Finance Monthly. Bus i ne s s & Economy 19 Oops again… How did it go so wrong? The Global Financial Crisis of 2008 threatened a global depression. The problems were multiple – a dearth of bank lending (caused as much by draconian new capital regulations as risk aversion), economic slowdown, and incipient recession… Central banks were forced to act, and flooded the economy with liquidity in the hope it would stimulate growth. It didn’t. It created market bubbles. Investors quickly realised the easiest way to generate returns was to follow liquidity. Corporate managements figured out the best way to improve their bonuses was to inflate their companies’ stock price – not through carefully considered investment in new plants and products to improve productivity and profits, but by borrowing money in the bond markets to buy back their own stock. And that’s worked well…Not! All that money has now been lost by crashing markets, and they still have to repay the debt. Again… Oops… In Europe the 2012 sovereign debt crisis followed the banking crisis, triggering massive fears of imminent country defaults and the Greek debt crisis. The ECB did what it took and used monetary policy to advance billions to banks through Targets Long-Term Repos and other emergency measures… Very quickly banks and the market realised central bank liquidity was an arbitrage opportunity – if the Banks were buying bonds, buy more bonds to sell to them! As a result, nations like Italy saw the cost of their debt plunge, allowing some of the most heavily indebted nations to continue borrowing… Yet there is no guarantee, and never will be, that German taxpayers will ever agree to pay Italian pensions. As the German terror of hyperinflation is raised, and Europe suffers stagflation, it’s highly likely we will see new tensions across European debt arise. That’s why it’s a politician rather than a central banker running the ECB! Guess what… Oops… How did the Central Banks intend to undo the consequences of the distortion they created? Taper? Hah. We are passed that stage now. I guess we will never know how they planned to untie the knot they created... The good news is chaos spells opportunity for smart investors! Today? Central Banks are being assaulted on every front. Politicians are questioning their independence – blaming them for the effects of the sudden Ukraine War Energy and Food inflation spike. Bill Blain Strategist at Shard Capital
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