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Central Banks Dither Today, Panic Tomorrow

by John Rubino on June 7, 2012 · 28 comments

If central bankers weren’t the main architects of the coming depression, it might be tempting to pity them. The world is falling apart and everyone expects them to save the day with lower rates and/or exotic new stimulus programs. But at the same time everyone assumes this debt monetization will destabilize the financial system, bringing about the end of the world as we know it.

The bankers can’t win, in other words, because whatever they do or don’t do will be seen as causing a global meltdown of one kind or another. And the poor bastards know it.

So it’s not surprising that they’re dithering and seemingly working at cross purposes. First the European Central Bank decides to hold rates steady despite the imminent implosions of Spain and Greece:

Central bank in Europe decides not to cut rate
FRANKFURT, Germany — The European Central Bank withheld the stimulus of an interest rate cut Wednesday, keeping up the pressure on eurozone politicians to take decisive action — even as growth predictions worsened and fears intensified that Spain may need help bailing out its banks.

The 23-member governing council left its benchmark refinancing rate unchanged Wednesday at a record low 1.0%.

ECB President Mario Draghi cited economic growth forecasts for a gradual recovery this year in justifying the decision not to cut rates this time. Rate cuts are supposed to help growth by lowering business borrowing costs. Some analysts, however, said the bank’s expectations of only a 0.1% decline over the full year were overly optimistic.

Analysts say Draghi’s hands-off stance Wednesday was meant to underline the need for action on restructuring the euro by the 17-country eurozone’s divided and often slow-moving politicians. He has urged leaders to sketch in a vision of how the economies and financial systems of euro member countries can be better linked ahead of a June 28-29 summit where new ideas to save the euro are to be presented.

And the Bank of England does the same despite a deepening recession:

Bank of England holds rates and leaves QE unchanged
The Bank of England has held interest rates at 0.5pc and left quantitative easing unchanged at £325bn despite mounting speculation that it would take steps to stimulate growth this month.

The decision contrasts with the recommendation from the International Monetary Fund (IMF), which last month urged the Bank to restart QE to help restore Britain’s faltering recovery.

Surveys in the past week of the manufacturing and construction industries added to fears that the economy is continuing to slow, although today’s report on the powerhouse services sector offered some consolation by beating expectations.

Rates have now been on hold at a record low since March 2009, the longest unchanged period since decade spanning the Second World War and the subsequent austerity that ended in 1950.

The economy has collapsed back into recession, falling 0.3pc in both the first quarter of the year and the final quarter of 2011. The consensus forecast now is that the UK will grow just 0.4pc this year, compared with the Office for Budget Responsibility’s prediction of 0.8pc.

Then China cuts rates:

NEW YORK (CNNMoney) — China’s central bank announced a rate cut Thursday — its latest move to try and spur its slowing economy.

In its first rate cut since 2008, the People’s Bank of China trimmed a quarter percentage point off its deposit and lending interest rates. China’s one-year lending rate is now 6.31%, which is much higher than interest rates in the United States, Europe and Japan.

Economists and investors worldwide are concerned about China’s recent slowdown because it is an important driver of global growth. China is now the world’s second-largest economy behind the United States.

The central bank had most recently sought to spur growth on May 12 by reducing the amount of cash banks must hold in reserve, an effort to free up funds for lending and investment.

But China’s economy has continued to cool over the past month.

A purchasing managers’ index compiled for banking company HSBC earlier this month showed that Chinese manufacturing declined in May for the seventh straight month. The index fell to 48.4 in May from 49.3 in April. A reading of above 50 indicates growth in the sector.

Chinese exports have been hit by the European sovereign debt crisis, which has caused 11 countries on the continent to fall into recession and hurt demand from China’s largest market.

China’s gross domestic product, the broadest measure of its economic health, grew at an 8.1% annual rate in the first quarter. But that was sharply lower than the 8.9% growth at the end of last year.

And finally, the US Fed splits the difference by promising to act if necessary:

Fed ready to act if stresses mount: Bernanke
WASHINGTON (MarketWatch) — The Federal Reserve stands ready to act to protect the financial system and the economy in the event that financial stresses from the European crisis escalate, Fed Chairman Ben Bernanke said Thursday.

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said in testimony prepared for delivery to the Joint Economic Committee of Congress.

He called on European leaders to do much more to stem the crisis.

