By Alison Brook*
The pandemic has led central banks and governments around the world to spend record amounts to stimulate their economies, dwarfing what was spent during the global financial crisis. There are now concerns that the pandemic may be the final nail in the coffin for the decades-long growth in government and private debt. Unlike average business cycles which last about 7 to 10 years, debt supercycles typically last between 50 to 75 years. As a supercycle draws to a close there is a necessary process of debt deleveraging so a new cycle of growth can begin again.
The last stages of the debt supercycle?
The concept of the debt supercycle was introduced by BCA Research in the early 1970s. BCA Research is now one of many commentators who are arguing that the pandemic-induced recession marks the final stage of the supercycle, particularly for private debt.
The theory is that since WWII, central banks have managed the economy with countercyclical fiscal and monetary policy. This has made recessions less frequent and severe but has also promoted successive waves of ever-increasing household and corporate borrowing. However, with interest rates at or near to zero, the debt supercycle has now all but “played out”.
Niels Jensen, managing partner and CIO of Absolute Return Partners also sees the debt supercycle as “getting worryingly close to the end”. According to Absolute Return Partners in the early stages of a debt supercycle GDP and debt grow in a 1:1 ratio. That ratio declines as the supercycle “matures” with GDP only growing about $0.25 for each additional dollar of debt – a point which China and the US have already reached.
As more and more debt is added to stimulate economic growth, debt to GDP soars, and increasing amounts of capital is used to service the debt rather than being employed for productive purposes. Because of this productivity and economic growth slows at the end of a debt supercycle.
Drivers of the debt supercycle
Christopher Watling, CEO and Chief Market Strategist at Longview Economics maintains the current debt supercycle has been driven by three things:
- An unanchored monetary system (not backed by a commodity) which allows lots of liquidity creation and can allow massive imbalances to grow
- Financial deregulation post-1980s which has allowed mortgages to be purchased with lower and lower capital
- Targetting of CPI allowing more credit to be created
The result has been a massive growth in global debt and central banks creating increasing levels of liquidity. According to Watling, the answer is to anchor liquidity in some way and to write off all debt in a “debt jubilee” event. The aim would be to return to a model which focuses on productivity growth rather than debt servicing and unproductive investment.
The debt mountain
Global debt rose to a new record high of almost $300 trillion in the second quarter of 2021 according to the Institute of International Finance with total debt levels 10 percent higher than pre-pandemic levels. Debt to GDP declined slightly in the second quarter but the IIF warned in many cases the recovery was not enough to push debt ratios back to pre-pandemic levels.
Household debt also rose almost 3 percent in the first half of 2021 “in line with rising house prices in almost every major economy in the world" according to Emre Tiftik, IIF's director of sustainability research.
Historically, excessive debt levels have been brought down in four ways:
Austerity – spending cuts or raising tax levels generally prolongs a slowdown and lowers growth. Raising tax levels is unavoidable at the end of debt cycles when large wealth gaps exist due to high asset values
Economic growth – if economic growth exceeds interest rates, the Debt/GDP ratio will decline without the need for austerity measures. However, according to a McKinsey report on debt and deleveraging, since the 1930s growing out of debt has only occurred as a result of a war effort, a “peace dividend” following war, or due to an oil boom.
Inflation – high inflation reduces the real value of debt but it is something central banks tend not tolerate other than in the short term.
Default – default has been used by emerging market economies in the past but is not an option for advanced economies because of the long-term impact on financial stability.
The end of the debt supercycle does not need to be disastrous. Ray Dalio, the founder of Bridgewater Associates argues that if handled well the deleveraging can happen through a mix of cutting spending, reducing debt, transferring wealth and printing money. It may take a decade or more for debt burdens to fall, but once this happens the economy can reset and productivity can begin to grow once again.
*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission. The New Zealand GDPLive resource can also be accessed here.
70 Comments
For a moment I though this might be a first: a reasonable article from this front for a University discipline which is in big trouble.
But no, it mentions growth but suggests cycles are linear - the fundamental oxymoron.
Then still hangs on 'productivity'. I've pointed out that productivity is actually energy efficiency. No indication this is understood; so much for institutions of learning.
Yes, debt is an unmanageable problem. No, it won't 'come right'.
If you default the Bank owns your house. If the Bank defaults then a likely Govt bail out means the Govt then owns the bank, and thus your house. If the Govt defaults make sure you have a good supply of medicine, ammunition, and dried and canned food.
