| Linda Karlsson / pixelio.de |
The reasons why the central banks are implemented are different in each of the countries but they have some common reasons. These are found also in their mature duties.
Duties of the central banks are dictated by the currency, literally also producing the notes and coins, setting up interest rates and programs for refinancing the bank system or the size of minimum reserves of the banks. Some banks like the ECB and BoE take also control as one of their mature duties of the prices or more particular of the inflation rate. In Japan the central bank is also allowed to give credit to the government. In China is the central bank also there to control or fix the currency exchange course for the Yuan Renminbi. The FED also has the duty to support the US-Economy; this is one reason why the unemployment rate is one strong trigger for them to watch out. As a matter of fact, one duty is also described as long moderate interest rates.
This is interesting to know, because we have already very low interest rates for almost ten years. Beside this curious fact, almost all central banks claim that they are independent and do not stand under the control of their government. But the crisis from 2007 has shown and proofed us otherwise.
So far to the explanation what are the central banks and what are their duties. One duty is also to watch out for the currency and gold reserves. Out of this they are also the mature investors or buyer of gold.
The diagram below shows the balance sheets of the big five central banks during the last several years. As we can see their balance sheets literally are blown up and raised in unimaginable amounts and this all from scratch. In real they haven’t produced some goods or services for this. In Europe it mostly begun with the sentences of Mario Draghi „…we will do whatever it takes…“ and they did. The ECB called it OMT (outright monetary transaction), the FED QE (quantitative easing) and so on. Translated, they started to print money and fled the economy with money.
It is a good question if you ask yourself, where is all this money going? We speak here not about millions, it is billions/milliards. All what we feel as an outcome of this are the low interest rates for investments and loans. Also those prices for several things are rising faster than before, take a look at real estate prices.
All the money is coming in the system, but until now it flows mostly between central banks and commercial banks or state treasurer or big companies. Why so?
The answer to this question is probably a bit more complex than it seems. The banks most likely are still dealing with their problems. This can be bad credits, loans to the shipping sector, investment banking, new liquidity or credit rules. Summarized old problems and reducing the risks.
With the programs of the central banks were and are still bought state bonds, corporate bonds, stocks and not to forget bundled credits.
Yes, you read correctly, central banks are buying stocks, take a look for example at the Bank of Japan. This is probably not such a big surprise with the corporate bonds, but it affects only the big companies which have bonds out or which bring them out. The small firms have one to low ask for credits, so that they could be affordable for bonds. And from banks they maybe also don´t get credits because the corporate business, especially this with small once is too risky.
Probably the most interesting would be the fact of buying state bonds, bought from a state authority (central bank). Easily described there is someone, who I created and indirectly control, which buys my credits with money made out of nothing, isn´t this perfect to get rid of my credit? Because they money to afford the credit cam out of nothing and if this creditor is not willing to pay back, then I can let disappear this money out of nothing back into nothing, or?
Could be this a solution for all state-credits, which everyone knows that it will be impossible for the states to ever pay them back? It is also a great way that the states must not change their behavior.
