However this activity has its limits and global central banks are reaching those limits. "Limits" in this case is the proverbial bag of tricks used by central banks, "monetary stimulus" being the last trick in the bag. This then becomes the law of diminishing returns, since we've gone through QE1, QE2 and QE 3 -- so-called "Quantitative Easing" -- which are becoming progressively less effective.
The problem with monetary policy is that there is a hard and fast wall that is inescapable, namely that you can only drive interest rates down to zero. You cannot do what Japan has done which has proved to be unsuccessful, i.e. driving interest rates into a red number. In fact Japan has increased its debt to GDP ratio so that it's the highest on the planet, even higher than the government of Uganda. So what's the problem? Eventually they can't sustain a 200% debt to GDP ratio, while global exports are falling.
People don't understand why these nation-states can't just stand up to the IMF and the World Bank and say 'Enough' like Argentina did when it defaulted on its debt in 2001.
The only reason why Argentina has been consistently able to get away from what's called a "containable impact" is that the amount of money involved wasn't that large. Plus there was a global effort led by the Fed, the ECB, the IMF and the World Bank to restructure Argentina's debt and bail them out. Then the numbers were relatively small, but now you can't do that because the global economy can only handle one Argentina at a time.
Now we have a number of frightening would-be Argentinas on the horizon that would overwhelm the planet's central banks and the peripheral support mechanism that goes along with it -- the IMF, the World Bank, the Export-Import (Ex-Im) Bank, the global institutions of G-20 nation states which were set up in the 1960s, which are specifically designed for one purpose, which is to restructure debt.
The reason the indebted nations don't do a backroom deal and tell off the banks is because they know what the consequences will be for their own countries and their own people. Their countries would effectively fall apart because they're no longer able to do business.
If you default on your debt the way Russia did, without any type of mechanism to restructure and continue to service that debt in some fashion, and if you absolutely repudiate that debt, then your ability to conduct global trade is severely impaired. Why? Because you can no longer use the existing institutions that were designed to facilitate global trade.
Nation-states get into fiscal trouble for the same old reasons. It isn't because a larger central bank or group of central banks or the IMF puts them in hot water, they get themselves into hot water. What is the commonality of nation-states that have defaulted on debt? Massive governmental corruption.
Of all the different forms of government -- democracy, social welfarism, communism, oligarchies, theocracies and strong-man governments -- it is the so-called strong-man governments that tend to be the ones that default on their debt. The reason why is because there is a long-entrenched ruling elite at the top that has looked at what their countries produce as little more than a wealth-transfer mechanism to themselves.
Then a nation-state like Argentina or Venezuela -- and even Russia in 1997 -- will attempt to shift the responsibility onto someone else by saying it was the Big Bad Fed, or ECB, or Bank of Japan, or IMF, or World Bank that made me do it.
But that's not the case, since these countries got into trouble on their own by these deeply entrenched system of corruption or in Russia's case, the attempt to convert from a fiscally corrosive system that had been maintained for 70 years to a fiscally correct system.
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* AL MARTIN, author of "The Conspirators: Secrets of an Iran Contra Insider," is an Independent Political-Economic Analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. He is also currently trading the commodity futures market day and night and has a teleconferencing service to facilitate transactions in the markets. This is a service for independent market-experienced traders.
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