Central Banks: From Coordination To Competition

Authored by Charles Hugh Smith via OfTwoMinds blog,

This is one reason why I anticipate "unexpected" disruptions in the global economy in 2018.

The mere mention of "central banks" will likely turn off many readers who understandably have little interest in convoluted policies and arcane mumbo-jumbo, but bear with me for a few paragraphs while I make the case for something to happen in 2018 that will impact us all to some degree.

That something is the decay of the synchronized central bank stimulus policies that have pumped trillions of dollars, yuan, yen and euros into the global financial markets over the past nine years. Here are two charts that depict the "tag team" coordinated approach central banks have deployed: when one CB tapers its stimulus, another ramps up its money-creation/asset-purchases stimulus:

The balance sheets of all the primary central banks added together is astronomical:

This team effort is motivated by self-interest, of course; no one central bank can reflate the entire global economy, and yet that is the only way to reflate each nation/bloc's own economy, given the global connectedness of the modern economy.

But the threads of mutual self-interest are fraying. At this late stage in the credit cycle, the central banks must begin "tapering", i.e. diminishing and then ending their stimulus policies and eventually reducing their balance sheets by selling assets they bought in the stimulus phase (or simply stop replacing bonds they own that mature).

The Federal Reserve was first out of the gate in launching quasi-unlimited bond purchases, and it was the first central bank to cease stimulus (quantitative easing) and raise interest rates. It has now signaled that it will begin selling assets (i.e. stop replacing bonds that mature).

Those currencies/bonds that pay the highest interest (accounting for inflation, of will naturally attract global capital seeking a safe return above zero.

The net effect of this differentiation is that nations/blocs with near-zero yields will experience capital flight as money will flow to higher yields elsewhere.

The coordination of the stimulus phase will give way to nationalist self-interest in the tightening phase.

Those nations/blocs that need super-easy money and near-zero interest rates to keep their "growth" afloat will be drained of capital as capital goes to wherever it can earn more yield.

There's a further complicating factor: the relative strength of each nation's currency. This matters because as a currency appreciates, the issuing nation's exports cost more to buyers using their own currencies, and the nation with the appreciating currency loses the competitive edge of a cheap currency.

Since higher interest rates attract capital, they also tend to strengthen one's currency, as the relative value of currency is set by supply and demand: the more demand there is for the currency, the higher it goes relative the field of competing currencies.

There is a third factor as well: central banks need to reduce their balance sheets and raise interest rates, so they have some "policy accomodation" available to counter the next (and inevitable) recession/financial crisis.

The US has so far managed a hat-trick: it has raised interest rates a number of times, yet its currency, the US dollar, has lost over 15% of its value in 2017 compared to the Euro, which has gained 15+%.

There is a Darwinian twist to all this: any nation/bloc which manages to raise rates and end central bank stimulus without stifling its "recovery" or strengthening its currency to the point it hurts exports, and still be a global magnet for capital due to higher yields/rates, will have a substantial competitive advantage over its peers.

In effect, the self-interest that bound the central banks together in the stimulus phase reverses in the tightening/normalizing phase. Thus I anticipate a slow decay of central bank coordination and a rise of conflict/ competition, though this will of course be kept out of the media.

This is one reason why I anticipate "unexpected" disruptions in the global economy in 2018, as the coordinated stimulus phase ends and the disruptive, messy, Darwinian phase of tightening/ normalizing rates and balance sheets gathers momentum.

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messystateofaffairs Mon, 01/22/2018 - 08:37 Permalink

Central Bank economists talk a lot of mumbo jewbo. It would be nice to see these scammers tear each other apart while a specie crytocurrency takes front and center on the world stage. We can fully expect an attack on free market specie cryptos like Bitcoin with an intention to replace specie crypto with Jew controlled fiat crypto. The idea of Jew controlled fiat crypto is irresistible to them because they can dramatically reduce banking administrative overhead and run the whole world money show from one computer center. As an additional prize they can track everything the goyim make and spend and have their govt lackeys tax them to pay the interest on the fiat they issue and lend to their govt to "help" said goyim. Its called Milking the Goyim for the Benefit of the Chosen Ones. The real issue is not cryto vs gold (both can be specie) the real issue is specie vs. fiat.

booboo Mon, 01/22/2018 - 08:50 Permalink

Yea, everyone will rush to a fucking trailer park yard sale. "Look ma, only two bucks for a slightly torn moo moo with a few shit stains"

aqualech Mon, 01/22/2018 - 10:16 Permalink

Central Banks goal is to maximize the indebtedness of the world to themselves.  Oh, and these days to grab up huge volumes of equities while they are at it.  That became too hard to resist once they learned that, unbelievably, no one who mattered was going to object, no matter WHAT they do.

They might be offloading a little bit of their bond portfolio now that the price has peaked.

Don't worry on their behalf though.  Any losses to their portfolios will be covered by the taxpayers.  TBTF and all that.

aqualech aqualech Mon, 01/22/2018 - 10:21 Permalink

And while I'm at it.....BOJ and ECB and others probably would not have dared to do the QE thing if the FED, the most corrupt of the lot, had not shown that the public was not going to do shit to stop them.  It's open theft, and the propaganda that it is being done to benefit the dumb-as-shit citizenry has people begging for them to do more.

In reply to by aqualech

venturen Mon, 01/22/2018 - 10:26 Permalink

sorry but why tighten...that is like a Hooker closing for business....They lost their virginity...sky's the limit...this time is different...print to the moon.


Is there a limit on zeros?

Atlas Crapped Mon, 01/22/2018 - 11:24 Permalink

Would be a viable notion if in fact CBs truly had their respective national economies best interests as a priority. The best interests of the system are "JOB 1" and to the extent that powerful interests within those economies can be enriched by that prime mandate, the more the better.

That system is undergoing change as I write this, but not in the fashion portrayed here. It's OK to muse randomly, but to publish such musings compels Roacheforque to clarify ...