Today we have a world awash in debt, low growth and political spin that would make any talk show proud. The political landscape is divided so far that they cannot come together to get any job done. Therefore, central bankers have decided to step up and make bold moves – and for turning psychology, it seems to be working. The believability of ‘unknown actions’ stirs a bit of distrust and denial, and further when the currency takes a hit due to money printing rather than economic prosperity we tend to question the act. But is this just a temporary situation or are these central bankers stuck in a vacuum of constant action?
Should they print or not? Whatever your disposition may be make no mistake of the intent: Central bankers mean business. On Thursday the Fed came out firing with a guns a’ blazing, this time with some bold action. They announced a new QE plan of buying mortgage-backed seucrities in addition to their planned twist operation. Bold indeed! More recently, Mario Draghi mentioned some strong action was coming, not once but TWICE. We have so far seen some bond buying but limited in scope. At some point the flood of money will stop (yes, it will happen) but truly what is the goal of central bankers?
To me it’s about stimulating demand and buying time. Economies of the world can and will grow their way out of it – but what they need is stabilization and more time. The odds are long and unless your horizon is years then you are bound to see some disappointments in the short term. Let’s be honest – central bankers cannot make something out of nothing. They were dealt a bad hand and are clearly trying to fix a bad situation. Responsible fiscal policy is a critical component and the other side to balance the situation, Chairman Bernanke has been telling this to Congress for years. He and other central bankers cannot do it alone.
And the Fed has an open-ended buy program in place. Does that bother some? Of course it does, but it shouldn’t. Nobody puts the Fed in a box, and Bernanke was emphatic about it. They will let the conditions, economy and unemployment dictate when they are done. Period.
Some may believe that the Fed is now out of bullets. Well, I heard that excuse the last time around, and here we are with another QE program. In fact, this one is more open-ended, meaning the Fed is not out of bullets, they are just firing continuously with an endless supply of bullets. Oh, and let’s not forget about China. They have announced some massive infrastructure plans of their own to try and keep their economy going. The growth plan of 7.5% for the year is still out there but that may be tenuous. But, let’s not underestimate this country and government – they are clearly on board with turning out the crisis in Europe and if inflation stays lower then expect more easing. The People’s Bank of China has been dropping hints lately, so don’t be surprised.
Last month Mario Draghi was definitive and bold in his talk, yet nobody really believed him. After all, the rhetoric has been high since 2010, it appeared the euro leaders had no answer for the mountain of debt piling high from at least five of their member nations. To further complicate matters, these economies were sinking, unemployment high and they were selling more bonds to pay for their short term obligations. There really seemed no way out. Chairman Trichet was spinning the situation with no apparent answer.
I believe he is now the most relieved that he is no longer at the helm. At any rate, the ECB Chairman seems to not only have the support of the leaders to do ‘whatever is necessary’ to save the euro but even the courts in Germany agreed. This is clearly a massive can kick into 2015 and beyond, if it works the economies of the eurozone may actually start growing their way out of it. Some countries (like Greece) may have gone past the point of no return. The Fed has taken the reins and China is next to play. Not a good time to fight central bankers.