Entering text into the input field will update the search result below

The Day The Central Bank Powers Came To An End


  • Central banks in the developed world have just about thrown everything and the kitchen sink at the forces of deflation, with fairly little to show for it.
  • After the US and the UK, the Swiss have now been the third to throw in the towel.
  • Is this a general retreat? Are we going to succumb under the forces of deflation? Is there nothing else we can do?

There are powerful forces of deflation swirling around much of the developed world, the origins of which can be traced, in no particular order, to:

  • Deleveraging after asset bubbles burst
  • The half baked design of EMU producing a strong deflationary bias
  • Chinese overinvestment and overcapacity
  • Rising inequality
  • Stagnant or even declining populations

In a highly leveraged environment, deflation is very dangerous. It can lead to outright Fisherian debt-deflation spirals, or even in milder forms, (as has been on show in Japan for the best part of two decades and more recently Italy, for instance) it can wreck havoc.

In much of the developed world, it has been up to central banks to combat these forces. Central banks have chosen to embark, first on zero interest rate policies and then on forms of unconventional monetary policies, that is, buying large quantities of assets.

The results of these have been rather moderate, and that can be little surprise. In the face of deleveraging, monetary policy becomes rather powerless as households prefer to pay off debt, rather than take on new debt, despite record low interest rates.

But the forces of deflation haven't been beaten and the unconventional monetary policies have unfavorable side effects. They also have their limits, and it seems that we've just been hitting one. The Swiss central bank (SNB) has ended its 1.20 floor to the euro.

This was really unconventional monetary policy, comparable to buying sovereign bonds. What the SNB did was buy unlimited amounts of euro in order to defend the 1.20 floor for the Swiss franc.

Switzerland is a small, open economy, so this policy made sense in times when its safe haven status made it very vulnerable for very large capital inflows. These flows can be so large as to wipe out the competitiveness of much of

This article was written by

Shareholders Unite profile picture

Shareholders Unite is a retired academic with 30+ years of experience in the financial markets. He looks to find small companies with multi-bagger potential while mitigating risks through a portfolio approach.

He runs SHU Growth Portfolio where he offers wide coverage of several small companies with high growth possibilities. He has a buy and hold approach with tranche purchases of stocks of interest. The service features an illustrative portfolio to incorporate into your portfolio, buy alerts, weekend stock and market updates, and a chat room. Learn more

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (140)

Central Bankers can only issue more debt-they have no money(Fractional Banking 101) so what is happening is they don't have suckers enough to take on more who can generate a profit even at almost zero interest! Many are just too tired of the Mafia and their BS and sick working to death while they enjoy yachts in Monaco, private jets, all the beautiful young women, and castles in Europe etc. while telling billions of people to do more with less??? You cannot "fix" a system based on a SCAM. Greece does not haver to pay a bunch of scam artists like the crooks at Goldman Sachs who set them up. That's nothing more than the game the Mafia ran and it it the Mafia as the Italians never ran the Casinos in Vegas they were only used as muscle. Skimming everything on earth? They have set back technologies and a wonderful world too long. "Economics" isn't any "science" it's a few selfish idiots thinking they are smarter than everyone else and they have the right to own ALL the bananas! Well they don't. Plenty of bananas for all once you wake up. Now lets grow real food again on our farms instead of deadly, cancer causing death corn and beans so we can feed ten planets worth of humans and live sane lives. Flow cell batteries can give you real EV's and solar can give you more power than all the oil on earth. All the psychopaths, sickos, killers, politicians, can adapt to life. May take awhile but open your eyes, it's all there and beautiful.
David de los Ángeles Buendía profile picture
Mr. Rockefeller,

Central banks do not issue debt, they buy debt.
DigDeep profile picture
D.R sounds like you don't appreciate the corp-gov't cronyism....understood by most - avoided by many.
Zoltan Kiss profile picture
Thank you for rewarding my unprofessional questions with serious answers. You also have emboldened me to ask the same two questions in different forms.

If we define unemployment "People who want to work, but either can not find a job,
or could only find an inadequate part time job, or are working full time in positions that neither satisfies their financial needs, nor does it utilize their education and work capacities"..... I estimate that number in the US is about one third of the work force, or about 60 million people (justification of this number some other time).
From experience in Germany, (from the time when East Germany was absorbed in the West), the cost of creation of one sustainable job was about 1 million Euros.
The cost of creating 60 million jobs in the US, $60 trillion, is just not within the capabilities of the present capitalist system. To talk about the various economists, their theories etc. I feel is not addressing the real issues.

