The master narrative of the global economy shifted six years ago from “China will push global growth for decades to come” to “the central banks can push global growth for decades to come.”
Time after time we’ve witnessed enfeebled global markets jolted out of terminal declines by central bank pronouncements and new money-printing policies. Never mind that the European Central Bank’s (ECB) Mario Draghi had no concrete proposals in hand when he announced the ECB would “do whatever it takes” to save the European Union from the financial consequences of its reckless abandonment of risk management; the mere announcement was enough to trigger a massive reversal in global markets.
The major central banks have tag-teamed one rally in global stock and bond markets after another: the U.S. Federal Reserve goosed markets in 2008, 2009, 2010, 2011, 2012 and 2013, only ending its various quantitative easing (QE) money-emitting programs in late 2014.
The ECB saved the day with Draghi’s “whatever it takes” PR gambit and more recently with its own QE money-printing program.
The Bank of Japan (BOJ) injected monetary amphetamines into global markets with Abenomics, a last-ditch effort by the BoJ and the government of Japan to crush the value of the Japanese yen and import inflation.
The People’s Bank of China (China’s central bank) has kept the credit spigot open wide for years, unleashing one of the greatest credit expansions in recent history.
The flood of dollars unleashed by the Fed’s QE programs washed over the entire globe, encouraging people in emerging markets to take loans denominated in dollars. Now those loans are increasingly burdensome, as it takes ever-larger sums of local currency to service the dollar-denominated debts.
As I have often noted, the failure to address the structural problems that caused the Global Financial Meltdown of 2008-2009 effectively transferred systemic risk to the enormous foreign-exchange (FX) market, which is connected to virtually everything in the global economy.
This is one key reason for the diminishing returns of central bank policies: all central banks have succeeded in doing is pushing the systemic risk into an arena they do not control.
Full article: How Many More “Saves” Are Left in the Central Bank Bazookas? (Peak Prosperity)