QE and its role in the Dollar shortage, zombie banks and productivity woes

Overnight there have been some intriguing releases from the BIS or Bank for International Settlements, which if you were not aware is the central bankers central bank. The BIS has, although it would not put it like that been reviewing some of the problems and indeed side-effects of the QE ( Quantitative Easing) era, So what does it tell us? Well one major point links to yesterday’s post on India and indeed to the travails of Argentina and Turkey.

The second defining feature is the rise of foreign currency US dollar credit . US dollar-denominated debt securities issued by non-US residents have been the key driver of this trend, surpassing bank loans for the first time in the second half of 2017 . The overall amount of dollar credit to the non-bank sector outside the United States has climbed from 9.5% of global GDP at end-2007 to 14% in the first quarter of 2018. Since end-2016, however, the growth in dollar credit has been flat.

So the US Dollar has been used as a new form of carry trade as people and businesses choose to borrow in it on a grand scale. Also as global GDP has been growing the 14% is of a larger amount. But to me the big connection here is the way that this pretty much coincides with plenty of US Dollars being available because the US Federal Reserve was busy supplying them in return for its QE bond purchases. Correlation does not prove causation but the surge fits pretty well and then it ends not long after QE did. Or more precisely seems to have faded after the first interest-rate increase from the Fed.

The question to my mind going forwards is will we see a reversal in the QT or Quantitative Tightening era? The supply of US Dollars is now being reduced by it and we wait to see what the consequences are. But it is hard to avoid noting the places that seem to be as David Bowie and Queen would put it.

It’s the terror of knowing what this world is about
Watching some good friends screaming, ‘Let me out’
Pray tomorrow gets me higher
Pressure on people, people on streets

Things seem set to tighten a little further tomorrow should the Fed tighten again as looks likely.

Zombie Companies and Banks

This development has been brought to you be the financial world equivalent of Hammer House of Horror. All the monetary easing has allowed companies to survive that would otherwise have folded, or to put it another way the road to what is called “creative destruction” or one of the benefits of capitalism was blocked. A major form of this was the way that banks were bailed out and some of them continue to struggle a decade later but also took us down other roads. For example the debt model of the Glazers at Manchester United looked set to collapse but was then able to refinance more cheaply in the new upside down world. Ironically it was then able to thrive at least financially as in football terms things are not what they were.

The BIS has its worries in this area too.

In this special feature, we explore the rise of zombie companies and its causes and consequences. We take an international perspective that covers 14 countries and a much longer period than previous studies.

It is willing to consider that the era of lower interest-rates and bond yields which covers my whole career and some has had consequences.

A related but less explored factor is the drop in interest rates since the 1980s. The ratcheting-down in the level of interest rates after each cycle has potentially reduced the financial pressure on zombies to restructure or exit. Our results indeed suggest that lower rates tend to push up zombie shares, even after accounting for the impact of other factors.

So cutting interest-rates for an economic gain looks to have negative consequences as time passes. How might that work in practice? The emphasis below is mine

Mechanically, lower rates should reduce our measure of zombie firms as they improve ICRs by reducing interest expenses, all else equal. However, low rates can also reduce the pressure on creditors to clean up their balance sheets and encourage them to “evergreen” loans to zombies . They do so by reducing the opportunity cost of cleaning up (the return on alternative assets), cutting the funding cost of bad loans, and increasing the expected recovery rate on those loans. More generally, lower rates may create incentives for risk-taking through the risk- taking channel of monetary policy. Since zombie companies are risky debtors and investments, more risk appetite should reduce financial pressure on them.

The reason for the emphasis is that in essence that is the rationale for QE. That is something of a change on the past but as inflation as measured by consumer inflation mostly did not turn up the central banks got out their erasers and deleted that bit. It has been replaced by this sort of thing which links to the Zombie companies and banks theme.

In addition, QE can stimulate the economy by boosting a wide range of financial asset prices. ( Bank of England )

Note the use of the word can so that even the Take Two version can be erased! But the crucial point is that yet again the Zombies are on the march via central banking support. I guess most of you have already guessed the next bit.

Visual inspection suggests that the share of zombie firms is indeed negatively correlated with both bank health and interest rates.

Why are Zombies such a problem?

The have negative effects on economic life.

a higher share of zombie firms could depress productivity growth,

Could? Later we get more of a would as we see an old friend called “crowding out” return to the picture.

Zombies are less productive and may crowd out growth of more productive firms by locking resources (so-called “congestion effects”). Specifically, they depress the prices of those firms’ products, and raise their wages and their funding costs, by competing for resources.

But there is a deeper consequence.

We find that when the zombie share increases, productivity growth declines significantly, but only for the narrowly defined zombies………. The estimates indicate that when the zombie share in an economy increases by 1%, productivity growth declines by around 0.3 percentage points.


