Global Intuition:Languishing in liberal liquidity

Event.

    We examine the consequences of sustained major central bank liquiditystimulus with particular focus on risks of distortions in the financial system.

    Impact.

    The current sustained period of extraordinarily accommodative monetaryconditions has wide-ranging implications for the global economy and financialmarkets. Notably, heightened uncertainty and volatility are expected to remainsalient features as investors grapple with diverging policies in the majoradvanced economies and the risk of policy spillover effects in emergingmarket economies.

    Outlook.

    The European Central Bank’s (ECB) announcement of a fully-fledgedquantitative easing (QE) program has highlighted the structural challengesnow facing monetary authorities in Europe and Japan. At issue is whether ornot the ECB and the Bank of Japan (BOJ) are now testing the limitations ofmonetary policy.

    Moreover, the expanded QE measures in Europe and Japan also posemacroeconomic stability challenges for many countries across the world.

    These countries will either need to match these easing measures, or see theircurrencies strengthen against the Euro and Yen.

    Significantly, six years after the financial crisis this new wave of QE willprolong a world of lavish liquidity and zero/negative interest rates andas we have previously noted contribute to the liquidation of governmentdebt via the resulting ‘financial repression’.

    From a high-level perspective, the divergence in G4 monetary policies isalready evident in the relative movements of the major central banks’ assetsas they either expand or wind-down QE asset purchase programs (see panelon the left). Moreover, in respect to ECB and BOJ, there is justifiableuncertainty about the ultimate growth in the size of central bank assets. Thisreflects the generally open-ended duration of the measures; and riskssurrounding the limitations of monetary policy in the face of deep-seatedstructural issues.