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Digital Subscriptions > The Hedge Fund Journal > Issue 117 - October 2016 > Where Next For Monetary Policy?

Where Next For Monetary Policy?

The unveiling of tools of unlimited power

Recent shifts in policy direction by global central banks may prove to be profound. Since the financial crisis, most major central banks have responded to weak growth with ever lower rates or further bond buying. Today, a consensus may be emerging that these are the policies of the past. Not only this, but both the Bank of Japan and the ECB appear to be conceding that they are in fact self-destructive.

To some extent ultra-easy monetary policy has been successful in averting the worst possible outcomes from the financial crisis. In the ECB’s case bond-buying has achieved its primary objective: consigning sovereign contagion to history. Its secondary objective, strengthening the fiscal positions of European sovereigns and underpinning their accounting solvency, has also been achieved.

If ever proof was needed that Europe’s sovereign panic was induced by Trichet’s ECB rejecting QE in 2009, Mario Draghi provided us with the counterfactual. When the central bank with its printing press stands behind the government there is no credit risk, when it leaves them standing alone they are subject to runs. Such is the difference between money and debt.

However, it has also been increasingly clear for several years that bond-buying QE and ever lower interest rates run the risk of having counterproductive effects. This is most evident in two areas; i) in the impact on consumer spending, and ii) in threatening financial stability and the banking sector.

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