The recent news that $6trn in sovereign bonds in Europe and Japan have moved to negative interest rates highlights the limitations that central banks have in trying to stimulate growth, analysts have pointed out.
However, Moore does not see that as an investor concern.
“Investors are nervous that central banks, like an arsenal low on ammo, have nearly exhausted their remaining options to stimulate economic growth and combat deflation,” Moore said.
“Why are we so concerned about this? I am struck by the futility of worrying whether guns have more ammo when the bullets they have been firing are blank. Central banks have been aiming at growth and inflation targets for several years now without hitting them.”
Initial central bank actions in each developed market had a stabilising effect on the economy, he admits. But each subsequent move has had weak results on economic growth, the deflationary trend and business and consumer spending.
Monetary policy at this later stage is mainly helping buoy investor and business sentiment and give people the perception that something is being done to avoid a downward economic spiral.
Puny growth
Economic growth in major developed economies – the US, Europe, Japan – has not “accelerated” after central bank intervention, Moore said. In fact, “these economies…have settled into a relatively slow growth paradigm.
“While accommodative monetary policy is a necessary condition to create economic growth, it is clearly not sufficient.”
Low interest rates moved investors into riskier assets, particularly equities, and markets have responded. Since December 2008, the S&P 500 is up 179% and The FTSE Eurofirst 300 Eurozone is up 88%. In Japan, since 2013 when the government undertook a radical stimulus program to buy bonds, the TSE Topix is up 60%.
However, rising equity markets “ultimately need good economic and earnings growth to sustain”, Moore said.
For sustainable economic growth, he argues that monetary policy action needs to be followed by bold moves on government policies.
“The real issue that investors should be worried about is will government policy action begin to match the boldness of monetary policy. Without bold action on taxation, education, infrastructure, immigration and regulation, monetary policy, in isolation, will be the equivalent of firing blanks. Firing more will not impact the target.”
