Are Banks Running Out Of Options
By dodjit.com
What happens when central banks can’t control an economic slowdown using conventional methods?
Since the start of the economic crisis in 2007, more and more people have become familiar with economic terms. Once used only by market participants, now the average Joe knows words like; economic growth, inflation, stimulus plans. Furthermore, due to the current extreme levels in the markets, economic news has caught the center of attention, as viewers now observe on a day to day basis official’s policies, hoping for a brighter future.
For already a few months, citizens became accustomed to a situation whereas economic contraction has been immediately confronted with interest rate cuts. Central banks have pulled out their guns, fighting the slowdown over the last year with monetary easing, hoping that the economy would rebound and present healthy growth.
One by one, central banks confronted the markets with conventional methods finding themselves at a point of no return. By taking a glance at the chart below one can see that a majority of the central banks have now reached a situation whereas further easing will probably be completely pointless. Even though banks, like the Bank of England or the Bank of Canada still have another 50 basis, many are questions whether another rate cut will really help the economy. After numerous rate cuts since 2007, is one or two rate cuts really going be enough to do the trick?
Last week, three out of four central banks reduced their central rate, giving the same familiar statement. This time round Trichet, known for his smooth approach, mentioned in his minutes, following the interest rate decision, that further rate cuts could be realized to help stabilize the situation.
Despite recent encouraging words from Ben Bernanke, stating that the global economies could see a turnaround towards the end of the year, stimulus packages and other recent efforts have failed to restore confidence in the markets. The Bank of England grabbed the focus of attention last week among the major banks as they took the next step, announcing that they are ready to purchase billions of Gilts and private-sector bonds. With a central bank rate of only 0.5% and confidence down the drain, the BOE is hoping that lower yields will present a non-attractive environment for bonds, while easing the credit market. By purchasing Gilts and bonds of the private sector, the BOE is aiming to help the economy by releasing the money flow throughout the economy.
“Quantitative easing” – A new buzz word
A situation where a central bank reduces its interest rate to near zero, while flooding the market with money (increasing the money supply), to encourage private lending.
The Bank of Japan carried out quantitative easing for a 5 year period to try to stimulate their economy. From 2001 to 2006 the BOJ purchased trillions of Yen worth financial securities as they tried to flood the markets with excess liquidity. This policy, which took over 5 years, finally paid off as inflation levels in Japan began to rise while more money became available for borrowers.
The recent statement will make the Band of England the first European central bank to engage in this practice, so far only used by the Federal Reserve and the Bank of Japan.
Ok so where’s the problem, more money in the market means more spending no? Wrong!
Even though government officials are flooding the markets with money sending LIBOR rates (the rates at which banks borrow and lend to each other) down to new lows, those same commercial banks are cutting back, keeping the money locked up, unwilling to extend credit.
With liquidity still under abnormal conditions, consumers are reluctant to spend the remaining money they have, while businesses would rather cut back on operations. Both these factors are forcing the various economies into a dire situation. According to the excess reserves of Depository institutions in the U.S, holdings jumped rapidly during 2008 now showing a figure of approximately 798 billion of Dollars. This figure shows that despite government’s efforts, pumping excess money into the system, banks in the U.S are still reluctant to return to their normal activity.
Even though Quantitative Easing might be one way to deal with the current situation, one has to remember that flooding the markets with additional money will have various consequences, especially as the major holders of that capital are still reluctant to release it out.
With BOE providing more money and Commercial banks unwilling to return to their normal lending conditions, how do you think the pound will hold up? Especially as:
1) Investors are valuing the Dollar as a safe haven
2) Consumer consumption in the U.K is unable to return to a normal state, allowing the BOE to increase their interest rate, making their currency more appealing.
courtesy of stockcharts.com
Information reliability and liability: The contents are solely aimed for the use of "Experienced" investors in the financial markets who are fully aware of the inherent risk of trading. Dodjit does not accept any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in our trading recommendations. I make no warranties or representations in relation to the Information (including, without limitation, in relation to its accuracy or otherwise) and do not warrant or represent that the services will be error free or uninterrupted. Copyright: This article is subject to and protected by the international copyright laws. Use of the information brought in this article is subject to making fair use only in accordance with these laws. It is not permitted to copy, change, distribute, or make commercial use of the information except with permission of the holders of the copyright. Risk Disclosure: The risk of losses involved in the transaction or speculations in the financial markets can be considerable. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. Speculate only with funds that you can afford to lose.
