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Federal Reserve and Co. are preparing to change course: No more debt

2021-08-22T20:10:32.531Z


The world economy is facing a troubled phase. Because the Federal Reserve is preparing for a change of course - and other central banks are likely to follow suit.


Enlarge image

The US Federal Reserve in Washington (archive picture) wants to stop buying up US government bonds

Photo: MARK WILSON / AFP

In the middle of last week, the US Federal Reserve published the minutes of its monetary policy meeting at the end of July.

Packaged in all sorts of technical discussions, it says on page 5:

“Most participants noted that, provided the economy continues to perform as expected, it might be appropriate to slow down the pace of asset purchases this year (...) Some participants commented that economic and financial conditions are likely to have a Make reduction necessary.

However, several others indicated that slowing down the pace of security purchases would be more appropriate early next year. "

In plain language: The Fed wants to stop buying up US government bonds.

There is broad agreement on this in the Board of Governors.

It's just a matter of when to start getting out.

It's not really surprising.

Shortly before the minutes were published, some Fed governors had already made very similar statements.

Eric Rosengren, head of the Boston central bank district, was a little more precise in an interview with the Financial Times: He was in favor of gradually reducing the purchase volume from this fall and ending the program entirely next summer.

And yet, the protocol now makes it more or less official: a majority on the Fed's governing body is in favor of an exit from bond purchases, and soon.

Entry into the exit

The rationale is obvious: US inflation threatens to solidify; recently consumer prices rose at a rate of 5.4 percent. The macroeconomic problem is shifting from the demand to the supply side. What is lacking is not the willingness of citizens and companies to buy. Primary products, materials and labor are scarce - production bottlenecks that a central bank cannot change. (We have already discussed this several times at this point.)

Other central banks are likely to follow the Fed's U-turn. The Bank of England has already announced a corresponding approach. The European Central Bank (ECB) is still keeping a low profile. This year's central bankers' meeting in Jackson Hole promises to be correspondingly interesting. In the vacation spot in the US state of Wyoming,

all kinds of money experts will come together

from

Thursday

. Fed Chairman Jerome Powell will give a speech in which he could reveal details about tapering bond purchases. Round tables and lectures could provide further insights into the plans of other central banks.

It is a delicate maneuver: since the financial crisis of 2008, the central banks on both sides of the Atlantic have bought up gigantic amounts of national debt in several batches.

Shutting down these programs and then reversing them will be difficult - to say the least.

Because politics and business have got used to the extremely favorable financing conditions that the central banks have conjured up for them.

Relaxation exercises - with subsequent tension

The bare figures are impressive enough: government bonds worth a total of more than eight trillion dollars are on the books of the major western central banks, as can be read from the debt database of the International Monetary Fund (IMF). And the sum is still increasing. The Fed is buying up $ 120 billion every month; the European Central Bank (ECB) bought government bonds worth 25 billion euros last week alone. According to the IMF statistics, almost a fifth of the public debt of the USA and the euro countries is now with the monetary authorities; in Japan and Great Britain it is even more than a third.

There is a strange development behind the numbers.

In the past, states financed their deficits by convincing savers to buy government bonds.

But things have been different for years.

Central banks access the financial markets on a large scale and pay with freshly created dollars, euros, pounds or yen (»quantitative easing«).

With these quantitative easing exercises, they bring money into circulation, which is supposed to support the economy in times of crisis, when the commercial banks are again reluctant to lend money.

In addition, they lower long-term interest rates by buying bonds, which is particularly important when short-term interest rates are already at zero and the central banks otherwise run out of instruments.

What's the problem?

In the quantitative easing business

One of its core tasks is to ensure that a central bank stabilizes the financial markets during an acute crisis.

That was the case in 2008 during the financial crisis - it was last year when the Covid shock stuck citizens and bankers in the bones.

It goes without saying that billions will have to be spent on this. Once the crisis is over, it will sell the securities on the market again.

Everything is as before.

What sounds great and plausible in theory is different in reality.

Quantitative easing has long since ceased to be a temporary crisis intervention - not an "unconventional measure" as the central banks once called the bond purchases - but has long been part of the standard repertoire of monetary policy. No central bank buys up securities as radically as the Japanese. Under its former boss Janet Yellen, now US Treasury Secretary, the Fed managed to temporarily shrink its securities portfolios. Then Corona came and ruined all efforts.

