BNZ Weekly Overview February 18 2016
When The Barrel's Empty
Last week I wrote about the weakness in world sharemarkets in terms of specific factors. These included losses for energy sector businesses because of the structural decline in oil prices, slowing growth in China and worries about debt and capital outflows, weakness in the Japanese economy, and worries about the impact of tightening US monetary policy. But there are wider issues in play which also lie behind the growing disquiet.
One of these is the ineffectiveness of very loose monetary policies in recent years in stimulating growth in Europe and Japan. Another rapidly rising worry is the inability of loose monetary policies to boost inflation, and the growing uselessness of central banks maintaining 2% inflation targets when they seemingly no longer have the tools to much influence inflation. Related to that is concern that as they keep easing to aim at a target they are no longer able to hit the flood of cheap money will cause asset bubbles and collapses bringing new economic woe.
Related to that is the realisation that central banks have very little ability any longer to insulate their economies when not just cyclical but shock-driven downturns come along.
So as the monetary policy backstop disappears from investor and business expectations the risk is that investors rush to less risky assets – bonds – and businesses build even greater cash buffers and hold off on investments.
This big picture loss of monetary policy effectiveness means come the next wave of shocks countries will need to rely upon fiscal policies – but from governments with already large debts.
The way out is structural economic reforms aimed at boosting the ability of economies to adapt to change. But such reforms bring short-term pain, there is no appetite in Europe or Japan to inflict or accept such pain, and out of this will come a long-term redirection of capital away from those parts of the world toward America, Australasia, and the rest of Asia. These big shifts mean we should expect continued bouts of extreme financial market volatility.