The Dangers of Depreciation: The Decline of Central Bank Assets

Central bank assets

The Decline of Central Bank Assets

Feb 9, 2023

Central bankers worldwide hold a significant portion of their countries’ financial assets, which they use to manage their respective economies and stabilize financial markets. Recently, however, the value of these assets has been decreasing, leading to concerns about their ability to fulfil their responsibilities effectively.

The primary cause of this decline is the rising inflation and interest rates, which have decreased the value of bonds and other fixed-income assets that central bankers typically hold. Higher inflation erodes the value of these assets, while rising interest rates reduce their appeal to investors, as they offer lower returns. This has resulted in a decrease in demand for these assets, which in turn has contributed to their declining value.

The decline in the value of central bank assets is a cause for concern, as it reduces their ability to intervene in financial markets and stabilize the economy. In the event of a financial crisis, central bankers can sell these assets to provide liquidity to the market and prevent a meltdown. However, if the value of these assets has decreased, they may not be able to provide the same level of support as before.

Furthermore, the decline in the value of central bank assets can also affect their credibility, as it calls into question their ability to manage their own financial resources effectively. This can reduce trust in the central bank and its ability to implement monetary policy effectively, which can negatively impact the broader economy.

However, the crucial question remains: will they focus on what is happening now or on the rear outlook (examining old data)?

The Fed and other central bankers’ assets worldwide are losing value (they purchased bonds earlier at much higher prices). In one way, the Fed cuts off its nose to spite its face.

Britain’s move highlights a dramatic shift in countries including the U.S., where central banks are no longer significant contributors to government revenues. The U.S. Treasury will see a “stunning swing,” going from receiving about $100 billion last year from the Fed to a potential annual loss rate of $80 billion by year-end, according to Amherst Pierpont Securities LLC.

  • The Reserve Bank of Australia posted an accounting loss of A$36.7 billion ($23 billion) for the 12 months through June, leaving it with a A$12.4 billion negative-equity position.

  • Dutch central bank Governor Klaas Knot, warned last month he expects cumulative losses of about 9 billion euro ($8.8 billion) for the coming years.

  • The Swiss National Bank reported a loss of 95.2 billion francs ($95 billion) for the first six months of the year as the value of its foreign-exchange holdings slumped — the worst first-half performance since it was established in 1907. https://cutt.ly/rNiT4bB

Sweden’s central bank expects to report a loss of 81 billion Swedish crowns ($7.72 billion) for 2022 due primarily to higher market interest rates, it said on Wednesday. “The unrealised loss is mainly due to globally rising market interest rates, which has reduced the market value of the Riksbank’s assets,” it said in a statement. https://rb.gy/l5qzul

Bond Market Liquidity issues

Liquidity in the bond markets is drying up, and the Fed could soon be forced to intervene like the BOE and BOJ. Then we have the crises many developing nations face; some will be unable to pay interest on their loans. Pension funds are also facing liquidity crunches; they were supposed to invest their client’s funds in safe assets but decided to use complex instruments to boost their returns. Which is another sneaky way of stating they used derivatives to juice their returns. Wage inflation also shows signs of topping, which applies to rental prices. Hence if the Fed chooses to focus on real-time data instead of relying on old data, they would see that the path of least damage now is to adopt a less aggressive tone.

the index of consumer sentiment

Source: http://www.sca.isr.umich.edu/files/chicsh.pdf

This index is at an all-time low. This is a remarkable development in light of the official data indicating that we are not even in a recession. However, during 2008-2009, when readings were slightly higher, we were on the verge of a depression. Instead of calling it that, the great recession phrase came into play (in an attempt) to downplay the severity of the situation. However, now the psyops is so great that everything is just “wunderbar.

To summarise

For example, during periods of economic growth and low inflation, central bank assets may have increased in value, while during periods of economic slowdown or financial crisis, the value of these assets may have decreased.

One of the primary challenges facing central bankers is maintaining the value of their assets while also achieving their monetary policy goals. For example, if central bankers raise interest rates to combat inflation, this may reduce the value of their assets as the yield on bonds and other fixed-income assets decreases.

The decline in the value of central bank assets can have various consequences, including reduced ability to support the financial system, reduced confidence in the central bank and its ability to manage monetary policy, and potential negative impacts on the broader economy.

To address these challenges, central bankers may need to diversify their portfolios, implement more effective risk management strategies, and increase transparency and accountability in their operations.

Other Articles of Interest

D.C. pension board ignites debate

D.C. pension board ignites debate

D.C. pension board ignites debate after pulling 'direct' investments from fossil fuels Before delving into the topic, let's start with ...
Deepening Inequality: Why the The Poor Get Poorer, the Rich Get Richer

Inequality Crisis: 62 People vs 3.6 Billion Poor

Inequality Crisis The situation has progressively worsened, particularly after 2010. It was in 2009 that the world faced one of ...
Dollar Crash Imminent

Dollar Crash Imminent: True Or Rubbish?

The French Finance minister; a dollar crash is imminent. The era of the US dollar's "exorbitant privilege" as the world's ...
Psychological Ploys and bad banks

The Dark Side of Banking: Unveiling Bad Banks

Banking on Bad Banks How do you get the majority to embrace a particular narrative? In this instance, we have ...
US jobless claims

US jobless claims No Longer Connected To Stock Market

US jobless claims US jobless claims while higher are pulling back, regardless of whether they pull back or not, they ...
Better Trader

How to Become A Better Trader?

On becoming a better trader. If your goal is to become a better trader, print the above statement and put ...
Low rates. Another reason this bull market will not buckle soon

Low Rates Will fuel the biggest Bull Market rally in History

Low Rates Updated Dec 2021 Central bankers wanted to put the fear of God into the masses, and to a ...

Currency War and Negative rates; The Race To The Bottom

Currency War and Negative rates If you had told individuals before 2009 that we would be living in a negative ...
apple investment analysis

Apple investment analysis: Why Is Apple Investing in Didi

By Tom McGregor, CNTV Commentator Apple investment analysis Cupertino, Ca.-based Apple Corporation has enjoyed grand success in recent years. Its ...
Shell Company Secrecy End

Shell Company Secrecy End

Shell Company Secrecy End: 22 Investors Managing Over $505 Billion in Assets Sign Letter Calling on Congress Let’s quickly look ...
danish bank

Exploring Negative Interest Mortgage Rates: Are They Worth the Risk

Negative interest mortgage rates We have entered the era of Negative interest mortgage rates and in Denmark, many families are ...
Problem is Fractional Reserve Banking

The Pros and Cons of the Gold Standard: An Unconventional Analysis

Pros and cons of the gold standard: Is the current system better Updated Feb 2023 While many gold bugs and ...
Gold Standard: What is the US dollar backed by

What is the US dollar backed by?

What is the US Dollar Backed By? Surprise-Surprise Update Dec 2021 Among those whom I like or admire, I can ...
Incentives to Buy Electric Vehicles could run out

Incentives For Electric Vehicles could end

Incentives For Electric Vehicles could end The current incentives of between $5,000 and $8,500, depending on the price of the ...
Electric Vehicle

Electric Vehicle Charging Stations Market; AC versus DC

  Electric Vehicle Charging Stations Having different forms of energy is a good thing especially when it comes to the ...