Central Banks Have Failed

Tue, 18 Oct Pre-Open

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For us in India, easy money and negative interest rates may seem like abstract and irrelevant concepts. But in the West they are a reality.

In the aftermath of the 2008 global financial crisis, central banks have been trying to solve the problem of debt with even more debt through reckless money printing and near-zero interest rates. Yes, it's ironic but true.

In fact, we're now witnessing something that has never happened in the last 5,000 years of the world's financial history - negative interest rates. Negative interest rates are now a reality. Imagine your bank charging you fees for depositing money with them. Bizarre and scary, isn't it? In fact, a total of $11 trillion of government debt now offers a negative interest rate. And even some companies are started issuing negative-yielding corporate debt.

Take the case of Bank of Japan (BoJ). Last week, BoJ signalled it has a higher threshold for further monetary policy easing. This was further to the stimulus measures it introduced during the last month to achieve its 2% inflation target.

The bank, in its monetary policy last month, introduced a new policy tool called quantitative and qualitative monetary easing (QQE). It also announced it would expand the monetary base until inflation stabilizes above 2%. BoJ Governor Haruhiko Kuroda said the bank would start fixed-rate purchase operations worth 800 billion yen.

The central bank also stood pat on interest rates. It kept the policy balance rate unchanged at minus 0.10%. The BoJ first introduced negative interest rates early this year. The move was introduced on hopes that it would encourage banks to lend more and thereby spur spending and inflation. However, there has been no sign of this working yet.

Along with the BoJ, many central banks across the world are trying to prod growth with the help of stimulus measures and near-zero or negative interest rates. If you're interested in knowing what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book Hormegeddon (just pay Rs 199 for shipping and handling).

However, the issue, as we can see today, is that the above measures by central banks are doomed to fail. This is because in order to really stimulate growth in the economy, what is needed is an actual increase in productivity rather than an artificial boost through monetary policy programmes.

If the above actions of central banks do not come to an end, there is a possibility for another 2008-like crisis in the global economy...and India cannot afford to ignore it. If there's a severe crisis in the West, the consequences will be felt on our shores too.

We believe investors must be prepared to witness increasing volatility in the stock markets. Apart from the developments in the domestic economy, several global factors are likely to influence the course of the stock markets in the coming times.

Our message to investors is to not fear volatility and uncertainty. Instead, use it to your advantage as increased volatility could throw up bargain buying opportunities.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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