With continual liquidity injections, soaring balance sheets for central banks and interest rates at all-time lows, we’re currently seeing some critical and constructive opinions on the effectiveness of monetary policy from central banks in America and beyond.
 

Let’s look at the impact of some of these policies in America, as well as in the rest of the world.

The View in America
 

In a recent podcast and interview, chief economist and best-selling author Daniel Lacalle spoke specifically about the end of quantitative easing in a low growth environment.
 

He noted that a lot of the trouble that central banks are currently having is caused by very low levels of inflation. It’s also noted that because energy is required to drive inflation, technology has backed central banks into a corner.
 

Mr Lacalle’s criticism is that central banks tend to try to apply retrospective measures to current solutions, believing that previously successful solutions will be successful once more. This then has a knock-on effect for investors and entrepreneurs alike.
 

For example, as we’ve seen in relation to crude oil prices, it’s no longer easy to drive inflation and growth. Due to advancements in technology, the world is now far more inter-connected, which means that it’s difficult to get the drivers of inflation that existed in price formation.
 

However, one positive for central banks is that by continually injecting liquidity and by maintaining low-interest rates, central banks have been able to drive investments into technology. Once again relating to oil and energy, this has led to what is known as ‘the energy broadband’. Massive levels of investment have propelled the US to be a net exporter of oil, as well as providing alternative sources of energy, such as gas and renewables, which, in turn, creates market competition.
 

Ultimately, this injection of liquidity leads to customers having access to a number of different products and services that they didn’t have previously. This also means that monetary policy becomes disinflationary because it creates overcapacity rather than inflated capacity, as originally intended.

The World View
 

A recent Australian study has confirmed that this isn’t a US-only issue. The authors find that lower interest rates are actually having a diminishing effect on both consumption and on the supply of credit, lessening the effectiveness of monetary policy.
 

Likewise, in Japan, the Bank of Japan balance sheet has actually exceeded the country’s GDP, showing that central banks have hit a wall.
 

For this reason, there is also a belief that the longer-term debt cycle that should be driven by higher productivity growth in strong industries becomes corroded because governments spend more money and take on more debt.
 

To conclude, due to historically low interest rates and the need to continually inject liquidity, there is a growing belief from some economists that the impact of monetary policy is diminishing. Although first mentioned in the US, this has also been seen in Japan and Australia.

Images from Pexels