Cant see all hugs and a great forgiveness. It would be contry to the global debt enslavement agenda that profits from the money go round referred to as unproductive debt servicing and malinvestment that achieves nothing but bank profit.
Prof. Steve Keen has a suggestion about this. Mortgage holders would get a debt write-off of a set amount per person, and those without debt would be issued equity in productive assets of equivalent value. If those assets produce a rate of return similar to what the debtors would have to pay in interest, we're all square. I quite like the idea TBH.
I'd add that historically.... money printing ( rather than credit creation ) is one of the big ways used to reduce the debt burden.
The 2 arms of financial repression seem to be money printing together with keeping interest rates ultra low.
Best analogue yrs to watch are the WW2 years. (Fiscal and monetary responses to covid are akin to a "war" response. )
This is all Dalio stuff.. some of which is articulated in MP3 ( monetary policy 3 )
https://www.linkedin.com/pulse/its-time-look-more-carefully-monetary-po…
At some point there will be a "reset" ...where there will also be some big haircuts ( debt restructuring ), amongst other things.
I would not trust a Govt. to do the morally/ethically right thing ..... they are not principle based.
eg... https://www.reuters.com/article/argentina-pensions-idUSN2128838220081021
The rentier resurgence and takeover: Finance Capitalism vs. Industrial Capitalism
Marx and many of his less radical contemporary reformers saw the historical role of industrial capitalism as being to clear away the legacy of feudalism – the landlords, bankers and monopolists extracting economic rent without producing real value. But that reform movement failed. Today, the Finance, Insurance and Real Estate (FIRE) sector has regained control of government, creating neo-rentier economies.
The aim of this post-industrial finance capitalism is the opposite of that of industrial capitalism as known to 19th-century economists: It seeks wealth primarily through the extraction of economic rent, not industrial capital formation. Tax favoritism for real estate, privatization of oil and mineral extraction, banking and infrastructure monopolies add to the cost of living and doing business. Labor is being exploited increasingly by bank debt, student debt, credit-card debt, while housing and other prices are inflated on credit, leaving less income to spend on goods and services as economies suffer debt deflation.
Today’s New Cold War is a fight to internationalize this rentier capitalism by globally privatizing and financializing transportation, education, health care, prisons and policing, the post office and communications, and other sectors that formerly were kept in the public domain of European and American economies so as to keep their costs low and minimize their cost structure.
In the Western economies such privatizations have reversed the drive of industrial capitalism to minimize socially unnecessary costs of production and distribution. In addition to monopoly prices for privatized services, financial managers are cannibalizing industry by debt leveraging and high dividend payouts to increase stock prices.
* * *
Today’s neo-rentier economies obtain wealth mainly by rent seeking, while financialization capitalizes real estate and monopoly rent into bank loans, stocks and bonds. Debt leveraging to bid up prices and create capital gains on credit for this “virtual wealth” has been fueled by central bank Quantitative Easing since 2009.
Financial engineering is replacing industrial engineering. Over 90 percent of recent U.S. corporate income has been earmarked to raise the companies’ stock prices by being paid out as dividends to stockholders or spent on stock buyback programs. Many companies even borrow to buy up their own shares, raising their debt/equity ratios.
Households and industry are becoming debt-strapped, owing rent and debt service to the Finance, Insurance and Real Estate (FIRE) sector. This rentier overhead leaves less wage and profit income available to spend on goods and services, bringing to a close the 75-year U.S. and European expansion since World War II ended in 1945.
These rentier dynamics are the opposite of what Marx described as industrial capitalism’s laws of motion. German banking was indeed financing heavy industry under Bismarck, in association with the Reichsbank and military. But elsewhere, bank lending rarely has financed new tangible means of production. What promised to be a democratic and ultimately socialist dynamic has relapsed back toward feudalism and debt peonage, with the financial class today playing the role that the landlord class did in post-medieval times.
The Bank of England tells us that banks don't on lend other peoples money, all lending involves creating new money. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
Exactly: because banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source. Same principle as central bank QE.
Demand deposits referred to by the public as “cash in bank” is recorded and reported by monetary financial institutions (MFI) in units of account by double-entry bookkeeping in a process which the MFIs call “lending ” — but which is effectively a nullity — by debiting loans receivable and crediting demand deposits.
