How difficult will it be for central banks to normalize monetary policy in practice, and what will be the consequences of such policies for investors assuming that the central banks’ commitment to balance sheet reduction is maintained?
The answer, according to Chris Wood’s new Grizzle.com blog, is ominous:
This is uncharted territory.
The only precedent for the scale of the central bank balance sheet expansion of the past nearly 10 years was during World War II, with government debt and government guaranteed assets now accounting for at least as large a share of central bank balance sheets as during World War II.
Clearly, Wood explains, the purpose of such central bank balance sheet expansion in the 1940s was to assist the fiscal authorities in financing a war.
Which made us wonder, what ‘war’ are authorities financing this time?
The answer is simple – a war against reality!
The real aim, so far as Wood is concerned, has been to stop debt liquidation and thereby prevent the creditor classes, be they bankers or bond owners, from losing money.
As Wood notes, the biggest risk to world stock markets, and asset prices in general, in 2018 is that G7 central banks (led by the Federal Reserve) are finally attempting to normalise monetary policy nine years after the American central bank commenced quantitative easing in December 2008, in the midst of the so-called “global financial crisis”.
This raises the critical issue of central bank credibility. For the risk raised by the Fed’s attempt to normalize is that a stock market downtown may force it to reverse course; and with such a reversal there is a much greater risk of a resulting loss of central bank credibility.
This is because markets may conclude that central banks will never be able to exit so-called unorthodox monetary policy.