Zero Interest And Bond Purchases: The Central Banks All Look The Same

The Bank of Japan did the unexpected. It cut policy interest rates to a range of .01% and zero. That program looks much like what the Federal Reserve and European Central Bank have done. BOJ will also buy $419 billion in government and corporate fixed income paper, and REITs. Ben Bernanke has basically said that the American central bank plans to do the same.

The ECB announced today that it will pick up the pace of its government bond purchases. The disclosure of the plan coincides with the Markit’s composite index saying the PMI of the 16-nation eurozone hit a seven-month low last month.

Central banks around the word have now admitted in policy what everyone knew. The economies of the developed world have stopped their expansion, if there ever was much expansion at all.

The worry now is not that the central banks may act but that their actions may be overwhelmed by economic trends that are so powerful that monetary policy is nearly impotent to correct them.

There is absolutely no reason to believe that central banks can do much to address joblessness,  the most serious issue facing major Western economies. Many studies have shown the large corporations have added cash to their balance sheets at nothing less than a remarkable pace. Central banks may make that easier by helping bring down the cost that multinationals pay for new capital. These firms, however, have hoarded their cash and continued to cut costs or at least keep them low. That means that the largest firms will not hire new workers even if their balance sheets are healthy.

There is also no evidence that low interest rates and securities purchases, no matter how large, can shake money from banks for small business, which are still the engine of most economic expansions. Firms in the US with under 100 employees give work to about half of the American job force. These firms add workers quickly in times of expansion. They have no more access to capital today than they have had since the beginning of the recession, in most cases. That means they will not hire and may have to fire to keep their prospects for survival.

New central bank policies are, in theory, a stimulant to the economy. But, that success does not have any foundation unless job growth  goes with it.

Douglas A. McIntyre