These so created units of account are then denominated at will in dollars, pound sterling, euros, etc., depending on the terms of the documentation or underlying promissory note, or whatever is the legal document giving rise to this type of “lending,” using whatever is the name of the currency in the jurisdiction in which it takes place, but legal tender the “demand deposits” are not.
Banks do not have pre-existing funds in the form of legal tender to lend, except in miniscule amounts relative to the size of their loan portfolios.1 In other words, banks create demand deposits out of nothing, and it therefore remains a nothing. The malpractice continues because public accountants as auditors sanctify the aforementioned practice by “certifying” the banks’ financial statements, provoking credit expansion, moral hazard, asset bubbles, liquidity-stressed financial markets, bank runs, and eventually global financial crises. Link-pdf
Well...it is called a "term deposit". It fits my definition of the meaning of the word deposit...
Banks don’t lend deposits. The NZ Government doesn’t tax then spend. Loanable funds theory is yet more macrorubbish that totally misrepresents the monetary system: https://www.ineteconomics.org/perspectives/blog/what-mainstream-economists-get-wrong-about-secular-stagnation
This article is a muddle because it does not distinguish between debts denominated in local currency and debts denominated in international currencies.
In open economies such as NZ there are three key types of debts as below, with the first two the most important:
1) Debts owed by individuals and companies to other individuals and companies, intermediated through the banking system, and these are denominated in the national currency;
2) Government debts, also typically held in the national currency;
3) Debts held by individuals and companies that are denominated in international currencies, with these typically being USD, sterling and EU dollars.
In closed economies, there are often government debts denominated in international currencies. These are the debts that are currently defaulted on.
The situation is further complicated by assets held by foreigners.
Because this article does not distinguish between these debts and asset types, it is a total muddle.
KeithW
3) Debts held by individuals and companies that are denominated in international currencies, with these typically being USD, sterling and EU dollars.
In closed economies, there are often government debts denominated in international currencies. These are the debts that are currently defaulted on.
Cross currency basis swaps hedge these risks in most cases today.
In respect of balance sheets, the main parties with natural long-term positions wanting to swap foreign currency into New Zealand dollars are resident banks. The banks raise foreign currency funding (totalling about 40 percent of GDP) that is then swapped into New Zealand dollars to on-lend to households and firms in New Zealand dollars.
On the other side of the swap market, the main sources of New Zealand dollar funding are (i) non-resident entities who issue New Zealand dollar denominated bonds (oftenreferred to as Eurokiwi, Kauri and Uridashi bonds) when it is cheap relative to funding from other currencies (net of the cost of swapping the proceeds into foreign currency to meet their end-uses); (ii) the managed funds industry that holds foreign assets, but hedges some of the associated currency risk to match their New Zealand dollar liabilities; (iii) and the Reserve Bank which obtains foreign currency liquidity by swapping New Zealand dollars for US dollars to obtain foreign currency liquidity (discussed in the next section). Each of those parties relies, to a greater or lesser extent, on the continued functioning of those markets. - Link
The key conclusion (first sentence thereof) from this RBNZ article is "The quite limited role of foreign currency reserves in New Zealand, as in many advanced economies with freely floating exchange rates, is consistent with the monetary policy framework and open financial account". The conclusion then reinforces the key message of the article that the main purpose of these reserves is to maintain liquidity in the system. This is very different to many developing countries which use international borrowings to fund government spending and then subsequently get into strife when it comes to repaying those debts.
KeithW
FX swaps and forwards: missing global debt?
The outstanding amounts of FX swaps/forwards and currency swaps stood at $58 trillion at end-December 2016 (Graph 1, left-hand panel). For perspective, this figure approaches that of world GDP ($75 trillion), exceeds that of global portfolio stocks ($44 trillion) or international bank claims ($32 trillion), and is almost triple the value of global trade ($21 trillion).
The outstanding amount has quadrupled since the early 2000s but has grown unevenly (Graph 1, left-hand panel). After tripling in the five years to 2007, it fell back sharply during the GFC, even more than international bank credit. This most likely reflected a reduction in hedging needs, as both trade and asset prices collapsed.
Dollar funding costs during the Covid-19 crisis through the lens of the FX swap market
Demand for dollars via FX swaps
Aggregate data on the use FX swaps and FX forwards can be obtained from the BIS derivatives statistics.2 The BIS OTC derivatives data (OTC data) show that the total amount outstanding at end-June 2019 neared $86 trillion (Graph 2, first panel), with FX swaps accounting for an estimated three quarters of this total.
