2023 Author: Seth Attwood | [email protected]. Last modified: 2023-05-24 11:30
How world central banks are turning into giant financial holdings.
After the financial crisis of 2007-2009. the world has entered a new phase of its development. This is especially evident when you begin to delve into the life of central banks. These institutions, as their name suggests, are the hubs of the banking world. But before our eyes they are becoming the centers of the entire economic life of society. And tomorrow they can become the centers of the entire life of mankind.
At the dawn of capitalism, central banks emerged as centers of issue. They received the right to issue national money, i.e. to supply the economy with "blood". Then they gradually began to scoop up other vital functions. They began to control all private (commercial) banks, having received the status of banking regulators. Appetite comes with eating; in a number of countries, central banks began to control the entire financial sector of the economy, turning into financial mega-regulators. For example, in Russia a few years ago, the Central Bank received the powers of a financial regulator, putting under its control the stock market, insurance business, auditors' activities, etc. And that's not all. Central banks are called lenders of last resort. They not only supervise the banks, but also save them with the help of loans issued. We are constantly being told about competition and the market, but it turns out that everything is different in the world of banks: if an uncompetitive but very “necessary” bank starts to “sink,” the central bank throws it a “lifebuoy” in the form of a loan.
Modern central banks have become the saviors of not only "necessary" commercial banks. They save entire states. How? By lending money to "non-competitive" states. More specifically: covering government budget deficits by purchasing debt securities of governments (treasuries). Already in our century, the US federal budget deficits in some years reached one trillion dollars and a good half of this "hole" was closed by the US Federal Reserve System (Central Bank of America) by purchasing treasury securities. This rescue function of central banks is also responsible for the well-being in other so-called "economically developed" Western countries. The US Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, and the National Bank of Switzerland are the "backers" of the capitalist prosperity of the West. I name the most important central banks. However, the central banks of peripheral capitalism also “support” the welfare of Western civilization by buying debt securities of the treasuries of the USA, Great Britain, Germany, France, Japan, etc. These “peripheral” central banks form the second tier of the world central banking system (MSC).
The MSC is coordinated and managed from the Bank for International Settlements (BIS), created back in 1930; its headquarters are in Zurich. The BIS is also called the "club of central banks". I believe that the influence and “weight” of this “club” is no less than that of the well-known Bilderberg Club. However, these two clubs do not duplicate each other, do not compete, they complement each other, each has its own "niche". They are backed by the same “beneficiaries of last resort”.
Let's go back to our times (a decade after the start of the global financial crisis). The main innovation in the activities of leading central banks is a sharp increase in assets, mainly due to the purchase of debt securities on the market. This activity was formalized in the form of so-called "quantitative easing" programs. Let me remind you that when the central banks were created, their apologists put forward the following argument in favor of transferring the emission function from the treasuries to the central banks: the Central Bank, having an "independent" status, unlike the state treasuries (ministries of finance), will not abuse the "printing press"; and the Treasury, having lost the "printing press",will live within their means, avoiding state budget deficits. In the current decade, this argument in favor of central banks (which until recently was reproduced in textbooks) has been completely forgotten. The "independent" central banks turned on the "printing presses" at full capacity.
It is believed that the first to turn on the "printing press" is the Federal Reserve. This happened in 2008. Let me remind you that before the financial crisis, back in 2007, the assets of the Federal Reserve were at the level of 0.7-0.8 trillion. In the United States, there were three “quantitative easing” (QE) programs, the third was completed in October 2014. By this time, the Federal Reserve had increased its assets to 4.5 trillion. dollars, i.e. increasing them by 5-6 times in comparison with the pre-crisis level. For several years, the Federal Reserve has worked like a vacuum cleaner, sucking in two types of debt securities - treasury and mortgage. Moreover, the latter were often "trash". In this way, the US Central Bank tried to "sanitize" the American economy and create conditions for its revival.