As the graph shows, the values ​​on the books of the central banks have grown steadily. Every further crisis provided arguments for renewed and even larger interventions. The Bank of England tried to calm the markets after the Brexit referendum. Every new Sars-CoV2 variant creates uncertainty and justifies further bond purchases. In the eurozone, too, where the Germans in particular have been hesitant for a long time for reasons of principle, the ECB has been boldly in the quantitative easing business since the beginning of 2015.

It has become something of a

Jackson Hole consensus

emerged: an agreement of the International of central bankers that they buy up sovereign debt in periods of economic weakness

have

- virtually all central banks of the Western states and many emerging markets do so.

Does this year's get-together in the mountains of Wyoming mark a turnaround?

Forget the "new normal"!

In view of the gigantic sums that central banks have accumulated over the past decade, a reduction in debt levels is practically impossible.

Should the central banks begin to throw bonds on the market on a large scale, this would lead to enormous upheavals.

But: A lot would be gained if the states got out of routine bond purchases - and understood quantitative easing again as a short-term crisis measure, not as an expression of a “new normal”.

Because the framework conditions have actually changed: inflation is back.

In the past, central banks could pump virtually unlimited liquidity into the markets without prices rising.

An infinitely flexible global supply was able to service virtually any expansion in demand.

It's over.

Consumer prices are currently rising rapidly, also in the euro zone.

However, producer prices are rising even more strongly - which in turn carries the seeds of future consumer price inflation.

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For economic policy, the signs are reversed.

In the past decade, states have been able to spend money relatively unchecked because the central banks' bond purchase programs have kept interest rates low.

If there were not enough buyers for the state promissory notes, the monetary authorities stepped in as creditors of the last resort and bought even more papers than usual.

Without the help of the Fed, for example, Joe Biden's course of uncompromising expansion of the state zone in the USA would hardly be financially viable. In 2020, the budget deficit in the US budget was $ 3.2 trillion. The Fed bought around two thirds of this sum on the markets. In the current year, the national deficit is likely to be $ 2.3 trillion - an impressive 10.3 percent of US economic output. And the Fed is still buying paper worth almost two-thirds of this deficit. If the central bank now wants to reduce its purchases to zero by next summer, as the Boston Fed chair Rosengren mentioned at the beginning, then it may come to a purchase volume of around half a trillion dollars in 2022. That would still be almost half the amountwhich the Congressional Budget Office predicts as net new debt for the coming year. After that, the US government would have to finance itself in the traditional way.

Even more serious: the states' budget leeway is additionally limited if interest rates rise.

The risks for public finances are immense, as the Bank for International Settlements (BIS) recently calculated.

In the large developed countries, 15 to 45 percent of national debt is now “effectively due overnight,” a consequence of the quantitative easing programs, according to the BIS.

In other words: rising interest rates have a direct impact on national budgets because the necessary follow-up financing is becoming more expensive.

For some highly indebted states, things could get tight under these conditions.

What if things go wrong?

Then the central banks will help with new securities purchases.

As I said: every crisis provides arguments for renewed and even larger interventions.

The most important business dates of the week ahead

Open assembly area

Brussels -

European economy

- New insights into the mood among purchasing managers in the Eurozone.

Expand Tuesday area

Wiesbaden -

Germany-Detail

- The Federal Statistical Office publishes details on the development of the gross domestic product in the second quarter of 2021.

Expand Wednesday area

Munich -

German economy

- News from the business climate of companies: The Ifo Institute presents the results of its current survey.

Cologne -

games, trade fair, online

- Gamescom begins (online).

Expand Thursday area

Jackson Hole -

The Dropouts

- Federal Bankers Conference in Jackson Hole (US state Wyoming).

Until Saturday.

Nuremberg -

German mood

- consumer climate in late summer: GfK presents its new study.

Open area Friday

Berlin -

Deep in the South

-

"Compact with Africa" ​​economic summit, which deals with German-African economic relations.

Also there: Merkel and representatives from a dozen African countries.

Source: spiegel

All business articles on 2021-08-22

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