Some thoughts
“ECB President Mario Draghi cited economic growth forecasts for a gradual recovery this year in justifying the decision not to cut rates this time.” Seriously? The PIIGS are going to recover this year? Or will Germany and France somehow grow enough to offset Greece and Spain falling into the abyss? In any event, would a gradual recovery accomplish anything for a system that continues to pile up debt while offering zero hope for young unemployed college graduates? Unlikely across the board. The pressure will continue to mount even in the best case scenario.

The central banks are being cautious because they realize that no one trusts them. The financial markets are poised for a rush back into hard assets at the first hint of dollar weakness, which means monetary policy is losing its pop. Hence the desperate calls for politicians to deal with the fiscal imbalances and take central banks off the hook. But of course the fiscal authorities can’t raise taxes or cut spending, so they’re tossing the ball right back to the central banks.

There’s a “June 28-29 summit where new ideas to save the euro are to be presented” eleven days after the Greek election which might produce an anti-euro government. Should be a fascinating interim.

But in the end none of this matters. Either the most indebted countries implode and take down the rest of the global financial system or the central banks open the monetary floodgates and currencies collapse versus real assets. Or one then the other. In any event, dithering will soon be replaced with panic.

Tagged as: Dollar, euro, gold, inflation, monetary policy, silver

FredB

In chess this is called zugzwang, a circumstance where any move will make a player’s position worse.
Bruce C.

The central banks have enabled the fiscal irresponsibilities of governments and thus have created insoluble problems for the world. Had the Fed, for example, not been so complicit during the last century, facilitating deficit spending for wars, foreign country manipulations, and entitlement programs then the financial markets would have reigned in these things more naturally and justly. Instead, as is more obvious today than ever, the financial markets are highly distorted and unstable, and the inevitable unwinding will probably be horrendous.

Central banking is just another form of central planning, which supposedly had been thoroughly discredited as of WW2 (or at least the fall of the USSR), so this situation shouldn’t be a surprise to anyone. Now the CBs are realizing (finally) that artificially low interest rates (aka ZIRP) are actually a disincentive, and not a stimulus, so everyone but the US and China are trying to force the governments to take action fiscally but it’s too late for that now. And yet, Bernanke has been warning Congress to not let taxes increase nor spending to decrease next year, lest there be a recession. It’s gonna get ugly.
Marty

Folks, look up for our redemption draws near. There’s no better time to trust in The Lord!
- Sue
  
  Exactly. What’s coming is judgement. Reject God? Oh no, its going to be the other way around. I wonder if Sodom and Gomorrah folks shook their fist at God and said (just before they got fire & brimstoned) “I thought you were all about love!” God is perfect love, but God is also perfect justice. Look for a mushroom cloud near your city.
- Steve Smith
  
  As bad as an economic collapse would be it would be nothing compared to dying and dropping into hell for eternity. Or the Lord coming back for His bride and you being left behind. The whole world is in termoil and dont know what to do. It’s time for the anti-christ to step up and say hey folks I have all the answers. Were nearing the end of this church age of grace. Even so come Lord Jesus.
Gypsy

The Lord is sending this calamity as a punishment for the sins of the bankers – so don’t expect help from Her direction.
Tom

I think it’s clear we’re on the cusp of a dramatic shift in living standards, retirement age and a deep downshift in wages of the West relative to Asia. How can central banks fix any of it. Won’t happen. A lot of what we experience as Western culture is going to be swept away. Got gold?
Will Swanson

Does this mean I will have to come out of retirement to qualify to retire at a later date? How many Walmart greeters can there be? Maybe there will be an Ace Hardware greeter now. How hard is it to get a job over 50, little lone over 70?
http://www.TomBlairEA.com Thomas Avery Blair, EA

Time to hunker down, “circle-the-wagons” with those you love and trust, do away with all that is unnecessary, stock up on water, food, bullets, medications and precious metals-content coins, and fort up until martial law is declared (likely by July 1st 2012 if things keep going this way).

Goodbye to all checking and savings accounts, pensions, social security & medicare, and everything else denominated in “fiat currencies” like the U.S. “greenback” and the euro. The wealthy should shudder and hide in their holes, as should congressmen and senators, and await the aftermath when the hungry can’t be fed, and turn their full wraith while shedding the blood of and upon those who brought this ruin to the West and our societies.

In the end, China, India and possibly Russia will become the “haves” and most all of the Western nations will collapse into what one used to call “banana repubics” for the next couple of decades.

God help those with child or children, the handicapped, the elderly and the infirm. Death by dehydration is horrible, death by starvation is not better, but it does take longer. Maybe the bullet or the bayonette will be the only relief; will our own troops obey Pontus or will the U.N. bring in troops to enforce martial law in each and every respect?