If your argument is that insufficiently documented (i.e., insufficiently transparent) FX swaps have the potential to create a breakdown in the international monetary system, then I agree. But that is some way from what Alison Brooks seemed to be saying based on conflation of very different forms of debt
KeithW
Global off-balance sheet debt in it's many forms (balance sheet foot note declarations) dwarfs standard on-balance sheet debt. Furthermore, while it is collateralised by each vanilla FX currency counterparty, each leg is remorselessly marked to market and can cause an insurmountable drain on the losing agent's capital resources..
From the RBNZ - Financial Stability Review Nov. 2020
Due to the persistent gap between savings and investments in New Zealand,banks source about 20 percent of their funding from offshore.
A rough estimate puts this exposure north of NZD 100 billion. And while the counterparty currency risk is hedged by Xccy basis swaps - persistent, lasting deviations have to be endured by the foreign underwriters (Mrs Watanabe?) of the supranational NZD lender's bond issuance. The same can be said of the NZ bank foreign currency (USD) lender's underwriters - Aussie bank London subsidiaries? The basis is paid by the foreign currency lender - NZ banks.
I kinda disagree with u Kieth.
Its not a total muddle.... Kinda straight forward and simple, in my view. Most debt is held in the National currency, and if not, is most likely properly hedged..? ( The only variable you add is the degree of money printing that can be done, in a deleveraging, depending on the how closed ones economy is )
Also...with the Asian crisis (late 1990s' ) , it was mostly the private sector debt (denominated in mostly $US), that was the big problem.... Capital inflows turned to outflows .....boom/bust.... as far as I know.
With open , small economies like NZ... the big unknown , for me, is the degree of risk that Banks take on with FX swaps.
https://voxeu.org/article/foreign-exchange-swaps-hidden-debt-lurking-vu…
(Most of the big financial Crises , involve Banks...of course )
Roelof
I agree that the risk from FX swaps to the Australian owned trading banks that operate in NZ might be challenging to estimate. A lot of it may actually be in AUD.
However, the RBNZ is highly unlikely to have major exposure because they are only in the FX market to manage liquidity.
KeithW
Exactly - what an awful mess. The only thing I would add to your list of types of debt is liabilities owed by individuals / companies to the Govt. For example, Govt has $10bn of financial assets called 'student loans' (part of household debt). This could be struck off tomorrow (debt jubilee) with next to no impact.
Economic growth – if economic growth exceeds interest rates, the Debt/GDP ratio will decline without the need for austerity measures. However, according to a McKinsey report on debt and deleveraging, since the 1930s growing out of debt has only occurred as a result of a war effort, a “peace dividend” following war, or due to an oil boom.
Nominal seasonally adjusted NZ GDP(E) rose 7.2042% on an annual basis from Jun20 to Jun21.
A sovereign can inflate away debt if the average interest rate on the debt falls below the growth in nominal GDP. (It doesn’t matter whether it’s volume growth or inflation driving GDP.) It's called covert default. Link.
And yet banks keep piling sovereign debt on to their balance sheets seeking liquidity and safety in preference to risky lending to GDP qualifying enterprises.
I think a debt jubilee would end free market capitalism and we would find ourselves living under a communist construct.
How would you ever go about pricing an asset again if the precedent has been set that risk and reward have no meaning - or are we already there given what has happened post GFC and COVID?
IO ... The Best and most equitable idea for a debt jubilee, that I have come across , is by Steve Keen.
Basically a UBI that is funded by money printing and has to be used to pay down debt, by those who have debt.
Those that dont have debt are free to spend the money as they like.
Over time, this is a beautiful deleveraging (to use Dalios' term ) , that also respects the nature of risk/reward that u allude to.
Wouldn’t printing money without an equal increase in the quantity of goods and services produced result in inflation the likes of which we are currently seeing?
All this would do is reduce the buying power of many people and the qualify of lifestyles we currently have.
How is that fair to the people who prudently haven’t speculated using debt? They carry the burden of other people’s recklessness. Again risk/reward principles are violated (even if it is by stealth).
The precedent this sets is very bad and wouldn’t contribute to social stability or a civil society.
The context of a debt jubilee...would probably be in an environment where we are facing a probable deflationary depression...
