OK, guys. Enough is enough. Every major developed country central bank is printing money like a 1920s gangster with a printing press in the basement and too much ink.
But, what does that money printing really do for the economies of the developed countries? So far, very little except find its way into risk assets in a very big way.
The issue is not how much money is printed (really an increase in bank reserves offset by purchases of UST and Agency MBS) but if that money gets used in the real economy. For a terrific description of the process, take a look at this Hoisington Review summarized at InsurerCIO.com. Follow the link there for the entire paper.
Bottom line is that the dollars used to buy the UST and MBS are used to purchase many different kinds of investments, many of them risk assets (or certainly more risky than government debt). The offset (net increase in bank reserves) sits on the balance sheets of the TBTF banks who are slowly, if at all, adding to their loans to businesses.
An unintended consequence of QE infinity is rates are so low in the corporate bond market that large companies find no use borrowing from banks. While small and mid sized companies are very, very cautious in borrowing to expand in the current economic environment. Ergo, those reserves do nothing but cause to reduce the velocity of money and act as a strong anchor against the winds of ‘money printing.’
Until economic activity picks up materially faster than productivity improvements, or the velocity of money stops falling and even starts rising a bit, there will be little cause for worry about inflation. We might look to the housing recovery to help the situation, but post 08/09, housing is a rather small part of GDP.
Currently, the US is in a disinflationary (lower inflation) mode, with the latest PCE indicator coming in at 0.9% or over 60% less than the Fed’s target of 2.5%. Couple this with nickel, tin and bellwether copper prices all in a bear market and you start to see where the central banks underlying concerns may be: further disinflation or deflation.
While the Bank of England and the ECB do their QE best to outdo the Fed (and they have as a percentage of GDP), the real QE big spender is Japan (planning to expand the BoJ’s balance sheet by at least 1% of GDP every month for the next two to three years). Compare the BoJ’s QE to the Fed’s at only about 1/2% per month and you can see that Uncle Ben can only look up at (and out for) the BoJ.
So, while the Fed pushes against a string (opposed by fiscal incompetence in D.C.) to keep the US economy from stalling, other central banks have their own challenges…and they all seem to have the same ‘solution’.
Some may call this a ‘race to the bottom’ or a ‘currency war’, but I prefer to consider it a race to the bottom to avoid major disinflation and, perhaps, deflation.
The real challenges are ahead of us…not behind us. “Low rates for longer” may only be just one investment challenge, should we approach nil inflation numbers.
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