Now we have negative yields on Treasury bonds or very close to zero then central bank purchases of Treasury bonds are probably very ineffective because all they do is replace one zero yielding asset Treasury bonds with another zero yielding asset money in banks and private agents portfolios. I had on piece of paper with zero yield and it has been replaced with another zero yield piece of paper. Of course, the zero yields on Treasuries also means artificially low yields which helps to keep open Zombie companies. Zero yields also smell of panic and do necessarily lead to a depreciation of a currency when other central banks also have zero yields. I came across a very short but interesting article by William White that is well worth a read LINK1 in it he states:
While recognising the great contribution of central banks to restoring financial
stability early in the crisis, there are good reasons for doubting that monetary
policy will prove effective in stimulating global aggregate demand over time.
Much of what has been done smells of panic. By increasing uncertainty, policy
actions might even have encouraged both households and corporations in the
advanced economies to hunker down and spend less. Moreover, what is more
certain is that, when monetary policy does work, it does so in large part by
encouraging people to bring their spending forward in time. However, inciting
people to spend by taking on higher levels of debt simply cannot go on forever.
Could we now be approaching payback time?
Notice his emphasis in the last part about how low interest rates are just also helping to create ever more debt in the system. Indeed, both public and private debt levels have increased substantially since 2007. In his article, White continues with a warning about how low interest rates have inflated asset prices to unsustainable levels with the risk of a large correction somewhere down the road:
Easy monetary policies not only are unlikely to achieve their desired objectives,
but their unintended consequences are becoming increasingly evident, too. There
are sharp declines in productivity growth almost everywhere, along with a
slowdown in the formation of new businesses. It is not implausible that easy
money has encouraged the “ever-greening” of zombie companies by “zombie
banks”. Moreover, the prices of almost all assets, whether financial or in property,
have been bid up in many countries to levels that heighten the prospect of severe
future losses. Who will suffer and what might be the systemic implications? We
simply do not know. Monetary policy has led us into truly unchartered territory.
Yep there is a lot to worry about and the sooner central bankers wake up to the reality of what they are doing the better the chances of avoiding a repeat of the financial crisis will be. However, I am fearful that we are already too late. There is also an interesting interviw with William White that I would recommmend here LINK2 there is also a very good paper he wrote in 2012 entitled "Ultra Easy Monetary Policy and the Law of Unintended Consequences" that I would strongly recommend here LINK3
While recognising the great contribution of central banks to restoring financial
stability early in the crisis, there are good reasons for doubting that monetary
policy will prove effective in stimulating global aggregate demand over time.
Much of what has been done smells of panic. By increasing uncertainty, policy
actions might even have encouraged both households and corporations in the
advanced economies to hunker down and spend less. Moreover, what is more
certain is that, when monetary policy does work, it does so in large part by
encouraging people to bring their spending forward in time. However, inciting
people to spend by taking on higher levels of debt simply cannot go on forever.
Could we now be approaching payback time?
Notice his emphasis in the last part about how low interest rates are just also helping to create ever more debt in the system. Indeed, both public and private debt levels have increased substantially since 2007. In his article, White continues with a warning about how low interest rates have inflated asset prices to unsustainable levels with the risk of a large correction somewhere down the road:
Easy monetary policies not only are unlikely to achieve their desired objectives,
but their unintended consequences are becoming increasingly evident, too. There
are sharp declines in productivity growth almost everywhere, along with a
slowdown in the formation of new businesses. It is not implausible that easy
money has encouraged the “ever-greening” of zombie companies by “zombie
banks”. Moreover, the prices of almost all assets, whether financial or in property,
have been bid up in many countries to levels that heighten the prospect of severe
future losses. Who will suffer and what might be the systemic implications? We
simply do not know. Monetary policy has led us into truly unchartered territory.
Yep there is a lot to worry about and the sooner central bankers wake up to the reality of what they are doing the better the chances of avoiding a repeat of the financial crisis will be. However, I am fearful that we are already too late. There is also an interesting interviw with William White that I would recommmend here LINK2 there is also a very good paper he wrote in 2012 entitled "Ultra Easy Monetary Policy and the Law of Unintended Consequences" that I would strongly recommend here LINK3
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