Musburger1
2,500+ Posts
Bill Gross addressed the credit aspect of the equation in this article on zerohedge today.
http://www.zerohedge.com/news/2016-...hat-happens-when-financial-system-breaks-down
When investable assets pose too much risk for too little return. Not immediately, but at the margin, low/negative yielding credit is exchanged for figurative and sometimes literal gold or cash in a mattress. When it does, the system delevers as cash at the core, or real assets like gold at the risk exterior, become the more desirable assets. Central banks can create bank reserves, but banks are not necessarily obliged to lend it if there is too much risk for too little return. The secular fertilization of credit creation may cease to work its wonders at the zero bound, if such conditions persist.
He follows up with 4 more mini Q&As, as follows:
Can capitalism function efficiently at the zero bound?
No. Low interest rates may raise asset prices, but they destroy savings and liability based business models in the process. Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits. Central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates.
Can $180 billion of monthly quantitative easing by the ECB, BOJ, and the BOE keep on going? How might it end?
Yes, it can, although the supply of high quality assets eventually shrinks and causes significant technical problems involving repo, and of course negative interest rates. Remarkably, central banks rebate almost all interest payments to their respective treasuries, creating a situation of money for nothing — issuing debt for free. Central bank "promises" of eventually selling the debt back into the private market are just that — promises/promises that can never be kept. The ultimate end for QE is a maturity extension or perpetual rolling of debt. The Fed is doing that now but the BOJ will be the petri dish example for others to follow, if/ when they extend maturities to perhaps 50 years.
http://www.zerohedge.com/news/2016-...hat-happens-when-financial-system-breaks-down
When investable assets pose too much risk for too little return. Not immediately, but at the margin, low/negative yielding credit is exchanged for figurative and sometimes literal gold or cash in a mattress. When it does, the system delevers as cash at the core, or real assets like gold at the risk exterior, become the more desirable assets. Central banks can create bank reserves, but banks are not necessarily obliged to lend it if there is too much risk for too little return. The secular fertilization of credit creation may cease to work its wonders at the zero bound, if such conditions persist.
He follows up with 4 more mini Q&As, as follows:
Can capitalism function efficiently at the zero bound?
No. Low interest rates may raise asset prices, but they destroy savings and liability based business models in the process. Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits. Central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates.
Can $180 billion of monthly quantitative easing by the ECB, BOJ, and the BOE keep on going? How might it end?
Yes, it can, although the supply of high quality assets eventually shrinks and causes significant technical problems involving repo, and of course negative interest rates. Remarkably, central banks rebate almost all interest payments to their respective treasuries, creating a situation of money for nothing — issuing debt for free. Central bank "promises" of eventually selling the debt back into the private market are just that — promises/promises that can never be kept. The ultimate end for QE is a maturity extension or perpetual rolling of debt. The Fed is doing that now but the BOJ will be the petri dish example for others to follow, if/ when they extend maturities to perhaps 50 years.
