Losses are mounting at the world’s central banks

by Shaun Richards

Today we find that two pieces of news coincide and indeed collide. Ket me start with a piece written in the Financial Times by Agustin Carstens of the Bank for International Settlements or BIS. For those unaware the BIS is the central bankers central bank and thus his words carry a considerable weight.

Unlike businesses, central banks are designed to make money only in the most literal sense. They have a mandate to act in the public interest: to safeguard the value of the money they issue so that people can make financial decisions with confidence. The bottom line for central banks is not profit, but the public good.

That is quite a statement and reminds me of the words if The Jam in Going Underground which starts like this.

And the public gets what the public wants

But later morphs into this.

And the public wants what the public gets

There is quite a bit of rewriting of history being done by the BIS here as the central banks were rather popular in establishment circles when they were making or perhaps more accurately claiming to make pots of money. But the real issue here has been highlighted by the Reserve Bank of Australia earlier today.

Global inflation remains very high. It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy. It will be some time, though, before inflation is back to target rates.

So how is “safeguard the value of money they issue” going. Looking at the precise numbers it looks something of a disaster to me.

In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.

As you can see inflation in Australia has risen to nearly four times its targeted level bringing hardship to millions and misery to some. We know that the RBA is under pressure because when they are central banks try to blame foreigners with a “Global factors”. It was not always like this. We only need a short journey in Dr. Who’s TARDIS to  the 3rd of August 2021.

The economic recovery in Australia has been stronger than was earlier expected….. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year.

Just in case they were ready with the self-praise.

The economy is benefiting from significant additional policy support

Well played RBA! This was going to be achieved in what in their terms was to be an inflation free world.

In the Bank’s central scenario, it takes some years for the stronger economy to feed through into wage and price increases that are consistent with the inflation target. In underlying terms, inflation is expected to be 1¾ per cent over 2022 and 2¼ per cent over 2023.

I was going to say that should be moved from fact to fiction in the public libraries but really it should go straight to the fantasy section. Especially this bit.

 The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024.

The Interest-Rate Problem

This morning has provided its own critique of interest-rates not rising until 2024.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.35 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.25 per cent.

But for our purposes today there is a different issue to the by now long sequence of interest-rate rises.You see for QE ( Quantitative Easing) bond buying purposes this is what the central bank charges itself which is the cost of money. So it is now paying some 3.25% on its “borrowings” which is rather awkward to say the least when you have done this. Back to August 2021.

maintain the target of 10 basis points for the April 2024 Australian Government bond

continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid November.

So if you receive 0.1% and pay 3.25% you have quite a problem! So bad in fact that they tried to present it as a triumph. Let me take you back to the 25th of September last year when The Conversation told us this.

Why the Reserve Bank’s record loss of $37 billion was actually good for Australia.

How can this be? Well what looks journalism is in fact copy ans pasting the RBA.

The review concluded the bond-buying program worked relatively well.

Schoolboys and girls in Australia would love to be able to mark their own homework and thereby get away with stuff like this.

During the crisis investors fled to the safety of the Australian bond market, wanting to put their money somewhere safe: Australian government bonds.

This meant the bank bought bonds at high prices.

No! No! No! The central bank bought at high prices as a DELIBERATE POLICY as that is what Yield Curve Control means. They thought they were being clever but even The Conversation had to admit this.

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The report found the Reserve Bank made a substantial loss on the bond-buying program, estimated to be as high as $54 billion. Its overall loss this financial year will approach $37 billion.

The losses will be higher than that.Not because of bond prices which are similar to back then but the cost of funding which the RBA keeps raising. There is a fundamental issue here and it goes back to their claim interest-rates would not rise before 2024. If they believe that then as they were buying 3 year bonds mostly they would have been singing along with Electronic.

Getting away with itGetting away with it

As most if not all of the bonds would have matured ( assuming they did not roll them forwards)

So their own forward guidance may have torpedoed them.


There are various issues with the above.We know this because Agustin Carstens tries to deny them in his Financial Times piece.

This is particularly true if they bought assets such as bonds and other securities to stabilise their economies in response to recent crises.

If you look at the inflation they helped create they have in fact destabilised economies.

ensure stable prices

I am surprised that even a central banker has the cheek to publish that when inflation is roaring.

In times of crisis, central banks may also need to take on additional risks. And they do so with their eyes wide open

As I have described above using the RBA they closed their eyes and believed their own hype.

inflation has returned.

Where did those stable prices go? It only took a few sentences for them to disappear.

The soul of money is trust.

If so we are in quite a mess as who trusts central bankers now?

But the real issue is here.

In the past decade, with inflation and interest rates low for a long period, these bond purchases boosted income. In fact, some central banks were able to transfer unusually large profits to governments.

the establishment loved this party and central bankers were no doubt encouraged to pay ever higher prices. The problem is that they now have consequent losses.

exposes central banks to losses related to assets purchased in past successful rescue efforts.

Well they did successfully raise inflation but I doubt that is what he means,

Losses matter because they may inflict a bruise on public finances

At last! We get there. If you claim profits then surely you should address losses.

The Fed’s cumulative loss from its quantitative easing now stands at almost $26 billion. The Swiss National Bank made a loss of 132 billion Swiss francs ($143 billion) last year, while the European Central Bank (ECB) now pays 2.5% interest on 4 trillion euros that commercial banks got for free during the crisis years.

The U.S. Treasury will not need to worry about bailing out the Fed, which can simply defer any loss. But the Treasury will still be missing the $50 billion to $100 billion the Fed’s bond profits used to provide each year.  ( Reuters )

I notice they do not mention Japan.Perhaps their calculators lacked sufficient noughts for the numbers.

Central banks will not collapse ( well not from this anyway) as they can simply print. But there is a catch as that is effectively what got them into this mess.


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