The losses sitting on central bank balance sheets are starting to soar to eye-watering levels. The US Federal Reserve has a “mark-to-market’ loss of $911bn. The UK taxpayer has already handed over £150bn ($192bn) to cover the Bank of England’s losses.
Now, the UK’s respected National Institute for Economic and Social Research is calling for an inquiry into the whole stimulus policy:
“The Bank of England has made a cumulative loss of £72.3bn, or about 2.8% of 2023 GDP. The Federal Reserve had lost about $900bn by the end of March 2023. The German national audit office, the Bundesrechnungshof, has warned that the Deutsche Bundesbank may need to be recapitalised on account of QE losses.”
HOW DID WE GET HERE?
1983-2000 was a period of unparalleled economic growth. This was largely due to the “demographic dividend” created by the vast BabyBoomer generation. But demographics weren’t well understood at the time:
- This allowed policymakers to instead claim the prosperity was created by independent central banks
- They argued they were able to magically control the economy by controlling interest rates/money supply
- Being “wise and far-sighted” meant they could successfully manage a global economy with billions of people
But things soon began to wrong for them. The demographic dividend began to become a deficit in 2000. And the first sign of this was the bursting of the dotcom bubble in 2000-2.
And so the banks introduced a new tool, in addition to interest rates. They claimed the “plumbing” of financial markets had got blocked. And it needed to be “flushed through” by printing large amounts of liquidity in the form of stimulus:
- As the chart shows, the amount of money used to flush the system then began to increase exponentially
- It averaged $700bn/year between 2003- 7; then $3.1tn/yr between 2008-14; then $4.3tn/yr between 2015-19
- Finally, it averaged $7.7tn/yr in 2020-2, before the combination of the war and rising inflation forced a rethink
Each time the economy began to slow, the central banks doubled down on the failing policy. People like ourselves questioned whether this made sense. But we were told that “in hindsight”, the problem was that not enough liquidity had been provided.
China was the biggest spender, particularly after 2008. Its $50tn ‘subprime on steroids’ stimulus created the largest real estate bubble ever seen.
The others were on a smaller scale, But the USA still reached $8.7tn at its peak. The European Central Bank did $7tn. Japan did $6.8tn. Even Switzerland did $1.2tn and the UK $1.1tn.
In reality, of course, the central banks were never “in control”. They were simply floating on the demographic wave. And after 2000, the demographic dividend created by the Boomers (born 1946-70) was becoming a deficit, as they moved out of the Wealth Creator age group.
The background is shown in the first chart.
- The oldest Boomer became 25 in 1971; by 1983, the average Boomer was 25; by 1995, all the Boomers were 25
- As the second chart shows, this dramatically boosted consumption (60% – 70% of GDP in the West):
- By 2000, there were 65m US households in the Wealth Creator 25-54 age group, and they spent an average $69k
But the clock was ticking on the boom. People were no longer dying at pension age, as in 1950. Even worse, fertility rates fell below replacement levels (2.1 babies/woman) in the West after 1970.
So there were starting to be a lot more people in the low-spending Perennials 55+ group. And the number of higher-spending Wealth Creator households had plateaued.
In 2021, the average Wealth Creator household was spending $69k. The average Perennial household was spending only $56k.
As the third chart highlights, the issue is that by the age of 75+, the average Perennial household spends 45% less than the average Wealth Creator household.
Inevitably, therefore, the great central bank experiment is falling apart. And the costs are mounting all the time, as they have to refinance the debt at higher interest rates. The US will have to refinance almost half its debt within 2 years as the chart shows.
It is already clear that they can’t control the inflation caused by the war. Nor can they can control the way OPEC+ is increasing energy prices, and causing food costs to soar due to the rising cost of fertilizer.
Even worse, they have created a mountain of debt, which can never be repaid given that the world now has an ageing population.