On the second question. I also ran companies for a time. I understand the difference between income and shareholders value, "assets". But we could only increase shareholders value from operations, by bringing profits after taxes down to assets.
The 100 US billionaire assets were much greater (5 times the 20% change in assets)
We are only talking about the change in assets in the last two years, which presumably were their after tax profits, so it should have shown up in the GDP, OK not as assets, but as income. The example in question; the 100 US billionaire have earned 20% per year over 1.48 trillion assets, or about $600 billion over two years, which is comparable to the growth of the GDP throughout the 6 years of the Obama presidency. What gives?
Neil_Anderson profile picture
To Shareholders Unite

<< In principle, central banks can sell unlimited amounts of its own currency ... they can buy unlimited amounts of assets ... >>
--> Central banks can buy unlimited amounts of assets? Seems a bit short-sighted to me, after all, central bank purchases of any asset tend to (artifically) raise the price of the asset purchased. And when the central bank must sell assets to avoid inflation, the price of the asset drops like a rock. That means the fair market value of (some of) the central banks' assets drops like a rock, and their liabilities remain unchanged. Do that on a large enough scale, and the central bank becomes insolvent.
--> A significant insolvency means that the central bank may not be able to sell "enough assets, fast enough" to avoid inflation.

<< But, apparently, the SNB deemed there were limits to this, and they did have something of a point ... >>
--> Defending the 1.2 franc = 1.0 euro exchange ratio seems rather stupid. If SNB continued defending the 1.2 exchange rate, then a lot of stupidity would happen:

Mon: SNB takes a bunch of euros out of circulation by printing swiss-francs to buy more euros to defend the 1.2 exchange rate.

Tue: ECB prints more euros to replace whatever the SNB took out of circulation on Monday. This raises the exchange rate above 1.2

Wed: SNB prints more francs to buy more euros out of circulation to defend the 1.2 exchange ratio.

Thu: more of the same self-fulfilling stupidity ... (aside - this is why "unlimited" is such a dangerous idea.)

Conclusion: The SNB did what was best for themselves, and as it turns out, what was best for the ECB, as well. The SNB should be applauded.

<< But the prospect of the ECB embarking on full QE ... made the SNB sufficiently uncomfortable that it ended the peg to the euro by surprise. >>
--> How can this be a surprise to any big-time banker? If anyone "in the game" was indeed surprised, well, they shouldn't have been "in the game" in the first place. They should be ashamed of themselves for a general lack of insight or due diligence, rather than being angry at the SNB for this so-called 'surprise' move.

<< Switzerland may now well turn into the proverbial bird in the mine as this will unleash the full deflationary vortex ... >>
--> The SNB can still print money and buy assets other than euros. The SNB can still buy euros and let the exchange rate rise slowly.
--> Even if the SNB did nothing, that might not spell disaster; depends on many factors, such as whether or not the Swiss exporters employ a lot of people and whether the swiss exporters compete on price ... or quality.

<< In the words of Krugman ... this only works if central banks "credibly commit to being irresponsible." >>
--> QE does not always have to shoot for 0% interest rates, therefore, the liquidity trap (if there is such a thing) can be avoided. Some central banks can be less irresponsible than othes.

<< Draghi has pulled this off with his 2012 "whatever it takes," quelling a peripheral bond debt-spiral without actually having to intervene. >>
--> In fact, Draghi did not even have the authority "to do whatever it takes" when he said those words. At that point, he was just a highly successfully bluffer, and the success that the markets besowed upon him surely helped him get the authority that he needed.

<< There are a few things monetary authorities could try to fight deflation, stuff like NGDP targeting or inflation targeting. >>
--> Promising to continue QE until NGDP or inflation hits a certain target is experimental and dangerous. Break your promise and the central bank loses credibility. Keep your promise and the central bank could face insolvency if the policy doesn't work.
--> The SNB promised to defend the 1.2 exchange rate with "unlimited" printing of swiss-francs and unlimited purchases of euros. Not so smart, in my opinion.

<< ... central banks print money, which would finance a tax break for households ... and/or public expenditures ... >>
--> That's deficit spending, which is fiscal policy, not monetary policy. The central bank can accommodate fiscal policy, if need be. But there's no direct link between the central bank (as a bond purchaser) and the Treasury (as the bond issuer), or there should't be, for good reasons.

