After a quiet summer in the markets, volatility finally picked up in both stocks and bonds. From early July through late August virtually no movement occurred in the Treasury market and stocks barely budged.
During this quiet period, central banks around the world sat on their hands.
They may have talked a lot, but they didn’t actually do anything.
Then again, what could they do…?
The Bank of Japan (BoJ) has tried just about every trick in the book to kick-start inflation and prompt lending, which would grow their economy. Nothing worked.
When it introduced a negative rate, the markets punished the decision by selling Japanese bonds and firming up the currency — the exact opposite of what they tried to accomplish.
They’ve failed miserably…
One Failed Attempt After Another
Their problem is unfixable. An aging population spends less and doesn’t borrow.
Closer to home, the Fed has tried some of Japan’s tricks, like cutting the key interest rate to zero and then buying bonds or using quantitative easing (QE) to increase liquidity in the system.
It’s a mystery to me why they thought doing it in the U.S. would produce different results than those achieved in Japan, but be that as it may…
The Fed’s objective was to encourage spending, inflate asset prices, encourage borrowing and magically make the economy stronger.
Well surprise, surprise. That didn’t work here, either!
But apparently, running into a brick wall over and over again seems like a good idea. After all, what do us mere mortals not on a central bank board know?
Not long after the Fed threw trillions of dollars into QE, the Europeans decided it was their turnrn. The European Central Banks (ECB) implemented its own version of QE and many of their key interest rates are now negative.
Have the ECB stimulus programs worked to gear up their economies or stabilize prices or encourage lending?
No way! And in fact, it’s a disaster that’s starting to come unraveled.
Just look at the most stable economy in the Eurozone, Germany. Big banks like Deutsche Bank and Commerzbank have major problems. Will they get bailed out while Italian banks struggle? Unlikely, considering Angela Merkel has already said: “hell no!”
Still… central bankers around the globe continue to make bad decision after bad decision. And even though investor focus remains on what these geniuses will do next, their credibility is running on low.
Markets worldwide are coming to the realization that central banks don’t have the capacity to actually guide an economy. Besides, was that even why they were originally formed? And if they don’t have this all-powerful ability (intended or not), what now?
I’ll answer those questions at our Irrational Economic Summit later this month. The answers will surprise you!
Editor, Treasury Profits Accelerator