Barter will work only for those prepared; looting will be done under penalty of crippling death.

“The Lord is my shepherd, I shall not want, He leadeth me ….”
- Tony D
  
  This “doomsday” scenario is unlikely as tptb have been preparing for it. Rebellion will be put down by brute force of a military that may well be paid in goods to retain their loyalty. There may be a short period of chaos but “order” will be restored, at the expense of the average citizen and their basic human rights. This will be deemed as “necessary” to maintain order. A severe police/ military state is more likely than a awakening of consciousness of the majority of Americans. TPTB will find an external scapegoat to deflect their responsibility for the situation, just Nixon blamed the “speculators” for having to uncouple the US$ from gold.
- Steve Sheppard
  
  Agree, I hear you Thomas but I dont think that your outlook is going to play out given the other items still in the toolkit here and by July 1.
  Please I dont think so and just my thinking
  thanks
  Steve S
TC

Interest rates tell us how much something is worth. If I rent you my car, you pay me a percentage of its value every day you have it and insure me against loss. The same for gold, I would charge a nice percentage and insure against loss. Now, when central banks provide paper money at less than one percent, without insurance, and they’re having a hard time getting rid of it, it shows that what they are providing is becoming more and more worthless. Those who don’t trade in their paper for real stuff while somebody will still take it may not have a chair to sit on when the music stops.
Sue

They’ll print some more (idiots)! Yay! My gold stocks will go sky high just like they did in 2008. Then I’ll sell (before they crash again), go to my cabin in the mountains, buy LOTS of canned food, water, beans, n’ bullets. I’ll keep reading my Bible and wait for them to come get me. I figure I can take at least five DHS/TSA/whatever agency people with me when I go.
kopavi

The sad part in all this is that the several politicians who understand what is going on can’t do enough on their own, they need a majority. They won’t get a majority. As one politician from Euroland said, “We all know what had to be done. We just don’t know how to get reelected after we do it.”

Every day is a “historic” day, it has never happened before and will not happen again. Still, consider what we are facing, in the next several months we will face “historic” days that are more historic than others.
kopavi
http://www,ThisBloodlessLiberty.com David M. Zuniga, P.E.

A pessimistic Christian is an oxymoron. I believe we are now, finally, facing the cancer surgery we’ve needed for a century and a half.

A cartel of very shrewd mercantilists bought some members of Congress in 1862, drafting a “legal tender” act that was excoriated by many statesmen at the time. No one was listening, for obvious reasons. That same cartel had begun a smokescreen tactic that their progeny have used for 150 years: start a war to take everyone’s eyes off the scheme. Lincoln’s war split the republic of former co-sovereign States into two approximately equal, offsetting antagonists.

The counterfeiting presses ran all through the war and beyond. In 1871, six years after the devastation of 650,000 dead and destruction of almost 70% of all assessed property value in the South (think Iraq or Afghanistan), the forces of righteousness finally prevailed. The Supreme Court ruled the counterfeit over, restoring gold and silver…for a few months!

The bankers got their puppet Grant to seat two of their hand-picked boys for the high court, and later in 1871 they said, “Ooops! Just kidding! Counterfeiting is back on! Good as gold, start the presses!” In their follow-up ruling on Juilliard v Greenman, they crossed the Rubicon.

American government was finished with even the appearance of checks-and-balances. Can a court build ‘stare decisis’ on a perspicuous, demonstrable fraud in direct violation of the highest law? Well, yes; the USSC has done so. It is just fine to allow a criminal cartel to print fake money, force us to use it, and force us to pay interest on it. All patently illegal.

There are, I should think, at least three million honest, forthright, Constitution-honoring folk in this land. One in a hundred who would not bend the knee to Baal; who would make elected politicians obey the law. Obviously, 3,000,000 people with a tactically-sound plan could target, indict, try, convict, and incarcerate just a dozen members of Congress (on STATE criminal charges harmonizing with their abuse of office, fraud, and counterfeiting) for destroying their constituents’ wealth, ability to work, in many cases their homes, etc). Three million to 12 is pretty good odds when the law is on your side.

This criminal activity that has slung an entire republic from pillar to post, and to Hell and back for 150 years — can end in 90 days or less. That’s what the AmericaAgain! Indictment Engine (TM) is designed to do. But it’s been exquisitely difficult to land our Chief Counsel (state prosecutors so far have been flummoxed by the concept, then afraid to take on federal actors), and without that key co-founder, AmericaAgain! cannot yet create and define the market for informed self-government. Frankly, we need people to focus much more than they’re doing now.

