Dire Straits for central bankers - Money for nothing brothers in arms are out of ammunition

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Executive Summary

Better to sit down. We will be entering some pretty bleak conclusions in this report. The world’s central banks have hit stall speed. They have lost control and do not have enough altitude to recover. How bad can things get? There are two things at play here. One is economic (explicitly monetary) policy. The other is social reality (explicitly hardship). Both have become dysfunctional. Reckless central bank monetary expansion sold behind the banner of ‘nothing to see here’ has backfired. Money velocity (or the power of money) across the globe is plummeting to record lows. While the GFC was easily avoidable the post disaster mop up operation consists of printing our way out of the disastrous debt pile by inflating it away. Even negative interest rates leave inflation well below targets. Deflation still prevails. Poverty and post-GFC destitution has reached boiling point. When people feel robbed of their identity and increasingly their democracy we should not be surprised to see the rise of nationalism and non mainstream candidates and sadly violence, especially in Europe. This social disruption should not be ignored because the experimental financial engineering that was supposed to wiggle us from the bondage of moral hazard has had the complete opposite effect.

Here are 7 things to ponder;

  1. A recent US Federal Reserve survey found that 47% of Americans couldn’t raise $400 in emergency cash were the need to arise. 5% unemployment rate belies financial difficulties.
  2. A bank survey in Australia showed 50% of people wouldn’t be able to meet their financial obligations if unemployed for more than 3 months. Housing price to income ratio almost twice the level pre-GFC. Private debt: GDP ratio at 160%.Credit rating downgrade imminent.
  3. c.60% of ETF purchases in Japan and c. 100% of sovereign bond purchases are bought by the Bank of Japan which now owns 38% of outstanding government debt. 15 year Japanese government bonds now yield -0.004%. Japan’s move to negative rates  has caused a run on sales of mini-vaults as people look to store their own cash.
  4. M2/M3 money velocity has hit all time lows in the US, ECB, Australia, China & Japan.
  5. Italian banks non performing loans (NPLs) are approaching 20% and as high as 50% in the south of the country. The ECB is breaching their own covenants to hide the mess. Belgian Optima Bank has just been shut down for not being able to meet obligations. Many more?
  6. Over 25% of those in the EU live below the poverty line and youth unemployment is c.25% with long term unemployment now 50%. In Greece those numbers are 36%, 58% and 72%.
  7. China’s industrial sector among others shows clear signs of recording sales without much hope of being paid with receivables ballooning in some cases leaping to over 5 years of reported revenue pointing to a sharp uptick in corporate debt insolvency & NPLs to follow

I wish I could be optimistic about the future but I’m afraid there isn’t anything that shows much promise.

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