Central Banks Fall Flat In Stimulating Economic Growth

Bond markets are generally out of bounds for ordinary investors as they are very much the domain of banks, investment funds and other big financial institutions.

But the arcane way the markets work has come to the fore as the Bank of England, the European Central Bank and Bank of Japan have had unsuccessful forays to try and buy bonds as part of quantitative easing programs.

The central banks have failed to buy the bonds they want in exchange for cheap funds injected in to the economy.

The fear is bank stimulus of the economy from low interest rates and QE has reached the end of the road and no one is quite sure where to go from here.

Bonds come in two types – short and long dated. The terms simply mean bonds with a fixed term of less or more than 15 years.

Long and the short of bonds

The banks have no problem with buying short dated bonds as they are held by lenders and financial providers who benefit from lower interest rates from arranging mortgages and loans.

Cheap short bonds should also mean cheaper financing costs for businesses to trigger investment that leads to creating jobs and economic growth, only that’s not happened.

Long bonds are held by institutions such as pension funds and annuity providers who use them to underwrite liabilities a decade or more ahead.

These institutions are not so keen to push down interest rates that jack up their liabilities that are already near out of control.

The argument is economists suspect central banks have a toolkit that no longer works.

Pushing against string

They cite John Maynard Keynes, one of the fathers of modern economics. Keynes held the view that central bank manipulation of monetary policy was like ‘pushing against string’ and would eventually cease to work.

In that case, he said, government s need to look at boosting investment and cutting taxes.

Interest rates in Japan and the Eurozone have already dipped into negative territory and those in Britain may follow.

The world economy is on the brink, of what no one really knows, but the most developed countries bar the US seem to be heading for uncharted waters.

Central Banks Fall Flat In Stimulating Economic Growth
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