS coordinates. But they probly already know that.

Winston Churchill's picture

They'll just pin $100 bills to that Hellfire.

SoilMyselfRotten's picture

But they probly already know that


Only if you own a car, cell phone, computer or i-watch

Arnold's picture

I'm thinking 'Mobster Rolls' preserved in bacon grease, instead of bomblets, could be a multitasking weapon of desolation.


Micro dosing for productivity gains 'splains some of it.


Troy Ounce's picture


Sad, and these morons still get a platform to explain their failed policies.

Problem with helicopter money is : it is just another kick again the can.

Muppet's picture

Centrally planned massive inflation can solve everything.   Debts & deficits shrink and resolve themselves.   The Government gains power as people in crisis scramble.    Whats not to like for politicans.

withglee's picture

Trouble is they're trapped by the automatic inflation adjustments in SS and government pensions. This year they claimed inflation was zero. They're not going to get away with that for long ... people who buy groceries know better. The oil collapse allowed them to dodge the bullet this year.

Dark Daze's picture
Dark Daze (not verified) Stormtrooper Dec 26, 2015 8:06 PM

Yep. And about time. The only thing I wonder about is why we pay these crazy idiots to pretend to be doing a job that they continually fail at. The whole argument behind central banking in the first place was that it would remove volatility from the system and it hasn't. Time to return to the old Seneiorage system again.

withglee's picture

What we said from day one dooms all unconventional monetary policy - too much debt.

Too much "default". Very different from "debt" .... unless you're referring to governments.

Here we have the classic one bankrupt bailing out another bankrupt. Hard to see how that can work?

ebworthen's picture

Wait - ECB and "admirable"in the same sentence?

I haven't received my $4 million tax-free from the FED, 7 years after Wall Street got their bailouts.

And now tragedy will befall the world economy because of a 0.25% rate hike off of zero!

You see how insane everything has become?  And this article from bailout queen Citi!

Crazy town!

Winston Churchill's picture

Things made more sense when I od'ed on LSD.

Oh wait, maybe this is a flashback.

MrSteve's picture

Submit an invoice to the FRB for repayment of all your lost interest for the past seven years, now that the emergency is over and the FRB raised rates. Claim you want just compensation for the confiscation of your interest which the banks seized and used to buy US government bonds: that's the taking of private wealth for the public treasury, the dictionary definition of confiscation. For interest rates, use  the same rate the IRS charges on late payments, etc; they should be good for establishing a precedent of interest rate for a penalty on delayed compensation. Read the Fifth Amendment in the USA Constitution if you have any questions!

When they deny payment, take their letter as your confirmed proof of loss or uncollectable bad debt and deduct if from your income. Note this a scenario, not financial advice, blah, blah, blah...etc etc etc.

Cycle's picture

As soon as the first few euros hit the ground, euro bond prices will crater. Then what? An apology for the worst monetary policy in the history of recorded economics?

HopefulCynic's picture

How about the FED and the ECB, just pay the individual debts of everyone having an income of 45K or lower?

VWAndy's picture

How bout we barter and let the banksters eat all that fiat and every last bit of debt valued in it?

Jus7tme's picture

The banks and wall st street got all the QE cash they needed. Now it is time to turn off the spigot before the cash starts trickling down to someone who actually needs it.

Does that pretty much sum it up?



Village-idiot's picture

There is one other option. It's what President Warren Harding chose to do in 1921 with an impending depression.

He did NOTHING. He steadfastly refused to subsidise or bail-out anyone; not even farmers.

That "forgotten depression" lasted about two years and the economy took off.

In subsquent years Harding has been denigrated and called an idiot. He was defeated in the next election.

In the light of what is happening now I believe many are taking another look at his methods. But I doubt there's anyone these days that have the balls to do what's really necessary.

Dark Daze's picture
Dark Daze (not verified) Village-idiot Dec 26, 2015 8:08 PM

Iceland did. And got the same result.

DOGGONE's picture

Multiple track records of ours are crap at a glance
-- the first four charts are kept rarely seen. The people are STILL massively deceived by omission.

VWAndy's picture

One thing. If they go with the helicopter money thing they wont say anything about it. You will go to the bank to get out cash and it will be all new bills. New everything in the till. Even then most folks wont even understand what it means to the real economy.

Demdere's picture

My admittedly dim understanding is that nobody on earth is loaning the US Treasury $ any longer, net sales are negative.

Which means, in my admittedly dim understanding, that the rollover of the national debt, $18T that rolls over every 4.5 years, will now roll over onto the Fed's purchases.

Which, in my admittedly dim understanding of the effect of QE's $1T / year ==> 10% inflation when QE was via the banks, and as all of the newly created cash would flow back through the current bond holdrs as they are paid off, would mean that pension funds, ... must invest that cash, and the cost of real things will explode.  Not a different effect than giving that cash to the banks, so far as I see.

But the economy cannot return value sufficient to justify the purchase, and these purchases will spread the hot cash through the economy, transaction by transaction.  Builtin instability, and high inflation how wonderful.

Now the question I always have is, why my dim understanding?  Seems like I read enough to grasp such an elementry point and know one way or another.  Does someone not want me to question down this line of thught, or am I just ignorant?

I trust some of you here can help me decide.