The problem is that the "quality of lifestyles" we currently have is dependent on never ending credit growth (debt )....leveraging
One mans debt becomes another mans income...etc
A bigger problem is that reducing this credit growth will bring on a recession.
Trying to actually reduce debt levels ( reduce credit money ) , deleveraging....will bring on a depression.
To understand our monetary system is to know that credit is a claim on money. ie. Credit is an IOU note that is created by the Private Banking system and is accepted as money.
Steve keens idea addresses your concerns about fairness , while allowing for a deleveraging of debt , without having a depression , or at least moderating the downturn..
It involves an increase in Money...and a decrease in credit (debt)
In Ray Dalios' words.... a beautiful deleveraging.
"Look. I've got no debt, so I should get the UBI. The debt you think I have is actually owned by my Family Trust/Company/Dog (pick your favourite entity that isn't YOU)"
That's the problem, as I see it, with any Beautiful Jubilee; just as today there are ways-and-means to avoid anything you like, who is going to accept the existing debt?
(Example? The Current Government(s) Hand-Outs to business that are suffering from Lockdowns etc. We must all know, or suspect, a firm or two that have taken undeserved advantage of the situation?)
Roelof,
"The problem is that the "quality of lifestyles" we currently have is dependent on never ending credit growth (debt )"
No. PDK would no doubt put it better, but it depends on energy. Remember, without energy, no work is possible. Our whole way of life has been built on an apparently endless supply of cheap energy-oil, gas and coal. Now and indeed for some time the EROI of these fuels has been in decline and that decline will continue. The earth does not, indeed, cannot possess an endless supply of these fuels or the many minerals and metals which have become essential to our globalised world and as we seek to delay the inevitable, then it follows that it will become increasingly expensive to obtain them. Put differently, their EROI will keep falling.
One way or another, our current and hugely wasteful lifestyle is going to come to an end and we will all have to make do with less.
You would think that by now economists would have developed a more intelligent and far less risky way of managing our economies. This set up is just plain balmy and a recipe for an economic crash every few decades and the political and threats to world peace that go with that.
I've just finished reading The 4th Turning (generation theory). I think we will see change - but it will only come as Gen X realise the long term damage that the boomer cohort are doing with the status quo (despite currently benefiting from it). When they realise how unsustainable the path is that we're treading, and their role in resolving the situation, they're likely to start backing the millennial generation both politically and in action. Until that point, stupidity will likely reign to the point of complete self destruction (i.e. policies to protect asset prices at all costs).
"I met a traveller from an antique land,
Who said—“Two vast and trunkless legs of stone
Stand in the desert. . . . Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal, these words appear:
My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.”
The Roman Empire collapsed partly because of monetary debasement. Basically by cutting the allocation of silver in the Denarius (currency unit).
https://www.businessinsider.com/how-currency-debasement-contributed-to-….
No it didn't - and this is the most important point.
It collapsed because of reducing energy return on energy invested; it was simply taking more and more effort to get less and less to the centre.
The money debasement was an economists approach to fixing the problem; essentially trying to align the token with the underwrite. It didn't work because the underwrite was always falling away faster than the ticket-clipping.
This the crux of the whole matter - and the crux-point of the failure of economics. Pity we took to it with religious conviction.....
PDK is correct ..again. The Roman Empire ran out of wood. Their energy source. Wood was required to create charcoal to smelt silver, copper and gold.
They burnt through their energy source - trees. Thus silver production fell and as a consequence, they debased the silver denarius.
EROI again. Sound familiar.
You two are hopelessly in the rabbit hole of making everything suit your narrative.
If your proposition is that the collapse was because of depletion of resources, you are grossly misinformed. Pretty much none of the (authoritative) literature on the subject points to that as the root cause.
Kyle Harper's "The fate of Rome" should be the first book off the shelf, if you actually want to understand the history of the collapse of the empire. Not some echo chamber blog.
Yep - and what was his thesis about material depletion?
How was it imposed? Was it climate change, disease, and barbarianism or the fact that they 'burnt' through all the wood in Europe, as you imply?
You're trying to make the false argument that the empire exhausted all it's resources and collapsed. When in fact the empire was bleeding land to the invaders, suffering from the effects of climate change on productive lands, and fighting pestilence. That was the cause of the collapse. The material depletion was a result of these factors, not the cause.
Try logic - it always helps.
Why were they 'bleeding land to invaders'? Incidentally, accouring to your hackneyed religion, an Empire shouldn't need land......
Because they hadn't the energy to defend.
