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Rodney's Ramblings: Central Bankersí War

"When you also think of the rising national deficits and overall debt among most of the major nations of the world, let alone state and local government debt and unfunded liabilities around the globe, we are in for a long hard run before any of us regain stability and reasonable, sustainable rates of growth,'' writes Rodney Gascoyne.

I wrote about this subject 30 months ago in Bonzer magazine when this phenomena last reared its ugly head. If you read that version, you will see that there are now slightly different circumstances, although I believe much of the reasons for the actions are the same. http://pandora.nla.gov.au/pan/22764/20111206-1146/www.bonzer.org.au/index4c30.html?p=26047

The latest chaotic situation developing in the worldís financial markets seems to involve the main Central Bankers, as they battle it out against each other and their Governments. All of them claim they are independent, but more and more, their actions seem to be a substitute for inactivity or incapacity by their respective Governments on the fiscal front. Added to that, they seems to be participating in a free-for-all policy of protectionism and Beggar Thy Neighbour attitudes, started at the National level and supported through local media and legislatures.

In the US there is a political stalemate situation continuing, in the debt ceiling debate, over the Sequester and other coming battles in Congress, over how to expand the economy while trying to balance future deficits. The parties can agree on nothing and are at each other's throats, maybe more focused on future elections and power, than they are on the immediate problems of their nation. This does not bode well at all.

In Europe, they have problems with the Euro as well as the wider Union itself. During their ongoing sovereign debt crisis, it was clear there was little agreement by the nations as to how to act to handle the situation, and the EU and Eurozone, with support from the IMF, has only been able to offer a series of half hearted efforts and ideas to solve the problem, hoping to fool markets in the same way tried for some years, together with their lame attempts to run stress tests of the banks, to suggest they were sound. They donít yet realize they are not fooling anybody and the bond markets are only held at bay by vague promises of support by their Central Bank (ECB). They are not yet taking firm, enforced corrective fiscal measures, for all their nations, to any overall agreement or goals by all members. Into this void has stepped the ECB, trying to compensate for this fiscally insufficient activity, while buying up the bonds of the worse offending nations.

The actions taken by the central banks, having kept interest rates at near zero for years, the only other weapons they consider still available are those of Quantitative Easing (QE), even though everyone says this is a very ineffective tool in the circumstances. Many are currently continuing this failed policy even in the face of cumulative evidence that it is not working, except to print ever increasing amounts of their currencies, in a collateral attempt to lower the real value of debt they will eventually have to pay off.

They have or are all trying this again now: from Japanese serious attempts to buy bonds, aimed at lowering the value of the Yen; to the ECB continuing emergency funding for their banks and now buying national bonds of members to support their value; or, to the US and the UK talking and acting on another round or two, or indefinite versions of QE. Even bankers from emerging countries are intervening in the markets to lower the value of their currencies, for export advantage internationally or to negate counter actions by developed nations, or preventing excess funds from flowing into their economies, and possibly causing asset bubbles and local inflation.

As mentioned in an even earlier article in Bonzer, much of the QE is protectionist in nature, aimed at lowering their own currency at the expense of others, so hoping to increase the competitiveness of their exports, to fire up their own growth at the expense of other nations. These actions are hitting against each other, as shown by the dollarís recent rise, in answer to Japanís loss of yen value, in a determined effort by PM Abeís Government. He also intends to take control of Monetary Policy at the Bank of Japan, to further his future intent to manipulate the currency and real economic growth. This has completely negated the hoped for lowering of the dollar from multiple runs at QE by the Federal Reserve.

The Federal Reserve is now talking about indefinite QE, as a means of reversing this unhappy impact of the dollarís rise, partly caused because it is a flight to safely in times of uncertainty. Might this then cause the ECB and others to repurchase even more bonds when they need, to regain their own objectives? Its almost as if the banks are trying to fight with each other, hoping that the ones with the deepest pockets will win in the end, but at what cost to the world economy? At its worst, this could bring on trade wars between nations and economic groupings, as they each try to save their own economic bacon, mostly resulting from their own inability to act in the correct manner fiscally. Wasnít it this that caused the Great Depression in the 30s, when the US suffered far worse than other nations?

When you also think of the rising national deficits and overall debt among most of the major nations of the world, let alone state and local government debt and unfunded liabilities around the globe, we are in for a long hard run before any of us regain stability and reasonable, sustainable rates of growth.

Many commentators are warning of a protracted period of years before unemployment can return to more normal past levels. Against this background, real economic growth in the developed world will be held up for decades as we attempt to pay down what we owe, perhaps at ever increasing rates of interest.

The test for us all personally, will be finding ways to preserve the value of any assets we have, to allow us to carry on living at anything like the ease to which we have become accustomed. Good luck!

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