We all know that asset prices (stocks) are being supported by the central bank’s easy money policies. Leading central banks such the Federal Reserve, Bank of England, Bank of Japan, the European Central Bank, Reserve Bank of Australia, and others have been either creating money, or lowering interest rates in order to inflate stock markets around the world. Usually, this action by the central banks will help boost the economies around the world by making money easier to borrow. It will also help to increase exports by devaluing the currency. The only problem is that every country is now doing the same thing simultaneously.
Is this money printing by central banks sustainable? If money printing solved all of the problems of the world why didn’t the central bankers start this a long time ago? There would probably be no hunger or poverty in the world today. The problem is that money printing does not work for long periods of time. It will usually lead to inflation or another major bubble in stocks, commodities, or real estate. Just think about it, the policies made by former Federal Reserve Chairman Alan Greenspan could be the leading reason why the markets experienced the tech bubble in 2000, and the housing and credit crisis in 2008. This time around there are central banks printing money in almost every country and there could be giant bubbles building all around the world.
Below are a list of some of the easy money programs by the central banks:
- Bank of England: £375bn quantitative easing program, interest rates are 50 basis points
- Bank of Japan: The bank is increasing its purchase of government bonds 50 trillion yen ($520 billion). The benchmark interest rate in Japan was last recorded at 0 percent. Japan’s economy is 1/3 of the United States.
- Federal Reserve (United States central bank) has a zero percent fed funds rate which is the overnight lending rate to the large banks. The Federal Reserve is also buying $85 billion a month worth of U.S. Treasuries, and mortgage backed securities. The Federal Reserve’s balance sheet is estimated to be over $3 trillion.
- European Central Bank: the central bank just cut interest rates to 50 basis points from 75 basis points. The ECB also buys debt from nations such as Spain, Italy, and Portugal in order to keep borrowing costs low. They have several other monetary programs in place at this time. The European Central Bank’s balance sheet is roughly at $3.45 trillion.
- Reserve Bank of Australia; they just cut interest rates to 2.75 percent today.
In doing some research I found that these central banks had printed over $17 trillion in new money over the past few years. This money printing is certainly helping the stock and real estate markets higher, but is it sustainable? What is the exit strategy when inflation starts to creep into the economy? How long can the money printing party continue?