Global monetary expansion has been unprecedented. Chart 1 shows the average interest rate of the U.S., U.K., eurozone and Japan along with the U.S. $9 trillion added to these central banks’ balance sheets since 2007. As we have often said, this is an experiment with eventual consequences. From a cyclical perspective, monetary reflation has yet to gain much traction in the real economy and, therefore, more should be expected, perhaps much more. The Bank of Japan, for example, just announced that they intend to double the money supply over the next two years. Credit continues to contract in many countries and sectors and economies are once again softening in most parts of the world. This is a reflection of the fact that the long-term debt supercycle still has a long way to go before it is significantly unwound.
Central banks, to use Keynes’ old cliché, are still “pushing on a string”, reflected in sharply falling money velocity (Chart 2) and rapidly rising commercial bank reserves, both in absolute terms and relative to GDP. Traction in the real economy is the ultimate objective of monetary expansion and, until it becomes more apparent that it will be achieved, there is no end to aggressive central bank action in sight. The intermediate objective of central bank monetary expansion is asset inflation and balance sheet repair. Here central banks have been far more successful, excluding the seriously troubled debtors which do not have their own central banks.