Most wars are won or lost on who brings the most energy to the battlefield; cannons tend to overcome spears.
https://collapseofindustrialcivilization.com/2012/07/14/eroei-and-the-c…
https://www.resilience.org/stories/2019-01-24/why-do-societies-collapse…
"The system dynamics model tells us that the origin of the diminishing returns lies in the gradual depletion of the resources that flow through the system. "
https://onlinelibrary.wiley.com/doi/10.1111/ajes.12162
"More complex societies are more expensive, requiring greater energy per capita. The process of increasing complexity necessitates greater energy production, creating a positive feedback cycle. Past societies have collapsed under such pressures."
It wasn't climate change, it was soil depletion and the increasing maintenance demands of road/ship/horse/firewood.
But of course, according to our got-it-wrong-but-can't-relive-career-or acknowledge Disciplinary failings know-it-all - they won't be 'authoritative'.
Its called shooting the messenger. There IS authoritative evidence, as if the current state of the fertile crescent isn't obvious enough. Oh, and please avoid the 'all the wood' type comments - that's the same as the 'running out of oil' nonsense (which comes from the same camp as you). Running out is never the problem, diminishing returns (both quality and energy-demanding) are the problem, and post-peak is the problem time.
Globally, we are already past peak - whatever accounting system you choose to believe clearly does not include such measures. I feel some sympathy for those who were sucked in by Harold Hill; but the trombones aren't coming, OK? It was horsepoo. Acknowledge and move on.
"Incidentally, accouring to your hackneyed religion, an Empire shouldn't need land"
God you make some crap up, PDK. That isn't even close to describing how economists view factor endowment. But, misinformation is king in your world, I guess.
So, again, your argument essentially comes down to "ignore that book and instead read these blog posts."
A messenger is someone who is actually indifferent to the truth about any given topic. They simply carry a message. You whinge all day abut people 'shooting the messenger' when you are nothing of the sort. You are indeed the architect of your own narratives and those you purport, which rely on junk analysis and the constant shoehorning of issues into a narrative space.
I'm not denying that resource access declined during the downfall of the roman empire - I'm just highlighting the difference between correlation and causality - Something that is never evident in the junk analysis or narrative fitting you dedicate so much time to.
Reading "More" by Philip Coggan (2020). Provides a great historical survey of the world's economy. Has some cracker quotes too that made me laugh at how apt they would become later in 2020
e.g. "A greater emphasis on home working will reduce the need for a daily commute"
and
"Diseases like SARS can spread more easily in the airline age."
Highly recommended, including discussions on devaluation of currencies.
A debt jubilee wouldn't have to be just one event. Reserve Banks could start by forgiving the government bonds they hold and increasing rates to control any associated inflation over a period of time.
In the western world more retirees per worker will likely mean more sustained wage inflation. Labour productivity isn't increasing at the same rate that labour force participation is dropping, consequently there will be an increasing squeeze on goods and services.
Genuine question - what do banks actually do with the deposits we make into savings accounts & into term deposits if they don’t lend them out? Also why do bank economists talk about bank borrowing overseas, presumably to lend out here? The BoE stuff makes sense to me except for this.
Anyone working in the banking sector can correct my thinking…. but in basic terms I think they carry out duration matching of liabilities and assets. So your term deposit is a liability that can be matched in duration with a loan (a bank asset) (not 1:1 but within a pool of assets and liabilities). Obviously this occurs over different time periods and with different types of funding (the overseas but you mention) in addition to term deposits (on the liability side) and is carried out as best as possible to reduce interest rate risk.
All interbank payments are made by the use of central bank reserves. If a bank makes a loan but the resulting deposit goes to a different bank then it requires a transfer of reserves to the other bank. If a bank cannot maintain its deposits it will eventually run out of reserves and not be able to make more loans. It will then need to borrow reserves back from other banks or borrow more reserves from the central bank which is more costly.
Banks do need to maintain levels of capital and other liquidity under Basel 3 international banking regulations and it maybe these that they borrow from overseas. The Reserve Bank lists liquid assets here. https://www.rbnz.govt.nz/-/media/ReserveBank/Files/regulation-and-super…
Bitcoin,the only decentralised and fixed supply hard currency in existence that cannot be manipulated by central banks and governments.Perhaps a painful transition as it is adopted by countries as legal tender.But after that the ultimate egalitarian solution for distributed wealth.
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