<< Compared to the QE policy experience, [fiscal policy initiatives] have considerable advantages ...>>
--> Unless the National Debt is already bloated. After all, when Dr.Krugman asserts that the size of the US National Debt (which is now $18 trillion) doesn't matter "because we owe 'the Debt' to ourselves" that seems to make sense until one accepts it at face-value, and then asks the next logical question: "Well, Ok, but then why do we bother taxing any U.S. citizen at all? Why not just balloon the U.S. National Debt to the moon?"
--> Conclusion: there will always be some maximum level of Debt beyond which is too much for the current US economy to handle, however, no one really knows how large it can be before it becomes dangerous. And what may seem fine this year, might be too large next year, if economic circumstances get dicey.

<< [Deficit spending] injects money directly into the veins of the economy.
--> True, but the US government already spends a lot of money to the tune of 22% or 23% of GDP. When Uncle Sam spends money, it's not like when you or I spend our own money because individuals tend to be more price conscious.

<< The basic innovation of [the orignal] Keynesianism is simply to ... >>
--> Pay off the deficit spending during the resulting boom.
--> "The time for austerity at the Treasury is during the boom ..." - quoted from Lord John Maynard Keynes.
--> If Keynes were alive today, he'd be considered a conservative as he is surely rolling over in his grave at what his followers have promolgated in his good name.

<< We know from Japan how pernicious deflation can be once it has set, and we know from Fisher that markets can spiral down in self-reinforcing feedback loops called debt-deflationary spirals. Do we want to risk this? >>
--> Do we want to ask the people who erroneously believe the size of our Debt doesn't matter?

<< As observers, we like economic experiments as they put ideas to the test >>
--> Let's not play games nor conduct experiments with people's livelihood, unless it's absolutely necessary. Yet, why is it absolutely necessary so often, and why doesn't any one think about that?
Shareholders Unite profile picture
I'll only answer the more serious stuff..

["Central banks can buy unlimited amounts of assets? Seems a bit short-sighted to me, after all, central bank purchases of any asset tend to (artifically) raise the price of the asset purchased. And when the central bank must sell assets to avoid inflation, the price of the asset drops like a rock. That means the fair market value of (some of) the central banks' assets drops like a rock, and their liabilities remain unchanged. Do that on a large enough scale, and the central bank becomes insolvent."]

What inflation?

Never heard of reserve requirements? The Fed could simply raise these if there was ever this risk of inflation accelerating.
Neil_Anderson profile picture
To Shareholders Unite

You asked "What inflation?" and avoided a lot of other interesting topics. Good call.

Come on, you know the answer is "Asset Inflation" as when, you know, a central bank starts buying assets in a QE program; you know, like when T-bond prices rose during the QE programs. Come on.

Reserve Requirements? Yes, everyone's heard of that ... but you've focused on the wrong type of inflation. Reserve requirements have no effect on Asset Inflation (described above).

BTW, if the US economy did have the ordinary type of inflation that you're thinking about, the reserve requirement (10%) for large banks and small banks (3%) would both probably have to be increased to 70% or 80%, assuming that were the only action undertaken by the Fed to slow the growth of the money supply.

In fact, in that strange circumstance where the Fed's only response to inflation was to increase reserve requirements, it'd surely be more efficient to simply jump to a 100% Fully Reserved banking system ... which is essentially how the US banking system has been operating under QE these last few years.

Don't believe me? Just think about how much money banks were creating when they weren't making loans, and think about how borrowers kept paying off their loans and mortgages in the normal course of business. One can easily argue that for a period of time, the US banking system's rate of money creation was less than zero. That's destruction, not creation.

When people pay off their loans, that's deleveraging, which contracts the money supply, which leads to deflation ... unless Banks are making enough new loans to offset this natural deleveraging, which the banks usually have succeeded in doing ... until the Crisis.

But as we know, the Fed stepped-in and created money ... in the same way that they would create if we had a 100% reserved banking system.

[It'd be "more effficent" to avoid setting new reserve requirements, say 70% or 80%, and then later on discovering they needed to be increased or decreased for some unforeseen reason(s). A 100% Reserve banking system is more predictable than an 80% Reserve banking system, offering greater control over money creation]
Shareholders Unite profile picture
["You asked "What inflation?" and avoided a lot of other interesting topics. Good call. Come on, you know the answer is "Asset Inflation" ]

No, I didn't know that. When economist talk about "inflation" they usually mean the CPI, GDP deflator, something like that. When they want to talk about asset inflation they call it "asset inflation" or even "bubbles"

["BTW, if the US economy did have the ordinary type of inflation that you're thinking about, the reserve requirement (10%) for large banks and small banks (3%) would both probably have to be increased to 70% or 80%, assuming that were the only action undertaken by the Fed to slow the growth of the money supply."]