In other words, I’ve been praying that God would stop showing us so much mercy, and show us the justice we deserve as a people, instead. Then perhaps my key team members (like a great CEO who can lead a service company and membership organization that ramps logarithmically) will come out of the woodwork.

Americans will be shocked, stunned into action. I honestly think that is required now; the average citizen is truly insipid, truly inert. The Great Depression did precisely that for Americans after the “Roaring Twenties”.

http://www.ThisBloodlessLiberty.com
- Yay Man
  
  You have hope in mankind. I have hope in Jesus returning. Your “pessimism” is my optimism. You don’t really believe in the second coming, do you? Not a Christian then, by definition. i.e. believing in what Jesus said.
Custerluck

Note the last paragraph, “either the most indebted countries implode and take down the rest of the global financial system or the central banks open the monetary floodgates and currencies collapse- -”.

If either happens (and in Europe we cannot stop indebted countries from imploding), the other (monetary floodgates open), immediately follows. They are intertwined. The most important question is when will this happen? I believe a third action will be the thing that initiates the other two. The third action is “bank runs”. Even if only two percent of the world’s wealth becomes frightened enough to move funds out of the banks and into precious metals, the game is over.

Bank runs have begun in Europe. They emptied the Greek banks first. The Spanish banks have had dramatic withdrawals for the last two weeks (forcing the Spanish government to nationalize it’s largest bank, Bankia). The runs have also begun in Italy which is three times larger than Spain.

Bank runs are difficult to stop and frequently are slowed by limiting funds that can be withdrawn or even declaring bank holidays (closing the banks for periods of time). Bank runs that are not stopped force governments to open the monetary floodgates.

Bank runs are a function of your state of mind. How close are you to removing your cash from your bank?
Ed_B

Bank runs are not likely to be a significant problem in the US. Helicopter Ben will surely show up at any such afflicted banks and… bombs away! Bales of $100 bills will cascade down and satisfy ALL possible demands for cash. Shortly thereafter, however, we will have many people who have a great deal of cash but no one will take the over-printed and now worthless stuff in exchange for things of REAL value.

I agree 100% that central banking = central planning and that this is financial failure in motion… for now, anyway. The failures of the Fed are many, the successes few. Bubbles keep happening with no awareness of the policy causes of their creation. This guarantees additional bubbles and collapses when they pop.

Jim Willie’s recent comments regarding ZIRP as a powerful tool for capital destruction are dead on. A short-term reduction in borrowing rates can goose an economy somewhat but doing this over the long term only distorts the markets, leads to incredibly poor capital allocation decisions, and causes savers to stop saving. Why save when inflation is 3-4 times higher than the interest paid on the saved money? Better to buy things that are useful and needed, such as tools, land, weapons, ammo, food, water, meds, fuel, seeds, clothing, machinery, etc. Unfortunately, savings are what power a strong economy and create future demand and growth. By satisfying the borrow-and-spenders at the expense of the savers-and-investors, we get a lot of poorly thought out speculation but no real growth of capital.
bob D

ok, you can set it up that way, i.e. the banks did it and can undo it, but
also is that the banks threw the baby to the wolves and now can not
figure out how to save it,,,,,

thus they no longer the problem, the wolves are,
and the wolves are not the banks but are the national govts’ big shots who
keep throwing the babies to the wolves and then wonder why no one will
help them fix the mess they have caused

—- no sense in fixing it until
after this nov pres election,

if obama re-elect then the game is over,

if romney is elected it will take him about a year to fix the usa and
euroLAND econs back to viability and honest trade folks,

but no matter who does what
and no matter how good it looks superficially
the econ, worldwide,
is in a freefall until y2030,

so until then keep your loot under your mattress,
and keep all assets locked up, etc,

—–sort of go back to being a caveman…….
- BL
  
  The Romney appeared to me once, in a dream. He said, “trust thee not in the speculation of precious metals, for I shall make thee whole again. Through the powers vested in me by Goldman Sachs and Bank of America, I will return the nation to its glory. For I am not The Obama, although one might think I was based on my record”. As I stood there before The Romney, feeling humbled, a thought came over me. I asked The Romney, “Oh exalted one, hasn’t Goldman Sachs and Bank of America also contributed to The Obama?” He looked me right in the soul and said, “Yep”. “So you don’t really have the peoples’ interest in mind?”, I reply. I’ll never forget this, he said, “Nope” and then sipped what appeared to be a slurpy. I woke up pissed off and wanting a slurpy.
bob D

the other dynamic folks are not looking at, is that China has instituted
its own World-Central-Bank specifically to destroy usa FedResSyst – bernie and
all, – and bring all nations into a big world group trade relationship using only
chinese Yuan (china currency) as the FX (foreign exchange) between the
trade nations, a piece of cake, is what the FedResSyst (the Fed) has tried
to do all along but has failed and is what China will do easy because they
are the swiftest traders of all and thus to make their profits they make more
of the nations trade thru the Chin-world-central-bank getting the 8% quasi-tax the fedResSyst has been getting all along, too bad, and getting the spread off
the yuan FX involved, easy profits… when you are an honest bank like the
chin bank is….

