In Barclays' Global Economics Weekly note, subtitled "Diminishing policy power" - analyst Christian Keller argues that if the world faces an "adverse shock" to its economy, then the following policy response, either through fiscal or monetary stimulus, is "increasingly exhausted."
Since the financial crisis, central banks around the world have embarked on unprecedented levels of loose monetary policy, cutting interest rates and launching huge packages of quantitative easing to try and facilitate inflation and economic growth. The level of easing is such that, as Bank of America Merrill Lynch noted on Friday, central banks have now cut interest rates 666 times since the collapse of Lehman Brothers in 2008. The Bank of England's cut from 0.5% to 0.25% last Thursday is the latest.
All of this policy action hasn't stimulated anywhere near as much activity as expected. Growth around the world still remains subdued, with the eurozone - where interest rates are below zero, and bond buying programmes have been enormous - particularly weak. The problem, Barclays says, is that there's now not much more the likes of the European Central Bank can do to boost the economy.
Here's the key extract from Keller at Barclays (emphasis ours):
"In the meantime, monetary policy easing seems to have reached its limits. Since early June, central bank actions (and their anticipation) have driven down bond yields and flattened curves even further. The consequences have been strong flows into EM bonds, as investors are forced to search for yield, and continued pressure on bank assets, as investors fear for banks' profitability in a 'low for long' world. In particular, this adverse effect on banks suggests diminishing returns of continued monetary accommodation and possibly even a point of 'reversal', ie, where its effects could become contractionary as bank lending tightens as a result. ECB officials have recently acknowledged as much, even if noting that thus far, the ECB's negative policy rate had not reached such a 'reversal rate' yet."
The alternative to expansionary monetary policy is the return of strong fiscal policy, in the form of heavy borrowing, and investment in infrastructure projects like railway lines, hospitals, tech ventures, and schools. Another alternative, so-called helicopter money, where governments give money directly to citizens, has gained traction in the past year or so.However, both forms of fiscal stimulus, Barclays notes, are limited, especially given the high levels of public debt around the world.
Here's the extract (emphasis ours):
"While it is true that financing fiscal deficits has become very easy due to aggressive monetary policy, public debt ratios remain very high and have continued to rise, given still-high fiscal deficits in most advanced economies. Some form of 'helicopter money' could help in theory, by monetizing deficits or cancelling debts held by central banks. However, concerns about the unexpected consequences this could have on the public broader confidence into the system - and, thus, the effectiveness in practice of such radical policies - have kept even Japan's more adventurous policy makers away from it. The resistance elsewhere would likely even be higher. Hence, should the policies stimulus provided thus far fail to generate the necessary escape velocity for the global economy, the future policy options in response to adverse shocks seem increasingly exhausted."
And here's the chart:
Barclays
While suggestions that monetary policy is running out of effectiveness aren't exactly new - Credit Suisse described QE as an "exhausted tool" in April - fears that fiscal policy might no longer be able to create growth are particularly troubling.