Not likely IMHO. If we had real inflation, they would have stopped QE much sooner and shuffled in a few interest rate hikes, depending on the seriousness of the situation.
insightful?informed decider profile picture
The middle class in this country is just about gone already. There's a speech about how they didn't cause it somewhere tonight
Shareholders Unite profile picture
["The middle class in this country is just about gone already. There's a speech about how they didn't cause it somewhere tonight"]

As it happens, median wages have been lagging productivity growth since the 1970s
insightful?informed decider profile picture
"As it happens, median wages have been lagging productivity growth since the 1970s'"

yes BUT , the wages are NOT the only way the middle class are being systematically purged. They are being targeted for taxes in ways never before. And now they must finance 1 more Obama idea for redistribution, free college to those people that probably will go because most community colleges will have the cafeteria offering free breakfast ,lunch ,and dinner if you have a student ID. Or they might accept the EBT cards that are the badge of honor for Obama liberals. Just put it on the bill of the middle class after all they have 2 or 3 part-time jobs right? Why did Willie Horton rob banks SU?
Aren't Obama's proposals to be funded by closing tax loopholes at the very top?
I say bring deflation on. Let the debtors choke on their debt.
Shareholders Unite profile picture
["I say bring deflation on. Let the debtors choke on their debt."]

Yes, by all means... If you want to wipe out half the world's middle class
The middle class usually is wiped out by inflation.

The top 1% can cope with it and actually profit from it, the middle class can't.
Shareholders Unite profile picture
Robots, AI and cheap overseas labor do create problems for the labor market but the past 200 years show that productivity increases normally translate into higher earnings, profits, or both, which increases markets for goods and services that are not so easily automated or shifted abroad.

This time the negative effects might well balance, or even outweigh the positive effects though.

Wealth is not counted in GDP, only income is. I think one of the basic problems is inequality, which shifts money from low to high savers and removes incentives to invest in additional productive capacity. High saving countries export their problems to the rest of the world by exporting surplus savings and importing demand (these are flip sides of an accounting identity, as it happens).

Have to run now, but feel free to ask additional questions
Zoltan Kiss profile picture
Shareholders unite

I have always enjoyed your articles on any topics, even if I did not fully understand.
I saw the consistency of your arguments and in any specific discussions with the
commenter I found your side of the arguments more compelling.

I am not an economist. Also understand that all professions language is a conspiracy
against layman. At best I am a layman. Help me with some of my questions, just because there are no bad questions.

The first two of my many questions/answers.
The reason there is high unemployment, because there are no jobs. We have enough of our human necessities covered, food, shelter, clothing and all the new unnecessities, iPhone 5,6,7 etc are made by robots and due to the wealth distribution, fewer and fewer people can buy them. In the jobs that are created,
mostly service jobs, some of my engineer friends are flipping hamburgers at McDonald's, or are driving taxis.

Second question
Why should the 1% invest their money to create jobs, when you can only make
real money with money? As Forbes pointed out in one of their articles, the upper 100 billionaire in the US, increased their wealth by about 20% each year, creating more wealth in the last two years than the total GDP growth during the Obama years in the US. Than someone pointed out that wealth created by these 100 billionaires is not even counted in the GDP.

SU, I know you can say this has nothing to do with the topics you discussed.
But please you tell me. Your article and my perceived reality must intersect.How? Where?
Can you provide a link to the Forbes article? It puzzles me. It would seem the increase in wealth would count as income and be included in GDP, unless of course it was created outside the U.S.
The SNB did not buy euros in cash, they bought bonds, mainly German government bonds (and a lot of US and other assets). It was basically QE, sort of.
What they did not do is what the ECB intends to do, that is buying PIIGS-government bonds.
This did not help ECB policy, which intends to flatten yield spreads.
sleek profile picture
Shareholders Unite,

Thank you for another excellent article. Always informative and covers all the angles.

You write: "But QE has ended in the US..."

What has actually ended is QE asset purchases. QE is alive and well. The Fed looks at a stock model, not a flow model. And as long as their balance sheet remains expanded, QE is still in effect and monetary policy remains stimulative.

