A major central bank just made a desperate move…
If you’ve been reading the Dispatch, you know we’re living through a gigantic “global monetary experiment.â€
In short, global central banks cut interest rates to zero to fight the 2008 financial crisis. They’ve held interest rates near zero ever since.
These reckless “easy money†policies have made it extremely cheap to borrow money. Using borrowed money, people have bought trillions of dollars’ worth of stocks, bonds, cars, commercial real estate projects, and single-family homes.
This has warped prices of nearly everything. U.S. stocks, commercial real estate, and art prices have all climbed to record highs.
•In December, the Federal Reserve raised its key interest rate for the first time in years…
Many in the mainstream media called it the end of easy money. We pointed out at the time that interest rates were still extremely low. You can see in the chart below that the rate hike was tiny:
Although the rate hike was tiny, global stock markets couldn’t handle it. U.S. stocks were in a strong bull market from March 2009 through December 2014, gaining 204%. However, since the Fed raised rates on December 16, the S&P 500 has dropped 6.4%.
Foreign stocks have also fallen. The Stoxx Europe 600, which tracks 600 of Europe’s largest stocks, has dropped 5.4% since December 16. The Japanese Nikkei has dropped 8% in the same period.
If markets were healthy, a tiny rate hike would not cause them to fall apart. Global financial markets are addicted to easy money.
•On Friday, Japan’s Central Bank dropped its key interest rate below zero…
The Wall Street Journal reported (emphasis ours):
Central banks around the world are going to new lengths to boost their economies, underscoring both the importance and limits of monetary policy in a global economy plagued by paltry growth and unsettled markets.
