Monetary policies: when fear become greed…

This article follows our previous article on a possible hyper negative rate. We saw the impact of potential policies on economy like hyper negative interest rate. The key problem here is to understand what is coming next. By making expansionist policies, central banks reduce their ability to adopt new policies (hyper negative or positive rate). We are preparing a monetary cyclical return…

Expansionist policies are becoming structural!

A brief monetary history will remember us that we are not in an exceptional context. As I insisted previously, a high balance sheet to GDP ratio for central banks is a classical cyclical dynamic on the very long-term plan. The BoE balance sheet was precisely 19% of the GDP in 1947 and even 21% if we go back to 1732. Nothing is different this time, excepted our position in this “super-cycle”. Since the 2008 crisis, central banks lowered interest rate to 0%. In 2015, the slowing economic growth pushed interest rate to negative in Europe. 

                Direct result: the collapse in yields implied a stronger implicit value for stocks, real estate, and even metals. Monetary expansionist policies falsify value and the decisions of those who keep assets in their portfolios. Year after year, public budgets are becoming more and more dependent of central banks policies. Lower rate led to higher debt, lower potential growth, and lower solvability… It is a structural spiral persisting since 2000s. If central banks stop their policies, the systemic risk could become contagious and extremely dangerous. By avoiding a short and midterm risk, central banks indirectly amplify next policies and so on… Until growth come to 0% with inflation. From this observation, we have to distinguish coming trends.

One of the main monetary cycle is based upon a structural systemic risk cycle also noticeable through gold price. We can identify risked monetary periods for the next years: January 2021 (private risk followed by may 2021), August 2021 (private/public risk), March 2022 (relative economic cycle return), October 2022, etc… By the identification of economic and financial cycles, we can conclude in the high probability of these risks that are not always traduced in terms of interest rate variation.

 To achieve the interpretation of our mathematical dynamic structure, it seems to be that the next big monetary decision could appear around 2026 due to a possible reaction to the economic cycle.

From fear to greed… And then?

The structural need for greater and greater policies produced a structural greed. With their “no limit” programs, governments developed a REAL bubble on their own deficits (now uncontrollable for at least 15 to 20 years). These policies raise centralization of our economy because it benefits firstly to public sector. Financially, it amplifies the market rise. From fear… To greed… From greed… To hope…Or disillusion.  

                Otherwise, the monetary problem now is real. Central banks will have to maintain expansionist policies for the next years while it raises the risk of correction on growth. On the one side, a -4% or -5% interest rate could imply deep structural changes: a differentiation between a currency for exchanges and a currency for savings, a rise in private assets, a banking instability, and even deflation and negative potential growth if the interest reduction is slow. On the other side, a positive interest (>1% for example) could lead to direct massive budgets difficulties. The only option for central banks is 0%! But it is not an eternal policy.

                From a pure historical analysis, interest rate can only go up after a relative stagnation we can estimates between 5 and 15 years/20 years. It is a question of marginal efficiency of expansionist policies. A 0% interest generates exponential tensions; because the gap between economy and the monetary system is raising. Even under the Roman Empire, after the collapse in the value of money at the end of the second century and the beginning of the third century (after the antonian pandemic, the demographic return and geopolitical tensions with North and East), inflation predominated to deflation. It has been the same pattern after 1830s, 1945, etc…

By Thomas Andrieu FOR ROCHEGRUP.