The European Central Bank (ECB) took over the baton of "quantitative easing" overseas. From March 2015 to May of this year, the ECB bought bonds for 1.5 trillion. Euro. Especially without advertising, the central banks of Great Britain, Japan and Switzerland were also actively engaged in "quantitative easing". Particular attention should be paid to the Bank of Japan, which, without too much hype, began to increase its assets since the early 1990s, thus trying to revive the national economy. Japan is a kind of testing ground for financial capital.
At the beginning of this summer, analysts at Bank of America published a number of figures showing the greatly increased scale of activity of the "great five" central banks (the US Federal Reserve, the ECB, the Bank of England, the Bank of Japan and the National Bank of Switzerland). For the period 2011-2016 they managed to grow their assets by $ 7 trillion. In the first four months of this year, the increase amounted to another 1 trillion. dollars. At the end of the first quarter of 2017, the total assets of the "great five" were equal to $ 14.7 trillion. dollars. But even on the eve of the financial crisis in 2006-2007. this figure will be slightly higher than 3.5 trillion. dollars. Over a decade with a little more than a fourfold increase in assets! And this is against the background of global economic stagnation, which has not yet been overcome. In relation to GDP, the assets of individual Central Banks in 2007 were as follows (in percent): US Federal Reserve - 5, 8; ECB - 9, 9; Bank of Japan - 16, 3; Bank of England - 4, 4. And today the assets of the Fed and the ECB are at the level of a quarter of GDP, the Bank of England - almost 23% of GDP, and the Bank of Japan - almost 60% of GDP.
The mentioned "five" central banks really stand out against the background of all the central banks of the world. According to the Bloomberg agency, the total assets of the ten leading central banks of the world in 2016 amounted to 21.4 trillion. dollars. Here is how they were ranked by assets (trillion dollars): People's Bank of China - 5.0; US Federal Reserve - 4, 5; Bank of Japan - 4, 4; ECB - 3, 9. They are followed by the "second echelon", which includes six central banks: Switzerland, Great Britain, Brazil, Saudi Arabia, India and the Russian Federation. Together, their assets are equal to 3.6 trillion. dollars. The remaining 107 central banks of the world have assets on their balance sheets, equal to another 3.1 trillion. Doll.
According to the latest data, at the end of May 2017, the growth of assets of the "great five" has already amounted to 1.5 trillion. dollars per year, according to expert estimates, the growth in 2017 may amount to 3.6 trillion. This has not happened before. The record year was 2011, when the growth amounted to 2 trillion. Doll.
For the third year in a row, the US Federal Reserve's assets have not grown, since the KS program was stopped. And the programs of the ECB's Constitutional Court and the Bank of Japan continue to work. According to the latest data from the Bloomberg agency, the ECB and the Bank of Japan on a sharp turn managed to bypass the Fed in terms of absolute assets. At the beginning of May, the Fed's assets were equal to 4.47 trillion. dollars exactly the same was the indicator of the Bank of Japan, and the ECB it was 4, 60 trillion. Doll. Over the past month, the Bank of Japan has still increased its assets, so it can be assumed that the distribution in terms of assets at the beginning of the summer will be as follows: first place - the People's Bank of China; the second is the ECB; the third is the Bank of Japan; the fourth is the US Federal Reserve.
In the near future, the difference between the quantitative indicators of the balance sheets of the ECB and the FRS will increase even more: by the end of 2017, the ECB, as part of the ongoing LTRO (Long Term Refinancing Operation) program, will buy back assets for another 455 billion euros (512 billion dollars). The Bank of Japan also continues to pursue its own quantitative easing program, buying up $ 80 trillion in securities. yen per year (approximately $ 720 billion).
Many economists, businessmen and politicians are confused and even frightened by the shock rates of growth of assets of central banks and their astronomical scale. For different reasons. One of them is a sharp increase in the amount of money coming into the economy from central banks. Overproduction of any commodity leads to a fall in the price of it. It's the same with money: overproduction makes money cheap and even free. In the world of money, this manifests itself in the form of a decrease in the lending rate. More specifically, in the form of a decrease in interest rates on loans, bank deposits, and securities.
