The Invisible Hand
Jeroen Blokland | Dec 06, 2019 09:01
Central banks around the globe are injecting more liquidity into the financial system again. As a percentage of GDP, G4 central-bank balance sheets are rising once more – from an already historically high level. The reason, of course, is that they are having to pursue extraordinary monetary policy to reach their goals, which boils down to much higher inflation than is currently reported in most cases. However, the impact of this extraordinary policy doesn’t stop there.
Investors are being forced to look for higher yield and returns in more risky assets. Those who own cash are looking for bonds with a yield above cash rates; those who want a steady income are moving to high yield, because credits often give hardly any income at all; and those who need returns north of 4% are having to move to equities to increase their chances of success.
While it is difficult to quantify the direct impact of central bank policy on the willingness of investors to move up the risk curve, I’m pretty sure it’s quite significant. Hence, the renewed increase in liquidity should be seen as a positive for risky assets in general. Will there be an end to the seemingly endless growth of central-bank balance sheets? I’ll save that for another time
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