Global central banks spend $834 million an hour to keep economy alive
Global central banks, led by the US Federal Reserve, the European Central Bank (ECB), and the Bank of Japan (BoJ), have collectively spent $834 million an hour, that’s $13.9 million/minute, during the last 18 months to keep businesses viable, amid the Covid-19-led lockdowns, Khaleej Times reported.
According to strategists at Bank of America, trillions of dollars, euros and yen have been created to shore up the global financial system and to provide the much-needed liquidity to households and businesses. It is an amount that represents the wall of money that helped the companies stay afloat during lockdowns and led to the biggest stock market rally of a generation.
The Fed, ECB and BoJ have pulled out all the stops in their response to the Covid-19-induced global economic slowdown. They have maintained negative or rock-bottom interest rates and aggressively expanded quantitative easing programmes into previously unchartered waters, including, to various degrees, announcing unlimited quantitative easing.
Over the last 18 months, the central banks had deployed a host of traditional and nontraditional monetary tools to help fight the global meltdown.
For instance, the US Federal Reserve System alone has put in $4 trillion. Other central banks responded with unprecedented intensity to the economic crisis by absorbing so much of the bond market to force down the borrowing costs.
As a result, currently, there is more than $16 trillion in debt with a negative yield, a report quoting strategists at the Bank of America, said.
Their bond-buying spree had fuelled the greatest stock market surge in a generation. However, the big question for investors is how much longer can central banks keep the cash spigots flowing at full force.
Analysts warn that consequent to the central bank actions, which also include various interbank swap agreements aimed at ensuring that there are enough euro, yen and, most importantly, dollars available to sustain the international banking system, the world has entered unchartered economic and monetary waters.
Despite the central banks’ aggressive monetary policy stances, the long-term interest rates remain subdued, in large part due to their “yield curve control” efforts, essentially, using bond-buying operations to influence the interest rate levels across the yield curve.
This suggests that inflation will remain under control and the economic growth will remain relatively tepid.
However, many economists fear that the rapid growth in the money supply will feed into long-term inflation and that the enormous debt piles built up during this crisis and the global financial crisis of 2007/09 will act as a drag on economic growth prospects. This combination could result in stagflation, a challenging economic situation in which high inflation is coupled with low growth in a vicious cycle.
In its June minutes, the Fed provided a particularly gloomy analysis of the prospects for the US economy. It expects unemployment to remain elevated until the end of 2021 and foresees a 6.5 per cent contraction in 2020 GDP; followed by a five per cent expansion in 2021, insufficient to return the economy to its 2019 size.
The ECB is currently running a negative interest rate policy: Its target interest rate is set below zero in a bid to encourage banks to lend.
The ECB has an extensive asset purchasing programme, purchasing securities ranging from the government bonds to regional and local authorities’ bonds, corporate bonds, asset-backed securities and covered bonds. It was engaged in the ongoing quantitative easing before the crisis hit in the first quarter.
Since then, it has expanded its quantitative easing programme and rolled out a €1.35 trillion Pandemic Emergency Purchase Programme to purchase additional securities.
The BoJ has spent decades battling a secular decline in the Japanese economy and persistently low inflation and deflation. Like the Fed and the ECB, the BoJ also anticipates that the Japanese economy would be hit hard by the coronavirus.
In response, it has expanded its quantitative easing programme, removing the limits on the amount of Japanese government bonds it can purchase.
After years of quantitative easing, the BoJ owns over 50 per cent of the outstanding JGBs and this is likely to grow further, as it pursues a policy of unlimited quantitative easing. It has also maintained its negative interest rate policy and signalled that this policy will remain in place until growth and inflation resume.
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