Interest rates not only tend to zero, they go into the "minus". And the main role in this belongs to central banks. They themselves begin to set an example of how you can go into the "minus". The ECB has been holding the deposit rate at minus 0.4% for the second year already. Since this year, the Bank of Japan has set a negative rate on deposits (minus 0.1%). Last year, the Federal Reserve discussed the option of introducing a negative interest rate in the event of a worsening economic situation in the country. So far nothing has happened. But this plan "B" is always at hand for the Federal Reserve.
And the assets of central banks are not only "littered" (for example, contain low-quality mortgage securities), but also unprofitable. Because central banks buy government debt with negative yields. Today, this is especially true for debt securities of the EU member states purchased by the ECB. What is a central bank, the financial result of which will be with a minus sign (ie loss), still very few people understand. However, the Central Bank's losses are not a hypothesis, but a "medical fact" that has already been recorded by the Bank of Japan (though not on an annual basis, but only on a monthly and quarterly basis).
Central bankers are trying to convince everyone that "quantitative easing" is a temporary measure, that over time they will begin to sell the securities accumulated in their assets. And how central banks can get rid of "junk" ("toxic") papers in the future, no one really knows. Indeed, on the balance sheet of the Central Bank, they are accounted for at par, and they will have to be sold at a market price below par, which will create losses. On the balance sheet of the Fed, for example, of the total assets of 4.5 trillion. dollars on mortgage securities account for 1, 8 trillion. Doll.
In the meantime, we observe that central banks are more and more inflating their assets. And here we see the transition of the economic expansion of central banks to a new quality. Once central banks were engaged in lending to commercial banks, this was their main occupation. Currently, they are busy buying government debt securities. And tomorrow their main activity may be the purchase of corporate securities - both bonds and shares. Even yesterday it was impossible to even imagine such a thing. It was sedition, heresy - from the point of view of the canons of liberal economic science. And today this heresy is not only voiced, but also implemented in practice.
Over the past year, the ECB has been buying up corporate bonds along with government debt securities; in May, the ECB's portfolio of such securities exceeded $ 100 billion. year. The Corporate Sector Purchase Program (CSPP) is an integral part of the ECB's quantitative easing program. CSPP started on June 8, 2016 and will continue. The ECB portfolio contains securities of such European companies as Deutsche Bahn, Telefonica, BMW, Daimler, ENI, Orange, Air Liquide, Engie, Iberdrola, Total, Enel, etc. It is noteworthy that among the corporate bonds purchased by the ECB, there are securities with negative returns. This is the open direct support of the giants of the European economy by the Central Bank.
And if the ECB is still a newcomer to the corporate securities market, then there is a central bank that can be called a “veteran”. This is the Bank of Japan. He has been buying not only corporate bonds for a long time, but also shares of Japanese companies. The Bank of Japan is listed among the five leading investors (shareholders) of more than eighty largest companies in the country. He is expected to become a major shareholder in at least 55 companies on this list in the near future. The National Bank of Switzerland also buys shares of the companies without much advertising. The ECB leaders have already made a statement several times about their plans to expand their investment portfolio at the expense of shares of European companies.
I think these are the "first signs" signaling to us that central banks will move to a new quality. They will not only be "issuers", "lenders of last resort", "financial regulators" and "mega-regulators". They will become financial holding companies that will take control of the entire economy (or rather, their own shareholders and invisible “beneficiaries”). This is no longer a "market", it is no longer "capitalism" (all the more so since interest and profit will order a long life). Central banks, unknowingly, are digging the grave of capitalism. The classics were right when they said that capitalism would inevitably die. But they were wrong when they declared that the proletariat would become the gravedigger of capitalism. The central banks will be the gravedigger.