There is a fair bit to consider here. The first is the role of the BIS in this which in some ways is welcome but in others less so.  The former is an admittal of some of the side-effects of easy monetary policy but the latter is the way we are getting it a decade late. Or in the case of Japan a couple of decades or so late! To my mind intelligence also involves an element of timeliness. Although to be fair to do quantitative research you do need an evidence base. The catch as ever for the evidence in economics is the way that some many things are varying not only with each other but also with themselves over time. Or if you prefer heteroskedasticity and multicollinearity.

As to the issues they tend to be on the back burner because they are inconvenient for the establishment. The career path of economists at central banks is unlikely to be improved by research into the collateral damage of its policies especially ones which it may not be able to reverse. At the moment both ZIRP and QE are in that category even in the US. So should the period of QT lead to the issue below rising in volume get ready for the claims that it could not have been expected and is nobody’s fault.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey

On that subject I note that a bank borrowed 563 million Euros from the ECB overnight which is odd with so much Euro liquidity around. Next we come to the issue of the productivity puzzle which seems likely to have a few of its pieces with zombie companies on it. The same zombie companies and especially banks that have been so enthusiastically propped up. Time for some Cranberries.

Zombie, zombie, zombie, ei, ei
What’s in your head?
In your head
Zombie, zombie, zombie


What is happening with Bitcoin?

The world of Bitcoin is ever-changing at least in price terms. As I type this then one Bitcoin would cost some US $6720 as opposed to the peak of US $19187 in October of last year. So quite a drop but we also need to note that if we go back to this time last year it was just below US $2000 albeit the rocket engines to take it higher were firing up. So in terms of it being a replacement for money the price moves over the past year make it almost impossible to think of it as a store of value although if we look further back it remains party-time for longer-term investors.

The background

This is that Bitcoin continues to come under verbal and written attack. From Financial News this morning.

Three of the world’s most respected economists have led a joint attack on bitcoin, claiming the digital currency will be “regulated into oblivion” as governments globally move to clamp down on money laundering.

So the heat is on in terms of threats.

Joseph Stiglitz, Nouriel Roubini and Kenneth Rogoff have renewed their assault on the  cryptocurrency believing it will be subject to further sharp and damaging falls as authorities crack down on criminals using Bitcoin to launder money and to avoid paying taxes.

These are familiar lines especially from Kenneth Rogoff who infamously does not like cash either. As to the title I think there are more than a few grounds to challenge this hype.

The three respected economists have renewed their assault on the cryptocurrency

Bank for International Settlements

Towards the end of June the General Manager of the BIS Augustin Carstens weighed in heavily on this issue. One particular section was breathtaking in its cheek and apparent avoidance of reality. The emphasis is mine.

Cryptocurrencies promise to replace trust in long-standing institutions, such as commercial and central banks, with trust in a new, fully decentralised system.

The trust issue is one that those in Denmark will be mulling right now. From the Financial Times last week.

The Kremlin critic investigating an alleged $230m Russian fraud is set to file a criminal complaint against Danske Bank in its home country of Denmark, accusing it of being a central player in a vast money laundering scheme.

As you can see we are shooting two birds with one stone as we note the “trust” in Danske and the fact that yet again it is a bank accused of money laundering on a grand scale or the exact opposite of the claims of Kenneth Rogoff.

Danske is under mounting pressure over the alleged money laundering. Mr Browder and local media claimed this week that the amount of transactions that flowed through the Estonian branch of Denmark’s biggest lender may have been as much as DKr53bn ($8.3bn), more than double previous estimates.

As the total market capitalisation of Bitcoin is US $141 billion it seems to lack the ability to match the banks in this area even if every Bitcoin is used for money laundering. After all Danske is only one bank and even if we just remain in the relatively small geographic area of the Baltics there seems to be a lot of money laundering going on. Here is the Baltic Times on the IMF visit to Latvia which ended at the weekend.

strong measures are necessary to restore the system’s reputation following the halt to ABLV Bank’s operations, the IMF points out. Effective implementation of anti money laundering and combating the financing of terrorism (AML/CFT) recommendations has to focus on reducing the proportion of questionable foreign deposits and the risks they pose to Latvia’s financial system.

For those wondering about ABLV I analysed its fall on the 19th of February. As to the ramifications this emerged at the end of last month according to Reuters.

Ilmars Rimsevics, a member of the European Central Bank’s policy-making governing council, was charged with soliciting and accepting a bribe, the Latvian Prosecutor General’s office said on Thursday.

This has posed two legal moral and ethical issues. Firstly there is the issue of financial crime in the Baltic based banks which presumably is why the head of ECB banking supervision Ms Nuoy has just visited Lithuania as according to domino theories it is the only one currently standing. Also it has raised the issue of how and if the law applies to central bank governors in the Euro area.

