Wall of money keeps markets buoyant

100 Dollar note
Inflation is not the enemy of central banks right now and their printing presses continue to run. Money creation look set to continue and government debts will rise.

There is uniformity amongst the leading central banks of the world that recession, not inflation, is the enemy. They are all offering ultra-low interest rates, substantial money creation and large bond-buying programmes for this year and beyond. 

The world’s financial controllers accept the Japanese model for the time being. Governments will borrow substantial sums to provide a fiscal stimulus. Central Banks will keep short term rates around zero – and will buy up government debt to keep longer term rates lower as well.

The Banks are not particularly interested in rates of money increase, and accept the results of their policies will be fast money growth. Over the last year, we have seen 25% growth in the M2 measure of money supply in the US, 14% in the UK, and around 10% in Japan and the Eurozone.

Cheap money for governments

None wish to be seen to be directly lending large sums for very little interest to their government owners, but most are effectively doing so by buying the second-hand debts issued by states. The governments and Central Banks have needed to do so, to provide an offset to the collapse of economic activity in a number of sectors badly damaged by anti-pandemic measures. In order to subsidise companies that have lost turnover through lockdowns, and to help people with benefits where they have lost income from employment, states have needed to borrow huge sums.

The latest Federal Reserve Board minutes of their December meeting confirm that the US authorities want to promote a stronger economic recovery. They remain concerned about the damaging effects of the anti-pandemic measures – and plan to continue ultra-low interest rates and substantial money creation for this year and beyond.

The Fed has excelled itself since last March, throwing large amounts of new money into the US and world system to offset the deflationary impact of the closures. At the latest meeting, the Fed said it will continue offering dollars under its swap and repo facilities for foreign Monetary Authorities until the end of September 2021.

Lower for even longer

It suggests that the Fed funds rate will remain unchanged for a long time. It expects inflation to rise above 2% in a couple of years – and wants it to stay there for a bit to get the average closer to 2% after a period of low price rises. It reaffirmed plans to buy at least $80bn a month of Treasury securities and $40bn of mortgage backed paper. “All participants judged that maintaining an accommodative stance of monetary policy was essential to foster economic recovery and to achieve an average inflation rate of 2% over time,” it said.

Some commentators were disappointed the Fed was not more explicit about quantified triggers for changes of policy, nor more precise over volumes of purchases. The narrative of the Committee’s discussions implies they still intend to keep money easy and see no worrying inflation threat anytime soon.

View Full Article – published by Charles Stanley on 8th January 2021