Central banks are going bust

Investors believe that central banks will always manage the financial system and act as lenders of last resort. This article explains why they will almost certainly fail.

It is some time since I wrote about the consequences of quantitative easing, and how it led to massive losses for central banks, enough to wipe out their own capital many times over. The Bank of Japan is in the worst position, having started QE in 2000 and now owning 60% of its government debt. The rise in bond yields has created massive losses. But so far, no one seems to care. The chart below shows how this problem is mounting for the Bank of Japan:

That people no longer care about central bank finances will almost certainly change. Signs of a private sector recession can no longer be ignored or covered up by excess government spending. Bank credit is being withheld from commercial enterprises, and tariff wars are just beginning. Government finances are deteriorating, inevitably leading to higher bond yields and pressure for further QE. Perhaps current complacency over central bank finances will shortly become an urgent topic for public debate.

Setting the scene