ECB And BOJ Now Trapped In Endless Counterfeiting

The Fed was able to end its massive $3.7 trillion series of Quantitative Easing campaigns without the stock market and economy falling apart. The end of QE 3, in October of 2014, did cause temporary turmoil in the major averages; but all in all, it did not lead to a protracted market decline, nor did it immediately send the economy into a recession.

The consensus view then became that the Fed’s strategy of unprecedented interest rate and monetary manipulations was a huge success, and it would be able to slowly raise the Fed Funds rate with impunity.

Perhaps it was this assurance that gave Ben Bernanke’s successor, Janet Yellen, the temerity to begin liftoff in December of 2015. However, when the Fed commenced its first rate hike, it led to the worst beginning of a year in stock market history, as the Dow Jones industrial average lost more than 10% of its value between January 1st and Feb. 11th. Therefore, while the markets seem to have become somewhat comfortable with the end of QE (at least for now), they have also reached the consensus that a protracted tightening cycle is a completely untenable position for the Fed to hold.

The U.S. Central Bank’s “success” with QE, coupled with the pervasive condition of economic weakness throughout the world, persuaded the Bank of Japan (BOJ) and the European Central Bank (ECB) to not only follow in the Fed’s QE footsteps, but also to force sovereign debt yields into negative territory. In fact, thanks to the BOJ’s ¥80 trillion ($660 billion) and the ECB’s €960 billion ($1.06 trillion) per annum bond-buying schemes, there is now nearly $12 trillion worth of government debt that trades in sub-zero territory. What’s more, is the ECB’s total QE program now exceeds the entire GDP of Spain and Italy; while the BOJ’s intervention has brought its ownership to over half of all ETFs and over 33% of all its sovereign bonds.

But as arduous as the path to interest rate normalization will be to the Fed, it will be far more chaotic for the BOJ and ECB to even hint at rate hikes. Indeed, it will be virtually impossible for these two central banks to terminate their counterfeiting sprees without causing complete chaos in global markets and economies.