By Chris Berry (@cberry1)
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The unprecedented response of Central Banks to stimulate growth in the wake of the Great Recession has been unlike any before it in history. Trillions of dollars worth of liquidity was pumped into the global financial system in hopes to stimulate aggregate demand and growth rates. In the United States alone, the balance sheet of the Federal Reserve has ballooned from $700 billion to well over $4 trillion and the debate rages around what we have to show for it. Clearly, the Swiss National Bank saw the writing on the wall and un-pegged their currency from the Euro to avoid long-term damage to their domestic economy despite the overnight strengthening of the Swiss Franc and its potential to hurt Swiss exporters.
The uncertainty from central bank actions is starting to be felt around the world and the bond markets are a telling example. The Japanese sovereign yield curve shows the results of decades of interference to try and stimulate growth:
Negative yields out three years on the yield curve demonstrate a lack of growth potential and the Bank of Japan forcing yields into negative territory tells anyone that the Japanese economy, in its fourth recession since 2008, is going to struggle.
The European Central Bank has all but admitted its intentions to initiate a Quantitative Easing program of approximately 50 billion Euros per month imminently. Analysis of the German sovereign yield curve shows why:
Given the disputed results of QE in the United States, one wonders why central bankers in other parts of the world are trying to use the same or similar monetary policy tools which have yet to prove their efficacy at igniting “escape velocity” growth.
For the sake of completeness, here is the US sovereign yield curve:
The good news is that yields are positive. The bad news is that after unprecedented balance sheet expansion, yields are not indicative of growth and to tie your money up for a generation (30 years) in the US, you can only expect a return of 2.38% (as of Jan 15, 2015).
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