Central Banks Dither Today, Panic Tomorrow

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Published : June 08th, 2012
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Category : Editorials





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.


Data and Statistics for these countries : China | France | Germany | Greece | Japan | Spain | All
Gold and Silver Prices for these countries : China | France | Germany | Greece | Japan | Spain | All
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John Rubino is the author of The Coming Collapse of the Dollar (co-written with James Turk), How to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall Street financial analyst and columnist with theStreet.com, he currently writes for Fidelity Magazine and CFA Magazine He lives in Moscow, Idaho
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