Major central banks cut rates to head off deflationary collapse

Oct 08, 2008 (LBO) – Major reserve currency central bank led by the Federal Reserve, European Central Bank, Bank of England joined by Swiss and Swedish authorities cut rates by 50 basis points in a bid to head off a deflationary collapse of the global economic system. With interest rates already low the Bank of Japan did not cut rates.

The Fed cut rates by 50 basis points to 1.50 percent, ECB to 3.75, Bank of England to 4.50 percent.

With credit demand collapsing and banks unable to lend with depleted capital and uncertainties about counter party risks, policy rates have room to move down.

But a weakened banking system has made it difficult for central banks to transmit its rates across the yield curve with risk premiums rising on counter party risk.

It can lead to a condition known as ‘central bank impotence’ or a liquidity trap where rate cuts have little or no effect in the overall direction of markets or economy.

The paper money central banking regime that now exists in the world is facing its biggest test since it was born in 1971-1973 amidst a commodity bubble with the US dollar going off the gold standard.

Markets are coming to the realization that, when a bubble caused by excessive money printing bursts, the central banks have no