By dodjit.com
What happens when central banks can’t control an economic slowdown using conventional methods?
Since the start of the economic crisis in 2007, more and more people have become familiar with economic terms. Once used only by market participants, now the average Joe knows words like; economic growth, inflation, stimulus plans. Furthermore, due to the current extreme levels in the markets, economic news has caught the center of attention, as viewers now observe on a day to day basis official’s policies, hoping for a brighter future.
For already a few months, citizens became accustomed to a situation whereas economic contraction has been immediately confronted with interest rate cuts. Central banks have pulled out their guns, fighting the slowdown over the last year with monetary easing, hoping that the economy would rebound and present healthy growth.
One by one, central banks confronted the markets with conventional methods finding themselves at a point of no return. By taking a glance at the chart below one can see that a majority of the central banks have now reached a situation whereas further easing will probably be completely pointless. Even though banks, like the Bank of England or the Bank of Canada still have another 50 basis, many are questions whether another rate cut will really help the economy. After numerous rate cuts since 2007, is one or two rate cuts really going be enough to do the trick?
Last week, three out of four central banks reduced their central rate, giving the same familiar statement. This time round Trichet, known for his smooth approach, mentioned in his minutes, following the interest rate decision, that further rate cuts could be realized to help stabilize the situation.
Despite recent encouraging words from Ben Bernanke, stating that the global economies could see a turnaround towards the end of the year, stimulus packages and other recent efforts have failed to restore confidence in the markets. The Bank of England grabbed the focus of attention last week among the major banks as they took the next step, announcing that they are ready to purchase billions of Gilts and private-sector bonds. With a central bank rate of only 0.5% and confidence down the drain, the BOE is hoping that lower yields will present a non-attractive environment for bonds, while easing the credit market. By purchasing Gilts and bonds of the private sector, the BOE is aiming to help the economy by releasing the money flow throughout the economy.
“Quantitative easing” – A new buzz word
A situation where a central bank reduces its interest rate to near zero, while flooding the market with money (increasing the money supply), to encourage private lending.
The Bank of Japan carried out quantitative easing for a 5 year period to try to stimulate their economy. From 2001 to 2006 the BOJ purchased trillions of Yen worth financial securities as they tried to flood the markets with excess liquidity. This policy, which took over 5 years, finally paid off as inflation levels in Japan began to rise while more money became available for borrowers.
The recent statement will make the Band of England the first European central bank to engage in this practice, so far only used by the Federal Reserve and the Bank of Japan.
Ok so where’s the problem, more money in the market means more spending no? Wrong!
Even though government officials are flooding the markets with money sending LIBOR rates (the rates at which banks borrow and lend to each other) down to new lows, those same commercial banks are cutting back, keeping the money locked up, unwilling to extend credit.
With liquidity still under abnormal conditions, consumers are reluctant to spend the remaining money they have, while businesses would rather cut back on operations. Both these factors are forcing the various economies into a dire situation. According to the excess reserves of Depository institutions in the U.S, holdings jumped rapidly during 2008 now showing a figure of approximately 798 billion of Dollars. This figure shows that despite government’s efforts, pumping excess money into the system, banks in the U.S are still reluctant to return to their normal activity.
Even though Quantitative Easing might be one way to deal with the current situation, one has to remember that flooding the markets with additional money will have various consequences, especially as the major holders of that capital are still reluctant to release it out.
With BOE providing more money and Commercial banks unwilling to return to their normal lending conditions, how do you think the pound will hold up? Especially as:
1) Investors are valuing the Dollar as a safe haven
2) Consumer consumption in the U.K is unable to return to a normal state, allowing the BOE to increase their interest rate, making their currency more appealing.
courtesy of stockcharts.com
Information reliability and liability: The contents are solely aimed for the use of "Experienced" investors in the financial markets who are fully aware of the inherent risk of trading. Dodjit does not accept any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in our trading recommendations. I make no warranties or representations in relation to the Information (including, without limitation, in relation to its accuracy or otherwise) and do not warrant or represent that the services will be error free or uninterrupted. Copyright: This article is subject to and protected by the international copyright laws. Use of the information brought in this article is subject to making fair use only in accordance with these laws. It is not permitted to copy, change, distribute, or make commercial use of the information except with permission of the holders of the copyright. Risk Disclosure: The risk of losses involved in the transaction or speculations in the financial markets can be considerable. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. Speculate only with funds that you can afford to lose.
ahh farewell to happy dreams of 100% returns 
