Central banks around the world are pulling out all stops to try to counter what has been a persistent global deflationary trend. ... at least in developed economies. They have tried Quantitative Easings 1, 2, 3, etc. ... purchasing vast quantities of government debt and now even private debt to increase the money supply ... clearly to the point of diminishing returns ... since all this cash is not causing the sleeping giant of inflation to awaken. Of course, with all this debt on their balance sheets, they have also forced interest rates down ... even into negative territory ... so that all this debt doesn't crush their income statements and, more importantly, in an attempt to disincent private savers ... since saving negates spending which, in turn, is necessary for inflation.
What have been the consequences of all these central bank actions?
- I would argue that these central-banks' easy monetary accommodations have given the fiscal side of governments the license to spend beyond reason .. feeding the yaws of these ever increasing central banks' debt issuances. This will surely have longer-term consequences.
- Raising interest rates, particularly in the United States, has been like a trip to the dentist ... something put off until absolutely necessary. Don't forget that most 2015 projections had our Federal Reserve Bank raising rates four times in 2016. How many times so far? Zero! And that tooth is throbbing more and more. And I predict it won't happen before the election either ... since this might damage Hellary's chances. In December, it is more likely, especially if Trump is elected.
- Of course raising interest rates attracts capital from around the world which strengthens the dollar which then hurts exports and helps those countries importing here. Thus, the U.S. balance of payments gets even worse than it devastatingly is. This might be OK with Clinton but wouldn't sit well with Trump. He might lean on the Fed to weaken the dollar (not necessarily with interest rates) to help bring manufacturing back to America. The Fed might resist which would open another can of worms -- more federal government control over the Fed.
- The jury is out about what happens with government spending and deficits after the election. Both candidates have promised increased infrastructure spending and, Trump, a beefing up of our military ... while Hellary will open the spigots on social transfer payments. Taxes will likely go up under either candidate but, I would hope, under Trump, we might get real tax reform which might then spur our economy enough to reduce deficits. In Trump's case the Fed might be able to move more into the background except Trump might push to lengthen the term of our government debt. Clinton would still require a very accommodating central bank.
This is all very complicated with many fiscal and monetary cross currents. I wish I had the confidence that any of the world's central banks knew exactly what they were doing ... including our own. However, I think that one consequence is very likely to occur. Once all these monetary gurus have coaxed the inflation genie out of the bottle, that it will not stop at their targeted 2%. All this money in hiding around the world will then start sloshing around and may well sink a few of the more injudicious ships of state.
