Central Banks are Back - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 4 May 2013
Central Banks are Back A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
This was a week in which central banks made headlines around the globe for taking concrete action to improve the economic situation. The RBI cut interest rates in a bid to boost India's falling growth rate. The ECB cut interest rates in Europe in order to prevent further recession from taking place, and hopefully ease the debt crisis.

Furthermore, the US Fed announced plans to continue quantitative easing for the foreseeable future until economic conditions improve. This is on top of the large monetary stimulus announced by the Bank of Japan a few weeks ago. Central banks around the world are pursuing increased monetary stimulus in order to boost the economy.

But will these actions lead to improved economic outcomes? Or will monetary stimulus make things even worse? Many people have strong opinions on one side or the other, and hence the central bank's actions are heavily scrutinized. The true answer to this question is that we don't really know. We have to wait and see how it all works out.

The purpose of increased monetary stimulus is to encourage borrowing and investment, through lower interest rates. The cost of monetary stimulus is potentially higher inflation, because there is more money in the economic system. To evaluate how effective monetary stimulus is, we should simply look at the evidence so far.

In terms of inflation, higher monetary stimulus hasn't increased inflation over the last few years. In fact, inflation rates have fallen or remained stable for most countries, even as interest rates went down. Much of the criticism of monetary stimulus is a result of the possibility of very high inflation, but this just has not materialized.

The benefits of monetary stimulus include encouraging borrowing and investment. Unfortunately, it is quite unclear whether it has helped. Economic outcomes have generally remained weak despite monetary stimulus. Growth in many countries remains modest. The most likely explanation is that monetary stimulus may help a small amount, but we need something more to have real economic prosperity.

Central banks were very active a few years ago at the height of the crisis, and in the last year have been less active in cutting rates and pursuing monetary stimulus. Now it appears they are back with new interest rate cuts and actions to improve the economy. The recent evidence suggests that it though inflationary costs are low, monetary stimulus is unlikely to create significant benefit.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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3 Responses to "Central Banks are Back"

Raghavan Sathyan

May 5, 2013

So realistic VIEW!What to say more!!!


santosh arora

May 5, 2013

it is true that intrest rates must be kept low for the development of infrsture & general growth long term projects must be converted into small project for gaining the benefit stage by stage developments.
the most impotment thing that the senior citzen must be given higher intrest rate or retirement age to be increased so they can work longer
there should be jobs allocation & reserved for this age group. this has been ignored by the state govt as well center in delhi
lately finance minister has given the value of NRI investment but he forgot the local banks cocal companies state govt cheat them as they feel like & no action against the staff, officers & MD MD is there to collect the fat salary only. MD is just a dummy & acts on the recommandation of lower staff.
two cases
1.santosh arora of australia a nri invested 18 years back in cidco mumbai & paid cost of the flat in usd 110,000.00. if he does not pay in time then the panalty will be 23.50% intrest. till date cidco has failed to hand over the project. cidco has lost his file, giving on hire his flat to local people & collecting rent. he has visited & time to take the key of the flat but currupt saff has failed to give his key of the flat.
is it india & goverend by indians. the name of cidco engineer is GUPTA.
2. mr arora invested in maysore 20lacks in 1994 in a farm land. the co. name is Menakshi Resort garden plantation Ltd. the directo is mrs manazese & supported by her husband dr. williams manazeese. both has removed all the director 5 resined 3 not resined. she had been in jail for misappropition of co. funds. her husband went under ground & now both r on bail on health ground.
govt of karnatka has failed to take any action i/c roc banglore inspite reporting their activities. polic has been reported at banglore, kote maysore, sp police, maysor . but failed to take any action.
may i know where i can have the justice?
santosh arora
po box-145 neutral bay nsw-2089 australia
t & f 61 2 9953 6772, m 61 402426772

driver licence no 13513507 valid till 25 july 2016
how u can help

Like (1)

Prakash Virkar

May 5, 2013

You say that high inflation through QE has so far not materialised. But aren't asset bubbles a form of inflation? And when the money shifts out of stocks into goods and services, we will probably see inflation as conventionally computed show an upswing.

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