but what the hecks, the USA Fed Banks only screw the folks and never give them any return on their money, if you notice the banks always pay yearly interest less than 8% which is alway less than the 8% inflation rate thus
a loss to the customer and a gain to the greedy bank

if the banks were nice and shared the profits with their customers all this
econ freefall would not have happened, and the banks would have made
even more profit by being nice to their customers, ho hum
bob D

yes yes yes, the yearly inflation rate in USA is always 8% and more, thus if your money
is not making 8% or more per year you are losing money on your investment

even your equity must return more than 8%/yr or is a loser of hard earned money, the bonds
are even worse, they never give close to the 8% thus are the worst
“investment”
ever, and since are not guaranteed to pay back even the face amount never mind the interest, then they can refuse to pay
you the face amount and there is nothing you can do except cry in your pillow

all of this because the Fed Banks are greedy, and cheapskates, and are not
businessmen but criminals stealing money from their customers….

if you
know the reserve system you know that the member banks can use that to
create phoney money as if it were legitimate money and still make a fortune
— actually make more than they do by stealing from their customers

so the big question is why do they steal from their customers and the
answer is they are too dumb and too ignorant to be honest….
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HT

For anyone who does not think they can physically float atop a bubble, knowing it will be imminent the bubble will pop…
Why would anyone think injecting more printed paper money (promise to pay note), credit or otherwise… will help stable the impending doom of the economy is beyond me.

Blow that balloon up bigger & bigger is stretching the material thinner & thinner… bound to give sometimes.
http://www.devenir-rentier.info Devenir Rentier

The financial is built in a way that will lead to collapse anyway, whatever central banks will do or not do.
Watch the Debt Money videos from Paul Grignon
ejgejames

What is funny to me is the total lack of communication on the European side of the pool.
Looking at USA, where unemployment if considered with Clinton’ rules is a staggering 16% and with Reagan’s rules at 22%, and where 1 american in 4 lives on food stamps, the real financial and industrial situation isn’t anyhow different than Europe, and if you believe Jim Rogers, it is even worse.
But while in Europe they all move as free dogs ready to bite the neighbour, and their disaster is in full sight, the American financial tragedy is at least much better organized. I do well understand Bernanke and Obama’s fear that european lack of communication strategy will lead to disaster. An uncontrollable Europe will be the fuse, but I fear America is the very bomb ready to explode.
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Roy

I have a few ideas about the Financial Crisis I would like to share with you. First of a number of points, which I believe are true, but may be debated.

1. National debts, which are owed locally are quite different to those that are international. By this I mean debt that is owed to Greek citizens and organisations, are different to those owed to foreigners. (These ideas came to me while thinking about the Greek problem, but I see no reason, why they would not benefit any country in difficulty.)

2. There are some very wealthy Greeks.
It may alleviate the crisis if Greeks acquire debt which is currently owed to foreigners. The Greek government could impose this in much the same way as taxes, and in some countries pension contributions.

Clearly the same practice could be adopted in other countries, amounts would of course vary depending on local circumstances. For the poor, 2% and an income tax reduction of 4%, (this would increase diposable income by 2%, a growth stimulus, but still address the debt issue. For the very wealthy, in addition to swapping tax for the purchase, it would be reasonable to require an additional purchase of the tax payer’s National Debt. This is because they will be getting something for the reduction of disposable income. If people feel the “asset” is worthless, it is worth considering they (the wealthy) very likely benefited form the country’s acquisition of debt, indirectly if not directly…. It is much more reasonable that they bare the burden of their countries bad debts, than others that have not benefited.

The Government may also require, that wealthy individuals, domestic and expatriate hold 10% of their assets in national debt. The wealthy may not like this, but it is very likely that they have benefited more than the poor from the respective governments increasing national debts. The bankers and lawyers employed chasing this money would give some work to locals.

….Just a few thoughts to ponder. After all a new problem needs new solutions.