Oh and Mr.Carstens has thoughts in this area as well.

The goal should be to ensure that cryptocurrencies cannot undermine the role of central banks as trusted stewards of monetary and financial stability.

Technical Details

Hyun Song Shin has been the go to man for this sort of thing at the BIS for a while now although he does start by posing an issue for the BIS itself.

Much has already been said about how impractical cryptocurrencies are as a means of payment,
as well as the scope for fraud and other illicit activities they open up. The line from Agustín Carstens’
speech that they are a combination of a bubble, a Ponzi scheme and an environmental disaster has been
much discussed.

I thought that central banks liked bubbles! Is he really trying to tell us that they do not? The issue of the “precious” returns yet again as in spite of all the fraud issues people like this always highlight problems which are usually much smaller elsewhere.

Returning to his main points they are as follows.

One is the lack of scalability, which is about providing flexibility and capacity to function as a payment system regardless of the number of transactions.

The second problem is the lack of finality of payments. A payment being recorded in the ledger
does not guarantee that it is final and irrevocable. For cryptocurrencies, what counts as the truth is a matter
of agreement among the bookkeepers.

This bit also caught my eye.

At one point last December, the voluntary user fee
reached $57 dollars per transaction. So, if you insisted on buying a coffee for $2 with bitcoin, you would
have had to pay $57 to process the payment.

As someone who lives in central London I would like to know where you can get a coffee for US $2? More seriously Bitcoin needs to up its transactions game although if this was a bank no doubt the message would be that it is a result of its success.


This is a hotly debated topic as this from Crypto briefing highlights.

Published by the research team at CoinShares, a London-based cryptocurrency investment firm, the report argues that significant Bitcoin mining operations are principally powered by cheap renewable energy, and use roughly half the amount of energy that has been previously suggested.

According to the report, published today, the Bitcoin mining industry consumes approximately 35 TWh every year; 50% less than the 70TWh currently claimed by the Bitcoin Energy Consumption Index, which also argues that BTC mining has a carbon footprint that exceeds 32m tonnes annually. ( TWh =Terawatt Hours)

Best of luck with the idea that renewable energy is cheap! There are of course some examples but in general it is raising energy costs.


There is much to consider as we mull  whether these are just birthing pains or crippling ones? On the side of the former is the way that the establishment continues to spend so much time trying to rubbish Bitcoin. If it is so bad why bother as it will collapse of its own accord if they are right? We get nearer the truth as we note that the accusation of promoting financial crime is beyond laughable from people who promote the “precious” with their next breath. As to technology I am also reminded that the UK banks are often accused of having systems still based in the 1970s. That may or may not be true but it is true that the Bank of England did not lower Bank Rate beyond 0.5% because it was afraid of the impact on the banks. Even now according to Governor Carney it thinks they cannot take them below 0% a consequence which I think is much for the best albeit it does highlight quite a weakness in IT.

Looking ahead this is so reminiscent of the development of the railways if we look at the broader picture. They are of course still with us although there are more than a few commuters who wish that they were not if their social media output is any guide.

Money, get away
Get a good job with more pay and you’re O.K.
Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team ( Pink Floyd )




Negative Interest-rates are on the march again

This week is set to see much more news on the world of negative interest-rates and yields and we are already being warned that they are on the March with Reuters reporting this.

As you can see we have a new world record as Jeff Lynne would put it. Also it is a sobering reminder of the numbers we deal with today as yet again we find ourselves looking at trillions when supposedly there is not only no inflation but Larry Summers wants us to have much more of it. More of him later but for now let us continue with the policy of NIRP (Negative Interest-Rate Policy) which followed hot on the heels of the supposed cure-all of ZIRP where interest-rates were 0% or near to it.

The European Central Bank

The Euro and the European Central Bank are like the “supermassive black hole” that the band Muse sang about with its deposit and current account rate of -0.3% sucking neighbouring countries such as Denmark, Sweden and Switzerland into being satellites to it. If we move to government bond yields we see that the 2 year in Germany is at -0.55% and the 5-year at -0.36% as I type this so both are below the buying limit of the ECB itself. Thus markets are forecasting further easing on Thursday afternoon.

The most extraordinary features of this landscape are the way that 2-year bonds in France yield -0.44% and especially that the ones of Italy yield -0.06%. These in no way reflect economic reality in those two countries and are one of the clearest examples of market manipulation around.

The president of the ECB Mario Draghi has promised us more on Thursday via his Open Mouth Operations. We can expect another deposit rate cut to -0.4% or 0.5% as we again wonder how after around 5% on interest-rate reductions another 0.1% or so can possibly be key?! Also take care as other interest-rates may well move as other central banks ( Denmark and Japan for example) have moved to protect “the precious” and we may see an effort to exclude the banks from any pain. There are likely to be more bond purchases or QE with an extra 10 or 20 billion Euros a month added. We could see another “To Infinity! And Beyond!” effort by extending the scheme but last time the response to this was on the lines of Shania Twain.