Furthermore, tapering was not really tapering as asset purchases fell in line with government deficits. Nor was it optional as this is what was required to maintain a constant level of debt assets in the economy. As the government issued less debt, less purchases were required to soak up that debt.
I would add to the ECB "choices" dropping austerity and their "structured reforms" which include reducing wages, including minimum wages, limiting the ability of unions to represent wage earners and reducing public benefits paid through the welfare state. It seems incredible that the ECB, along with its allies the EMS and EC, would proclaim their fight against deflation while continuing policies that reduce demand and increase inequality. All three entities have sought to make compliance with their "reforms" mandatory for democratic nations in the EMU.
At negative real interest rates for government bonds. It is financially irresponsible for any government not to lower taxes and replace the income by issuing more bonds.
This is simple accounting to maximize financial returns.
This is not advocating any change in government spending.
Negative real interest rates won't last, so a temporary decrease in taxes is appropriate. And, why not also have some timely temporary targeted increase in spending?
dieuwer profile picture
Eventually something will give. The Great Depression also ended after all.
David de los Ángeles Buendía profile picture
Hello dieuwer,

The Great Depression did indeed eventually end, with beginning of World War II. That is not a happy precedent.
Neil_Anderson profile picture
To David de los Angeles

Some of the economists of the WWII era believed the Great Depression would revisit the world after WWII when so many soldiers returned home after the war.

The boom following the end of WWII was a big surprise to economists, especially because it is hardly noticeable (today) in the records because the relaxing of price controls (somehow) muted practically all evidence of the immediate post-war boom. (I had to say "somehow" because I must admit being a little fuzzy on the details, but I remember that being the gist of an aticle on it, somewhere or other.)
Salmo trutta profile picture
The title is obviously wrong. And "unconventional policy" is right. It’s called intervention overkill.

(1) QE, under Bankrupt U Bernanke (who doesn't know the differences between money and liquid assets), destroyed the savings-investment process (where savings are matched with investments).

(2) QE redirected the traditional counterparty relationship that existed between the member banks and the non-bank public - allowing the PDs to take down a disproportionate volume of open market purchases, discouraging countercyclical short-term investment by the CBs, negating money creation, extinguishing the stimulus, and lengthening the duration, of the NB’s wholesale funding, which decreased the supply of loan-funds (acting to raise all interest rates)…

The long-standing error here is that the utilization of commercial bank credit to finance real-investment or gov't deficits doesn't constitute a utilization of savings since financing is accomplished by the creation of new money. QE bottled up existing savings within the commercial banking system - enlarging the output gap (potential gDp), as money stock growth was insufficient to offset the decline in NB lending/investing.

QE, under the payment of interest on excess reserve balances, was deflationary, as it inverted the short-end segment of the wholesale funding yield curve (i.e., it induced dis-intermediation for just the non-banks).

Congress was at fault too. The FDIC introduced unlimited transaction deposit insurance for the commercial banks - drawing savings out from all over the world (its expiration was the catalyst for 2013 markets). This reinforced the stoppage in the flow of savings through the non-banks. I.e., it vastly lowered the transactions velocity of funds (the circuit income velocity of savings).

The solution to slow growth is to get the CBs out of the savings business – to put savings to work.
MisterJ profile picture
That is my big concern right now that the CBs have largely given up the fight against deflation. Hence you get the unmitigated government bond rally across the globe. Smart money knows deflation is staying and buys bonds at negative yields.
Shareholders Unite profile picture
["That is my big concern right now that the CBs have largely given up the fight against deflation."]

Yes, that's my worry as well
Jeremy Robson profile picture
Another Keynesian arguing that there are no consequences to monetization. Dreadful thought process that is getting more and more attention as it is the easy way out.
Shareholders Unite profile picture
Where do I say that there are no consequences to monetization?

If you've actually read the article, you might have come across stuff like this:

["The unconventional monetary policies seem to suffer from greatly diminishing returns, unwanted side effects, and general exhaustion."]

Another accountant who is too lazy to read and might be clueless about macroeconomics..
Jeremy Robson profile picture
You are clearly arguing for direct monetization of debt or fiscal stimulus or both. Your last line of the article says 'or try to inject more direct means into the veins of the economy'. Do you think that there are no consequences to this or have you just not written about them in the article. I have not resorted to personal insults which you have which I find regrettable.
Shareholders Unite profile picture
Well, sorry for that and indeed I shouldn't have, but what I argue for (like most Keynesians, as it happens) is actually fiscal policy. Everything has consequences, but the positive ones far outweigh the negative ones IMHO:
- We know by now that CB purchases of even very large quantities of sovereign bonds aren't inflationary under the present economic conditions
- A fiscal injection, accompanied by central bank bond purchases can be MUCH smaller as QE is just about the most inefficient way to stimulate demand
- The opposite policy (austerity) has been an unmitigated disaster under the present conditions.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

Related Stocks

SymbolLast Price% Chg
Invesco CurrencyShares® Euro Currency Trust ETF
WisdomTree Japan Hedged Equity Fund ETF
iShares MSCI Japan ETF
ProShares UltraShort Euro ETF
Invesco CurrencyShares® Swiss Franc Trust ETF

Related Analysis

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.