For more than a decade, central banks have been paying out billions of dollars / euros / pounds / yen etc. almost uncontrollably. just to keep the economy, in nautical terms, above the waterline.
The process began with the global financial crisis at the end of the first decade of the century and continued and deepened at the end of the second decade due to the COVID-19 pandemic. The US Federal Reserve Board, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank and dozens of smaller institutions generously bought bonds and stocks and lent to commercial banks at zero interest rates or even negative.
Some analysts have warned that this process could not go on indefinitely and, if it were not stopped in time, too many imbalances would build up in the economy and a crisis could ensue that would make the Great Depression seem like child’s play. Others, including bank representatives themselves, continued to reassure that the situation was under control and that the economy would be intelligently geared towards a “soft landing”.
But as is usually the case, talking and wishing is one thing, and reality is another.
Since last year, the world has been thrown from one crisis to another, due to its post-pandemic development and the desire to return to a certain normalcy, coupled with the distorted economic realities caused by too much “cheap money”. The straw that is about to break the camel’s back and even overturn it is the war Russia waged against Ukraine, adding to the problems an energy and food crisis.
When the future looked bright at the end of last year, the pandemic was taking over, the global economy had slowed but remained at acceptable levels, problems loomed but had not yet emerged, one central bank after another announced. that were starting to stop the so-called quantitative easing and move on to quantitative tightening. Put simply, buying stocks and bonds on the open market stops and goes into a sellout, combined with a rise in interest rates.
And then over the developed world loomed a forgotten specter that everyone rightly fears: inflation. Forgotten for several decades, this problem has not only complicated the situation, it has also put central banks in a situation of a kind of chess zugzwang: whatever they do, it will still be bad.
Most have chosen the belt-tightening route (the big exception being the Bank of Japan), but whatever they do now, their decades of generosity of “cheap money” are bound to backfire on themselves and the taxpayers.
Having drastically raised interest rates to combat rampant inflation, the UFR and its mostly European “colleagues” have had to make huge interest payments to commercial banks on the deposits that the same institutions have created through massive bond purchases and low-cost loans.
And this is happening at a time when millions of people are suffering from the skyrocketing cost of living and governments are again being forced to loosen the purse strings to avoid social upheaval. “The central bank continues to send money to the banks while we have to cut our spending,” said Lex Hoogdwin, professor of economics at the University of Groningen and former board member of the Dutch central bank, quoted by Reuters. “This is a purely political question.”
The cheap money boomerang is already flying. The question is who will hit: banks, governments or citizens, and how hard. Or, to put it another way, the task asks who will foot the bill for a decade of uncontrolled capital outflows.
And while requests to limit the payment of interest to banks on the one hand, they themselves complain that this is not fair, since it was this sector that suffered the greatest burden of the decade of low interest rates.
Michiel Hoogeven, a member of the European Parliament’s economic committee, which oversees the ECB, is among those who believe credit institutions should take the hit. “If taxpayers end up footing the bill, it will be grossly unfair,” he says.
In Britain, there are also demands on the Bank of England to cut interest rates on commercial bank reserves to save £ 30- £ 45bn in each of the next two fiscal years. According to the calculations of “Morgan Stanley” (Morgan Stanley) a percentage increase in interest rates reduces the revenue of the Ministry of Finance by 10 billion pounds per year.
The US Treasury shouldn’t worry about bailing out the UFR, which could simply postpone any losses. But he may be short of the roughly $ 50-100 billion he receives from the central bank each year since the financial crisis. “The UFR will not fail financially, but it could collapse politically,” said Derek Tang, an economist at research firm LH Meyer, quoted by Reuters.
The issue is particularly painful for the ECB, which now has to decide what to do with interest rates and its payments after decades of lending money to commercial banks at negative rates.
They are now well on their way to making a huge, guaranteed profit simply by returning that money to the central bank, earning an annual interest rate of 0.75%, which is likely to double this week and is expected to rise to 3% next year.
Such a move would put commercial banks between 31 and 35 billion euros if the deposit rate reaches between 2.5 and 4.5 percent in the coming months, estimates Eric Dorr, director of economic research at the IESEG business school. Paris.
According to “Morgan Stanley”, with such a development, the central banks of the Eurozone would suffer losses of around 40 billion euros in the next year alone. Ironically, the central banks of the most fiscally cautious countries – the Netherlands, Germany and, to a lesser extent, Belgium – will be most affected because they hold the largest share of the bank deposits and bonds they bought on behalf of the ECB., With zero or negative yield.
Whatever the ECB decides later today, the bank has already fallen into its own trap and the cheap money boomerang is rapidly heading for the Frankfurt office. It can divert it – to governments or citizens, but in both cases only one thing is certain – the crisis will only deepen and 2023 will be much more difficult than 2022. Because cheap money always turns out to be expensive.