Okay, so you’re a rocket scientist
That don’t impress me much

So if it comes it is likely to be as part of a combination. Also there may be other moves to help the banks which just by chance will help the Italian banks which one Mario Draghi used to supervise. Perhaps we will be warmed up to the purchase of high quality assets ( financial lexicon for these times red alert) at a future date like he did with Asset Backed Securities.

Bank for International Settlements (BIS)

This has intervened in the debate via its Quarterly Review and has in fact explained why the Bank of England shied away from 0% let alone NIRP back in the day.

Each central bank conducted an in-depth review of its IT systems as well as of its documentation and account rules.

Actually the Bank of England was more worried about the IT systems in the UK’s banks and that a year 2000 moment might apply if interest-rates went to 0%. As we live in a bankocracy it stopped at 0.5% where we in the UK remain. Sadly the BBC’s Andrew Marr was far to busy giving free publicity to the new book of former Bank of England Governor Mervyn King yesterday morning to ask such a relevant question. Indeed the toadying reached new heights with the use of the word “legendary” by the obsequious Marr.

As to the BIS on negative interest-rates they have caught up with something which has been a theme on here for 5 years or so.

The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do. A key exception is retail deposit rates, which have remained insulated so far, and some mortgage rates, which have perversely increased.

We are reminded again of the principles of Goodhart’s Law and the Lucas Critique. But we find ourselves reviewing a situation where central banks can influence money markets but the impact on the real economy is not only muted it may be inverse and perverse. An example of this has been provided by Frederick Ducrozet of Bank Pictet.

Cost of negative rates = €2bn

Against a total loan portfolio of 17 trillion Euros this is a rounding item perhaps but nonetheless it is a transfer from bond investors to governments of 2 billion Euros a year which is usually described under the category of taxation. This is a deflationary move which of course is supposed to stop deflationary trends as my financial lexicon for these times finds plenty of work.

Being based in Switzerland perhaps the BIS economists have a genuine reason to rue this development.

In particular, Swiss banks have raised the lending rate on mortgages, even as government and corporate bond yields fell in line with the money market rates

The biter bit? Anyway this is yet another deflationary influence on a policy which is supposed to provide a stimulus. If we take a broad brush view then negative deposit rates to apply to wholesale deposits but extremely rarely to retail ones. Will this continue as Mario Draghi sings along to Madonna?

Deeper and deeper and deeper and deeper
Sweeter and sweeter and sweeter and sweeter

The BIS has its concerns.

Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period>

Larry Summers

Larry seems to have worked himself into a panic, are the Harvard pensioners after him again? Or has his role in the repeal of Glass-Steagal come back into the news? From the Washington Post.

Market measures of inflation expectations have been collapsing and, on the Fed’s preferred inflation measure, are now in the range of 1 to 1.25 percent over the next decade.

Seeing as the target is 2% per annum that means a small undershoot in mathematical terms. However this may be the problem as Larry does not seem to be so hot at what he would call math.

In the 1970s, it took years for policymakers to recognize how far behind the curve they were on inflation and to make strong policy adjustments.

Actually the official measure of US consumer inflation peaked at 14.8% in early 1980 so a 12.8% overshoot is the same as a 0.75% to 1% per annum one Larry? Actually perhaps someone might nudge his elbow and point out that commodity prices are now rising (Brent Crude Oil has risen above US $39 as I type this).

Larry Summers wants everyone to pay more for things at which point he will do his best to claim that the inflation created makes people better off when in fact it makes them worse off.


There will be much to consider this week on the subject of negative interest-rates. Mario Draghi has repeated his pre- December Open Mouth Operations but you see according to the Bank of England Underground blog December was a disappointment.

That means the effect of QE2 on asset prices was still notable, for example, we estimate the extension led to a 5% depreciation of the euro against the dollar and a 6% increase in equity prices. Nevertheless, the extension’s impact was still substantially less than the initial programme both because the extension was smaller and had less impact per €100bn of purchases.

The situation is complex as we had more QE and an interest-rate cut combined but less bank for your buck (Euro) is the message here. Oh and you may note that QE and NIRP are being judged in terms of the exchange rate and equity markets. One in the eye for those who claim that there is any such intention!

Meanwhile Bank of Japan Governor Kuroda has been speaking clear this morning.

The answer is very clear. Individuals and firms as a whole will definitely benefit from this policy……..Deflation will not return to Japan. Price stability with 2 percent inflation will definitely be achieved.

Of course he introduced negative interest-rates only 8 days after denying any such intentions. Still here is food for thought for Japanese depositors and savers.

In other words, the interest earned on depositing 1
million yen for a year declines by 190 yen — from 200 yen to 10 yen.