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Global central banks spend $834 million an hour to keep economy alive

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on August 22, 2021
Global central banks have been flush with cash throughout the pandemic, but making sure they look at every situation so each penny is worth it. — AFP

Major central banks pull out all the stops by deploying all weapons in their arsenal to fight the global meltdown.


Global central banks, led by the US Federal Reserve, the European Central Bank (ECB), and the Bank of Japan (BoJ), have collectively spent $834 million an hour — that’s $13.9 million per minute — for the past 18 months to keep businesses viable amid the Covid-19 led lockdowns.

According to strategists at Bank of America, trillions of dollars, euros and yen have been created to shore up the global financial system and to provide much-needed liquidity to households and businesses. It is an amount that represents the wall of money that helped companies stay afloat during lockdowns and led to the biggest stock market rally of a generation.

The Fed, ECB and BoJ have pulled out all the stops in their response to the Covid-19-induced global economic slowdown. They have maintained negative or rock-bottom interest rates and aggressively expanded quantitative easing (QE) programs into previously unchartered waters — including, to various degrees, announcing unlimited QE.

Over the past 18 months, central banks had deployed a host of traditional and nontraditional monetary tools to help fight the global meltdown. For instance, the US Federal Reserve System alone has put in $4 trillion. Other central banks responded with unprecedented intensity to the economic crisis by absorbing so much of the bond market to force down the borrowing costs.

As a result, currently, there is more than $16 trillion in debt with a negative yield, a report quoting strategists at the Bank of America has said.

Their bond-buying spree had fuelled the greatest stock market surge in a generation. However, the big question for investors is how much longer can central banks keep the cash spigots flowing at full force.

Analysts warn that consequent to central bank actions — which also include various interbank swap agreements aimed at ensuring that there are enough euro, yen and, most importantly, dollars available to sustain the international banking system — the world has entered unchartered economic and monetary waters.

Despite central banks’ aggressive monetary policy stances, long-term interest rates remain subdued, in large part due to their “yield curve control” efforts — essentially, using bond-buying operations to influence interest rate levels across the yield curve. This suggests that inflation will remain under control and economic growth will remain relatively tepid.

However, many economists fear that the rapid growth in the money supply will feed into long-term inflation and that the enormous debt piles built up during this crisis and the global financial crisis of 2007-09 will act as a drag on economic growth prospects. This combination could result in stagflation — a challenging economic situation in which high inflation is coupled with low growth in a vicious cycle.

In its June minutes, the Fed provided a particularly gloomy analysis of the prospects for the US economy. It expects unemployment to remain elevated until the end of 2021 and foresees a 6.5 per cent contraction in 2020 GDP, followed by a five per cent expansion in 2021, insufficient to return the economy to its 2019 size.

The ECB is currently running a negative interest rate policy: Its target interest rate is set below zero in a bid to encourage banks to lend. The ECB has an extensive asset purchasing programme, purchasing securities ranging from government bonds to regional and local authorities’ bonds, corporate bonds, asset-backed securities and covered bonds. It was engaged in ongoing QE before the crisis hit in the first quarter. Since then, it has expanded its QE programme and rolled out a €1.35 trillion Pandemic Emergency Purchase Programme to purchase additional securities.

The BoJ has spent decades battling a secular decline in the Japanese economy and persistently low inflation and deflation. Like the Fed and the ECB, the BoJ also anticipates that the Japanese economy would be hit hard by the coronavirus.

In response, it has expanded its QE programme, removing the limits on the amount of Japanese government bonds it can purchase.

After years of QE, the BoJ owns over 50 per cent of outstanding JGBs and this is likely to grow further as it pursues a policy of unlimited QE. It has also maintained its negative interest rate policy and signaled that this policy will remain in place until growth and inflation resume.

— issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.





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